Caron v Said Jahani and John McInerney as joint and several liquidators of Courtenay House Capital Trading Group Pty Ltd (In liq) and Courtenay House Pty Ltd (In liq)

1. [1]

   BASTEN JA: On 31 October 2018 the liquidators of Courtenay House Capital Trading Group Pty Limited and Courtenay House Pty Limited (and the companies themselves) sought directions as to the distribution of funds held in Westpac bank accounts of the companies. The companies had operated forms of Ponzi schemes, their clients being investors in the schemes.

Background

1. [2]

   The investors, who were claimants with respect to the available funds, were placed in four groups, identified by the primary judge, Black J, as (a) the Westpac Investors; (b) the Post 21 April 2017 Westpac Investors; (c) the Mistaken Investors; and (d) two named persons, if they could satisfy the liquidators or the Court that the source of their deposits into the Westpac accounts was not the companies’ funds. [1] The relevant groups were described by the primary judge in the following passage:

2. [3]

   The appeal is brought by the third defendants in the proceedings below, and those represented by them identified as the Post 21 April 2017 Westpac Investors. Their complaint is, in substance, that the primary judge put them in the same category as the other Westpac Investors rather than making a separate, and more favourable, distribution available to them on the basis that their moneys were readily identifiable and separable.

3. [4]

   The position of the appellants at trial was set out in the following passages in the primary judgment:

4. [5]

   The practical significance of the appeal was identified in an affidavit of Mr Said Jahani, one of the joint liquidators, dated 1 November 2019. He noted:

Representation of investors other than the Post 21 April 2017 Westpac Investors

1. [6]

   Against that background it is convenient to refer to the two notices of motion before the Court. First, there is a notice of motion filed by the liquidators of the companies dated 1 November 2019. The first order sought by the liquidators was an order that they, as the first respondents to the appeal, “are justified in defending the appeal on behalf of all beneficial owners other than the Post 21 April 2017 Westpac Investors”; they also sought “a direction, order or advice” that they “are justified in paying their legal costs and disbursements” in accordance with the terms of order (4), the details of which may be put to one side.

2. [7]

   By way of alternative, the liquidators proposed that the fourth respondent, J P Melocco Pty Ltd, be appointed to represent itself and all other beneficial owners, other than those represented by the appellants: order (2). Order (3), presumably intended to be supplementary to order (2) only, sought a direction, order or advice that the liquidators “are justified in paying the legal costs and disbursements of the fourth respondent”.

3. [8]

   There is in evidence a copy of an email from the principal of J P Melocco to its solicitors, Ashurst, stating that it is willing to defend the appeal as a representative party if it is indemnified as to the costs.

4. [9]

   The appeal involves a dispute as to the distribution of funds between two competing classes of investors. In broad terms, if the appellants succeed they will recover a larger proportion of their investments than will the other beneficiaries. If they fail, all beneficiaries will share proportionately without reference to the date of 21 April 2017, which was the date on which ASIC obtained a freezing order with respect to the companies’ assets. The obvious course in such a case is for each group of beneficiaries to be represented by one party and for the liquidators to maintain a neutral position, which would not involve the incurring of significant costs. That is the alternative position proposed by the liquidators, the first being that they be appointed, in effect, to represent all the beneficiaries other than those represented by the appellants.

5. [10]

   In my view, the second (alternative) approach is preferable, namely to appoint J P Melocco as the representative with an indemnity as to costs and to allow the liquidators to maintain a neutral position.

Appellants’ application for leave

1. [11]

   Turning to the appellants’ motion, they seek two orders, namely (i) leave to commence an appeal against the companies in liquidation pursuant to s 471B of the Corporations Act 2001 (Cth) and (ii) an order that they be appointed pursuant to r 7.6 of the Uniform Civil Procedure Rules 2005 (NSW) to represent themselves and the other Post 21 April 2017 Westpac Investors.

2. [12]

   The application for leave to begin proceedings against the companies is not opposed by the liquidator, it is well understood that the Court may grant such leave nunc pro tunc, as noted by Gleeson JA in Zervas v Burkitt [2019] NSWCA 112 at [20]. It is, however, necessary that the Court be satisfied that it is appropriate to grant leave: there is the need to be satisfied that there is a serious question to be tried and that it is otherwise, in effect, a contained and efficient way of disposing of the proceedings.

3. [13]

   In this case, I am satisfied that there is a serious question to be tried. It is a contained and limited question turning on the relevance of the date of the ASIC freezing order and the resulting separable nature of the funds deposited on or after that date. It is a question which is entitled to have the consideration of the Court of Appeal in circumstances where the primary judge expressed his own caution in approaching it and expressed the view that it might well have substance: Courtenay House at [45]. In those circumstances, the first order sought by the appellants should be made.

Appellants’ representation order

1. [14]

   The second order (appointment to represent the group) is only necessary to the extent that orders made in the court below do not operate with respect to the appeal. To the extent that these are new proceedings with different issues that course is appropriate. I assume that the order below was made as a matter of expediency pursuant to r 7.6(2)(c). No reasons have been suggested why a similar order should not be made for the purposes of the proceedings in this Court and in the circumstances noted with respect to the leave application that order is appropriate.

Costs

1. [15]

   Order (3) in the appellants’ notice of motion sought a direction that the legal costs and disbursements of the appellants, the liquidators and the other respondents representing classes of beneficiaries be paid or recouped on an indemnity basis out of funds held in the Westpac accounts or otherwise out of assets of the companies in liquidation. Order (4) was said to be an alternative to order (3) and set out the mechanism for payment by the liquidators of the appellants’ costs, apparently in any event. With one qualification, the costs orders proposed by the liquidators are to be preferred. Each active party, and the liquidator in its role as a submitting party, should have security for payment of its and their costs of the appeal from the funds available in the Westpac accounts.

2. [16]

   So far as the cost orders sought by the appellants are concerned, it is not necessary for the Court to order that their costs be payable from a common fund when their appeal is designed to improve their position at the expense of other beneficiaries. At least on the face of it, and in accordance with the criteria referred to by Campbell JA in BE Australia WD Pty Limited (subject to a deed of company arrangement) v Sutton, [2] these are in substance adversarial proceedings between two groups of investors seeking distribution of a fund. At this stage it is at least possible that costs would follow the event; however, as representative parties, both the appellants and fourth respondent should have the protection as to their entitlement to recover their costs.

3. [17]

   The basis of the appellants’ claim is that their funds can readily be identified from the rest of the funds held by the litigators. Black J did not reject that premise. Accordingly, if it were thought appropriate in the ordinary course for an adverse costs order to be made against the appellants, that could take effect as a requirement to pay out of the identifiable funds which they and those they represent seek to recover in full. A similar order could be made if J P Melocco is unsuccessful, by reference to the other funds. No direction is necessary or appropriate at this stage to give effect to that contingency. It is sufficient that there be a direction which would remove the risk that the successful group would not recover their costs from the funds under the control of the liquidators.

4. [18]

   In these circumstances the appropriate course is to authorise the liquidators to pay the relevant costs from the funds under their control, accounting separately for the costs as between the funds in accordance with any order made by the court hearing the appeal. The orders will reserve to that court the power to vary the allocation of costs as between parts of the common fund, which will be, in effect, an accounting exercise and able to be undertaken after the event.

5. [19]

   The appellants’ costs of the motions today should be their costs in the appeal.

6. [20]

   In accordance with those proposals I make the following orders:

   1. (1)

      An order under s 471B of the Corporations Act 2001 (Cth) that the appellants have leave to begin and proceed with the appeal against the second respondent and the third respondent.

   2. (2)

      Pursuant to r 7.6 of the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR) and further or alternatively, the Court’s equitable jurisdiction, an order that the appellants be appointed to represent themselves and the Post 21 April 2017 Westpac Investors (as defined in Annexure A to the judgment) in this appeal.

   3. (3)

      Pursuant to r 7.6 of the UCPR and further or alternatively, the Court’s equitable jurisdiction, order that the fourth respondent, J P Melocco Pty Ltd, be appointed to represent itself and all beneficial owners other than the Post 21 April 2017 Westpac Investors in this appeal.

   4. (4)

      Pursuant to s 90-15 of the IPS and s 63 of the Trustee Act 1925 (NSW), give a direction and order or advice that –

   5. (5)

      Pursuant to s 90-15 of the IPS and s 63 of the Trustee Act, a direction and order or advice that:

   6. (6)

      Direct that the appeal be relisted before the Registrar for the fixing of a timetable for further interlocutory steps, such relisting to be at a time convenient to the appellants and the fourth respondent.

   7. (7)

      Otherwise dismiss the motions brought by the appellants and liquidators.

   8. (8)

      The appellants’ costs of the motions to be costs in the appeal.

   9. (9)

      Terms used above have the meanings identified in Annexure A to the liquidators’ notice of motion filed 1 November 2019, which is incorporated in these orders.