In the matter of The Summit Hotel Bondi Beach Pty Ltd

On 15 February 2023 the plaintiffs in these proceedings, Efrem Harkham, and 10-12 Campbell Parade Pty Ltd, filed an interlocutory process seeking in the alternative freezing orders, or injunctive relief, requiring certain funds that have been or will be realised from the sale of four properties located in Sydney be held on trust until further order of the Court, or pending the determination of these proceedings.

This judgment is concerned solely with the application by the second, fourth and fifth defendants for leave to cross-examine Efrem Harkham on his affidavit made 28 August 2022, and filed with the originating process on 9 December 2022. Plaintiffs’ counsel read this affidavit at the commencement of the interlocutory hearing on 10 March 2023 at which the application for leave to cross-examine was also made.

The second defendant is a company called HK Empire Pty Ltd (HK Empire), the fourth defendant is Terry Harkham, Efrem’s brother, and the fifth defendant is Geraldine Harkham, Terry’s wife. Consistently with the practice of the parties, and meaning no disrespect, I will hereafter refer to each of Efrem, Terry and Geraldine by their first names. The first and third defendants, The Summit Hotel Bondi Beach Pty Ltd (SHBB) and Patglen Pty Ltd (Patglen), respectively, are companies in which Efrem, Terry and Geraldine are shareholders and/or directors. SHBB and Patglen were the corporate vehicles used to purchase the real estate the sale proceeds of which are the subject of the interlocutory process. SHBB and Patglen accepted that this application is a shareholder dispute, and that they have nothing to say about the matter. Accordingly, for convenience, I will refer in this judgment to HK Empire, Terry and Geraldine collectively as the defendants.

The primary issue in dispute on the interlocutory application is whether the Court should make orders that include order 1(a) of the short minutes of order proposed by the defendants as an attachment to their written submissions. Those proposed short minutes of order provide for the proceeds of sale of the properties to be held on trust until further order or the conclusion of the proceedings generally in the manner sought by the plaintiffs. They also make provision for the payment of tax and other debts of the companies that owned the properties. Proposed order 1(a) is:

The Schedule defines the “Terry Related Entities” as Geraldine and six companies, one of which appears twice: in its own name and also as trustee for what appears to be a self-managed superannuation fund.

Terry and Geraldine initially offered an undertaking in par 4 of the proposed short minutes of order in return for the carveout of the $10 million from the asset preservation order that was intended to provide protection to the plaintiffs in the event that the Court found that any recorded liabilities of SHBB were not payable.

At the hearing on 15 March 2023 the Court admitted, as Exhibit 1, a copy of correspondence between the parties’ solicitors dated 13 and 14 March 2023. The email dated 13 March 2023 from the defendants’ solicitors attached amended proposed short minutes of order with a revised undertaking by Terry and Geraldine:

The proposed undertaking now offers a mortgage over Terry and Geraldine’s home, with a maximum liability of $10 million. This proposal was rejected by the plaintiffs, in a letter of 14 March 2023 that stated “the threshold problem from our clients’ perspective is that they do not consider that $10m, is a justifiable amount on the information available to them.” A counter-proposal to release $2.1 million of SHBB funds was made.

It is uncontroversial, and was accepted by the defendants, that cross-examination of a deponent in an interlocutory application is at the discretion of the Court. The conventional position was stated by Leeming JA in Ren v Jiang [2014] NSWCA 1 at [11]:

In ABL Nominees Pty Ltd v Mackenzie (No 2) [2014] VSC 529 Derham AsJ summarised the factors weighing in favour of, and against, leave to cross-examine being granted in interlocutory applications (footnotes omitted):

In Selvaratnam v St George - A Division of Westpac Banking Corp (No 2) [2021] FCA 486, Stewart J found:

In Dale v Clayton Utz (a firm) [2012] VSC 577, Hollingworth J considered the decided cases and, at [79], allowed for cross-examination on prescribed topics, as there was:

The defendants' application for leave to cross-examine Efrem must be considered in the context of a brief outline of the issues in the proceedings.

As noted, the plaintiffs filed their originating process on 9 December 2022. In accordance with an order of the Court, the plaintiffs filed a statement of claim on 2 March 2023. As this judgment is not a determination of the application for relief in the interlocutory process itself, it will be sufficient to set out the substance of the allegations in outline. Relevantly:

As noted above, as the defendants accept that, save for SHBB and Patglen being permitted to pay certain third-party liabilities, the net proceeds of sale of the properties should be held on trust for SHBB and Patglen, the only interlocutory question that remains is whether the Court should permit the carveout of $10 million to be paid out of the money held on trust for SHBB for the purpose stated in order 1(a) of the defendants' proposed short minutes of order, on the basis of the protection offered to the plaintiffs by the undertakings of Terry and Geraldine in revised order 4.

The objective of the plaintiffs' interlocutory application is to preserve the assets of SHBB and Patglen for the benefit of Efrem as a shareholder of those companies. Efrem's status as the holder of at least one third of the shares in SHBB and Patglen is sufficient to give him standing to apply for the interlocutory relief that he seeks. His entitlement to that relief does not depend upon his prospects of success on his claim against Terry for an account for breach of fiduciary duty arising out of the alleged quasi-partnership or partnerships. It does not make a difference to Efrem's entitlement whether he is entitled to one half of the shares in SHBB as claimed, or only the one third that he now holds. It is immaterial to Efrem's entitlement to the interlocutory relief that he seeks whether the assets of SHBB and Patglen are limited to the net proceeds of the sale of their properties, or whether the assets of one or both companies should be augmented by the Court's final determination as to the loans owed by, or to, Terry and the Terry Related Entities.

Consequently, the issue of whether the Court should make an asset preservation order on the terms proposed by the defendants will not require the Court to form a view as to Efrem's prospects of success on all of the claims made in the statement of claim. As explained, some of those claims if successful, will increase the value of Efrem's entitlement as a shareholder in the companies but it will not affect his entitlement to have the assets of the companies preserved.

The Court's consideration of the order that should finally be made on this application must start by focusing on the liabilities of SHBB that the defendants want SHBB to be able to satisfy by means of the carveout in proposed order 1(a). That carveout would entitle SHBB to repay "amounts it owes (as reflected on the accounts of SHBB)" to Terry and/or the Terry Related Entities.

If the orders sought by the defendants are made, then Terry and Geraldine, as the present majority directors of SHBB, will be able to cause the company at their election to pay to Terry or Terry Related Entities the amounts of any liabilities that are recorded in SHBB's accounts up to a maximum of $10 million.

In relation to these liabilities, the defendants’ solicitor’s 7 March 2023 affidavit provides:

SHBB’s financial statements for the year ending 30 June 2021 are contained at Vol 4, pp 3180-3185 of the court book. The defendants’ solicitors 7 March 2023 affidavit states at [45](c)(iv) that the 2021 balance sheet provides that SHBB has “long term liabilities includ[ing] amounts owing by SHBB to:…(iv) Terry and Terry Related Entities in the total amount of $20,446,204.34”.

The evidence presently before the Court does not disclose the facts that have given rise to the alleged liabilities as recorded.

In principle, the appropriateness of the Court making the proposed order 1(a) would depend upon the evidence of the strength of the defendants' claims that those liabilities are valid and enforceable, and perhaps also whether the terms of the liabilities disclose that they are presently due and payable. If a liability were shown to be valid and presently due and payable, it might be difficult for the Court to justify an order that restrained SHBB from satisfying the liability. That may particularly be so in the case of Terry Related Entities other than Geraldine, who are not parties to the proceedings, and in whom third parties may have interests, even if only as creditors. The Court would not be justified in casually ignoring the corporate veil.

The evidence on the present application does not permit the Court to form a prima facie view as to the validity of any of the liabilities, whether they are presently due and payable, or whether any third parties have any interest in the satisfaction of those liabilities that ought to be taken into account when the Court considers whether it should make an order that restrains SHBB from satisfying them.

If it were shown that the real beneficiaries of SHBB being permitted to satisfy particular liabilities were Terry and Geraldine, then it may be legitimate for the Court to have regard to the possibility that, as a result of the final determination of these proceedings, Terry and Geraldine may have a liability to SHBB or Patglen. That is, in considering the balance of convenience, it would be relevant for the Court to take into account the possibility that a de facto set off ought to be enforced to obviate the risk that, if SHBB is permitted to satisfy liabilities to Terry or Terry Related Entities, funds may not ultimately be available to satisfy orders that may be obtained by Efrem on the final hearing.

It appears that in the present case, the Court will not be able to make any interlocutory determination based upon even prima facie conclusions about matters relevant to the validity of the liabilities or the possibility of countervailing liabilities against which they should be set off.

There is also no evidence that would permit the Court to form any prima facie view about the legitimacy of the payments totalling $50,832,533.54 listed in [143] of the statement of claim. At present, Efrem's claim is no higher than that he was not invited to any meeting to consider any resolution as to the making of the payments and he was not consulted. It remains possible that, as Terry and Geraldine have been a majority of directors, and in the case of SHBB, a majority of shareholders, that the payments were authorised and legitimate.

It is in these circumstances that the Court must consider the reasons offered by the defendants in support of their application for leave to cross-examine Efrem.

The underlying proposition advanced by senior counsel for the defendants was that the weaker the plaintiffs' case, the greater the significance the balance of convenience will assume: T 21, 10 March 2023. The defendants seek to establish that the plaintiffs’ case is very weak, so that the balance of convenience should fall in their favour.

As I have explained above, I do not accept this proposition as a generality insofar as it applies to the strength of all of the plaintiffs' claims in the statement of claim. The argument may be valid, insofar as it applies to claims that may in some appropriate way justify a de facto set off against the liabilities that the defendants want SHBB to be able to satisfy.

Senior counsel for the defendant also supported the application for leave to cross-examine by making the following submissions on 10 March 2023, T 29.48 – 30.23:

As senior counsel recognised, it will not be legitimate in the light of the authorities considered above, for the Court to permit cross-examination at the interlocutory stage if the real purpose or effect is to cause Efrem to decline to withdraw an allegation that he has made, which may have the effect of undermining the plaintiffs' case at the final hearing.

When required by the Court to state the subjects upon which the defendants sought leave to cross-examine Efrem, senior counsel identified two matters that must be considered separately.

The first related to a desire by the defendants to cause Efrem to concede, by reference to share transfers signed by him and a resolution of the members of Negev that it be wound up voluntarily, that the plaintiffs' claims in [140(d)] and [141] of the statement of claim are false, because Efrem himself transferred his shares in Negev to Terry and Efrem voted in favour of the members' voluntary winding up of the company. The defendants propose to rely upon the documents in the court book at Vol 5 pp 3629, 3633, 3640 and 3647. On their face, these documents appear to show:

This aspect of the proposed cross-examination is only relevant to the issue of whether the payment by Patglen of the deposit of $689,750 under the contract for the sale of one of the properties the subject of prayer 3 of the interlocutory process to Terry was authorised. As explained above, on the basis of the allegations in the statement of claim, it appears that the defendants have justified the payment on the basis that Patglen was indebted to Negev for an amount of at least the value of the deposit and the deposit was paid to Terry because he was entitled on to an in specie distribution of the assets of Negev prior to its deregistration following the members voluntary winding up of an amount of at least the value of the deposit.

The defendants have not provided submissions to the Court on their application for leave to cross-examine Efrem on this issue concerning the significance of the available evidence as to whether Patglen was indebted to Negev, the circumstances in which the resolution was made to wind up Negev, and the consequences of the winding up in relation to whether an in specie distribution became payable to Terry that was equal to or greater than the amount of the deposit. Consequently, the Court is not in a position to assess what the significance would be to the outcome of this interlocutory application if Efrem were to admit in cross-examination that he had signed a transfer of his shares in Negev to Terry and that he had joined in the resolution of members to voluntarily wind up Negev.

If the cross-examination were successful and Efrem made the admissions sought, that evidence would tend to support an interlocutory finding that the payment by Patglen of the $689,750 deposit to Terry was authorised. That finding would have the tendency of reducing the value of Efrem's shares in Patglen upon its winding up. For the reasons I have already given, that is not a possibility that has any real bearing on the issue of the terms upon which the Court should make an asset preservation order in this matter. The carveout proposed in by the defendants in order 1(a) only concerns the assets of SHBB and not the assets of Patglen.

In these circumstances, I propose to decline the defendants' application for leave to cross-examine Efrem on the subject of his involvement in the transfer of shares in Negev and the resolution of members to voluntarily wind up the company. I consider that the possible consequences of that cross-examination are too remote from the issues on which the interlocutory application will be decided to warrant leave being given.

The second subject for cross-examination upon which the defendants sought leave concerns the related allegations in the statement of claim at [218], [219], and [244]: T 29.41. Those allegations, which have been outlined above, are to the effect that Efrem was unaware of any advances of funds made by Terry to SHBB or Patglen, and was not invited to any meeting of directors or shareholders of either company to consider any resolution to approve the borrowing of funds from Terry and that he was not consulted on the subject. Furthermore, the plaintiffs allege that Efrem's requests for the information to which he was entitled as a shareholder and director was not provided to him.

The defendants' senior counsel's submission on this aspect of the application was, T 29.41-29.46:

The defendants wish to challenge Efrem's claim that he was unaware of the advances of funds made to Terry and by Terry to SHBB. Mere "awareness" of the alleged transactions would not be material, but awareness may be relevant to the balance of convenience if it could support an argument by the defendants that Efrem has unreasonably delayed in bringing these proceedings or that delay may have caused the defendants to understand that Terry acquiesced in or approved the transactions.

Ultimately, as I have explained above, the remaining issue on this interlocutory application is whether the Court should permit the carveout proposed by the defendants in order 1(a) so that SHBB will be able to pay liabilities that appear in its accounts. Although, as I have also explained, the evidence does not permit the Court to make provisional findings concerning the validity of the liabilities or the strength of the plaintiffs' claims that loans by and to the companies by Terry and Terry Related Entities may not have been authorised, I accept the defendants' submission that Efrem's awareness of the transactions disclosed in the companies' accounts may be significant on the issue of the balance of convenience. Essentially, the plaintiffs urge the Court not to accept the undertakings offered by Terry and Geraldine in proposed order 4 as not providing adequate security for the carveout in order 1(a). Strictly, the adequacy of the undertakings in proposed order 4 may be influenced by the Court's assessment of the evidence going to the probability that loans by or to the companies by Terry and the Terry Related Entities were genuine. As the evidence does not permit the Court to make provisional findings on that subject, it is possible that evidence concerning Efrem's awareness that the transactions had been recorded in the companies' accounts may be decisive on the balance of convenience, at least in so far as that awareness may be shown to involve delay, acquiescence or approval.

The evidence relied upon by the defendants concerning their need for SHBB to be permitted to satisfy the liabilities contemplated by proposed order 1(a) is in my view relevant to whether they should be given leave to cross-examine Efrem on the issue of his awareness of the loan transactions. That evidence is given at [26] of the defendants’ solicitor’s 7 March 2023 affidavit in the following terms:

This evidence establishes that Terry may suffer substantial prejudice if the interlocutory orders made by the Court do not include the carveout in proposed order 1(a). Efrem seeks to resist the carveout, largely on the basis that he was unaware as a shareholder and director of SHBB of the loan transactions shown in the accounts of the company as between SHBB and Terry and the Terry Related Entities. As Efrem has taken that position, and as the true state of Efrem’s awareness may be relevant to the balance of convenience and whether the Court should permit the carveout in exchange for the undertaking offered by Terry and Geraldine, it will be appropriate to permit the defendants to cross-examine Efrem on the subject of his awareness of the transactions.

Accordingly, I will grant the defendants leave to cross-examine Efrem limited to his awareness of the transactions that the plaintiffs seek to impugn in these proceedings, relating only to loans or other liabilities in the accounts of SHBB.

As accepted by senior counsel for the defendants in submissions, the cross-examination at this interlocutory stage will be limited to direct questions (in the sense, allowing some reasonable latitude, that the cross-examination will not take place as on a final hearing).