FEDERAL COURT OF AUSTRALIA

Citadel Financial Corporation Pty Ltd (Administrator Appointed) v Action Scaffolding & Rigging Pty Limited (in liq) [2019] FCAFC 145

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondents' costs of the appeal to be assessed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    The appellant (Citadel) claims to be a secured creditor of the first respondent (Action), a company in liquidation. It claims to be subrogated to, and an assignee of, the rights under a charge that was granted by Action to Bibby Financial Services Australia Pty Ltd (Bibby). On that basis it says it is entitled to the property of Action in priority to other creditors. The primary judge did not accept those claims: Action Scaffolding & Rigging Pty Limited (in liq) v Citadel Financial Corporation Pty Ltd, in the matter of Action Scaffolding & Rigging Pty Limited (in liq) [2019] FCA 327. Citadel brings an appeal against that decision. For the following reasons, the appeal should be dismissed.

Context for the appeal

2    In 2008, Action granted a charge (Charge) in favour of Bibby to secure monies owed to Bibby under a financing facility. In February 2012, Bibby called in the facility and in March 2012 appointed receivers and managers to Action under the Charge.

3    On 5 June 2012, Bibby purported to assign the Charge to Citadel under the terms of an instrument described as a Deed of Assignment (Deed). Action was also a party to the Deed, as was Mr Maiolo (the sole director of each of Citadel and Action at the time). The Deed recited that (a) all amounts due to Bibby had been paid; (b) Citadel (described as the Assignee) sought to take an assignment of the Charge from Bibby; and (c) Bibby agreed 'to assign the Charge to the Assignee in consideration of the receipt of the Assignment Fee and on the terms and conditions set out in this Deed'. The Assignment Fee was said to be the amount of $2.00 including GST. The Deed said nothing about the payment of the amounts due to Bibby. Significantly, it did not say what the amounts were, who had paid them or when.

4    Notice of assignment of the Charge was given to Action on 5 June 2012 and sometime thereafter, the receivers and managers of Action retired.

5    Then, on 5 December 2012, liquidators were appointed to Action. On 7 December 2012, Citadel took possession of the assets in the purported exercise of powers conferred by the Charge. Thereafter, Citadel claimed to be both subrogated to the rights of Bibby under the Charge and to be an assignee of those rights under the terms of the Deed. The liquidators of Action disputed the claims by Citadel.

6    There was an extended dispute as between the liquidators and Citadel during which the liquidators sought material from Citadel to substantiate its claim. The claim by Citadel emerged in the following way:

(1)    On 10 January 2013, Mr Maiolo provided a verified report as to the affairs of Action in his own hand. In the section providing for valuation of amounts owing and secured by debenture he provided no amount, but simply stated 'fixed and floating charge' and in the section asking for details of any such charge he stated '[Citadel] has had a charge over the company once Bibby wanted to be paid out in earlier last year'. The report listed no amount as being secured and said that the liabilities of Action were $300,000.

(2)    On 17 January 2013, Citadel sent a letter to solicitors acting for the liquidators stating that an arrangement had been reached with Bibby 'whereby the sum of $750,000 was paid to Bibby by [Citadel] in order to pay out the Bibby facility'. A claim was made that Citadel was entitled to be subrogated and as a result the Charge had been assigned to Citadel 'to secure the payment made by it to Bibby'.

(3)    The solicitors for the liquidators responded the next day observing that the claim to be subrogated was now raised for the first time and that up until that time 'your repeated position has been that Citadel is a secured creditor of Action by virtue of a deed of assignment' and the only evidence of payment by Citadel was the $2.00 assignment fee provided for in that instrument. A number of details were sought, including 'evidence demonstrating that Citadel advanced $750,000 to Bibby from its own funds' particularly copies of all relevant correspondence and bank statements and other documents which establish the source of funds.

(4)    On 24 April 2013, solicitors for the liquidators followed up noting that further documents and information had not been provided. The letter stated in terms that if Citadel did not pay the amount that Action owed to Bibby it cannot rely on a right of subrogation and if it did pay 'it would have records to substantiate this fact'. The letter stated that the liquidators would proceed on the basis that Citadel has no right of subrogation. It also stated that the deed of assignment did not provide security to Citadel for any amounts owing to it by Action referring to Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) [2008] WASCA 80; (2008) 36 WAR 342.

(5)    On 6 May 2013, solicitors acting for Citadel responded by letter maintaining that Citadel was subrogated to the rights of Bibby under the Charge. Amongst other things, the letter said:

The actual amount paid to Bibby to resolve its claims, and retire the receivers and managers to [Action], was $704,301.00. We attach, for your attention, two (2) of the bank cheques provided at settlement to Bibby by our client ($90,000.00 and $47,301.00). Our client is currently attempting to obtain additional documents concerning the balance of the moneys paid. However, this may be of little significance, as we understand the amount currently held in the liquidators' account is substantially less than $137,301.00.

Right of subrogation

[Citadel] is a secured creditor of [Action]. As it has paid at least $137,301.00, in its capacity as a guarantor of the Bibby debt, it was entitled, as a matter of law, to be subrogated into the position of Bibby and its securities over [Action], in addition to the rights received under the Deed of Assignment. Our client clearly has the right to rely upon the assignment and the right of subrogation.

(6)    Despite the statement in the letter, additional documentation was not forthcoming.

7    Eventually, Action and the liquidators together made application under s 418A of the Corporations Act 2001 (Cth) for a declaration as to whether Citadel's entry into possession of property of Action had been undertaken validly under the terms of a security interest in the property.

8    The matter was heard in July 2018 and judgment was reserved. The possibility of an application to re-open was raised at that time. In late August 2018, Citadel sought leave to re-open to rely on two further affidavits, one of which was an affidavit of Mr Maiolo who, up until that time, had not provided an affidavit in the proceedings despite being the sole director of each of Citadel and Action at the time of entry into the Deed. The primary judge refused leave to re-open.

9    As to the alleged payment by Citadel of a debt due by Action to Bibby, her Honour found that:

(1)    The financial records showed that a debt was owed by Action to Citadel as at 30 June 2012 (being a reversal of what the position had been as at 7 June 2012).

(2)    There was no satisfactory evidence as to who had paid Action's debt to Bibby.

(3)    The payment was not made from Action's bank account.

(4)    It was reasonably likely that an amount of $704,301 was paid to Bibby to pay out Action's debt. However, the evidence did not reveal who made the payment.

(5)    The circumstances of the payment should have been capable of ready proof.

10    On the basis of those findings, her Honour was not satisfied that Citadel paid any amount to Bibby in settlement of Action's debt to Bibby.

11    Her Honour was also not satisfied that there had been any advance of monies by Citadel to Action between 5 June 2012 (when the Deed was signed) and 6 December 2012 (when liquidators took control of the affairs of Action).

12    It followed, as the primary judge found, that it had not been established that Citadel was a creditor of Action.

13    The primary judge concluded that:

(1)    Citadel was not entitled to be subrogated to the rights under the Charge.

(2)    There was otherwise no debt that could be claimed to be due under the Charge (it being expressed to secure indebtedness to Bibby which the Deed said had been paid).

(3)    In consequence, there was no valid assignment of the Charge.

Grounds of appeal

14    Citadel says that the grounds of appeal can be distilled to three points, namely:

(1)    The primary judge erred in refusing to allow Citadel to re-open its case where it sought to do so to respond to a new case propounded by Action and the liquidators in final submissions, alternatively the application should have been allowed to the extent that it sought to put in evidence undisputed contemporaneous documents;

(2)    Having found that an amount of $704,301 was paid to pay out Action's debts to Bibby, the primary judge erred in fact in failing to infer on all the evidence that it was Citadel that had paid Bibby; and

(3)    The primary judge erred in finding that there was no subrogation or assignment of the Charge.

15    It was suggested in submissions that leave might be required to raise the first point because it concerned an interlocutory decision. However, the appeal proceeded on the basis that s 24(1E) of the Federal Court of Australia Act 1976 (Cth) applies and leave is not required.

Subrogation and assignment

16    Subrogation does not involve an assignment. The position was summarised in Lowbeer v De Varda [2018] FCAFC 115 at [43]-[44] in the following terms:

... Subrogation is not an assignment by operation of equity. In England, it has been described by Lord Diplock as a transfer 'by operation of law', without 'assignment or assent of the person from whom the rights are transferred': Orakpo v Manson Investments Ltd [1978] AC 95 at 104. The essence of subrogation in equity is that a party has a right in equity to stand in the shoes of another party and to enforce the rights of another party in the name of that party. This might be described as a form of transfer by operation of law, but the essential character of subrogation is that it does not depend upon an assignment. Further, as the High Court has said in Bofinger [v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44] at [97], it does not depend upon the bilateral dealings between the party indemnifying and the party being indemnified. Subrogation will even operate in equity to revive a right that has been extinguished (such as a right to a security discharged by payment): Saraceni v Mentha [No 2] [(2012) 269 FLR 12; [2012] WASC 336] at [238]. Therefore, it is not properly characterised as a form of assignment. It is a right to enforce that which might have been enforced by the indemnified party if there had been no performance of the obligation to indemnify.

The essence of subrogation is that the rights that were held by the indemnified party may be enforced by the subrogated party in the absence of an assignment: DiMella v Rudaks (2008) 102 SASR 582; [2008] SASC 345 at [20]-[34] …

17    Therefore, in the present context, if Citadel had in fact paid out the indebtedness of Action to Bibby and that indebtedness was of such a character that it was secured by the Charge then Citadel was subrogated to the rights of Bibby under the Charge. No assignment was required.

18    It may be that parties in the same position might take the legally distinct step of Citadel paying Bibby an amount equal to its debt (or indeed a discounted amount) and taking an assignment of the Charge (together with the debt that it secures). However, that course was not taken here. The parties agreed expressly under the terms of the Deed that Action's debt to Bibby had been paid and the assignment fee was only $2.00.

19    An assignment of the Charge in circumstances where the debt had been paid by Citadel to Bibby would not enable Citadel to sue Action on the debt that had been discharged by the payment made to Bibby. Citadel would be left with subrogated rights to the Charge. It is possible that an assigned charge might also confer rights in respect of any future advances by Citadel to Action. However, that is not an issue that arises because Citadel does not claim in the appeal to be a secured creditor on the basis of any such further advances. The appeal is based on the claim that Citadel was subrogated by reason that it paid out Action's debt to Bibby and the assignment was granted in recognition of that right.

20    Of course, there would be no subrogation if Citadel (itself or jointly with others) provided funds to Action which it then used to pay out Bibby in discharge of Action's indebtedness. In that instance there would be an unsecured indebtedness by Action to Citadel (and any others who had provided funds). The assignment thereafter of Bibby's security by Bibby to Citadel would not provide security for the funds provided because the debt due by Action to Bibby the subject of the Charge would have been discharged.

21    All of which is to say that if Citadel could not demonstrate that it had paid out Action's debt to Bibby and therefore was subrogated to the rights under the Charge, the assignment of the Charge to Citadel conferred no right upon Citadel to claim payment from Action. As the Deed said, Action's debt had been discharged.

The central issue before the primary judge

22    The central issue before the primary judge was whether Citadel had paid out the debt owed by Action to Bibby that was the subject of the Charge.

23    The problem for Citadel was that it provided very little evidence to show that it was Citadel that had paid out Bibby. It presented no direct evidence of payment by Citadel. Instead, it advanced a case based upon the inferences that might be drawn from the terms of the Deed and some other documents. Those documents did not include bank records or accounting documents showing that Citadel had paid Bibby, nor did they include any documents relating to a settlement or completion of a transaction or dealing with Bibby by which Action's obligations to Bibby were discharged by Citadel as guarantor, nor did it include any affidavit evidence from any person involved at the time.

24    In a context where (a) Citadel and Action were related entities with a common director; (b) there was evidence that there were times when Citadel was indebted to Action, including just a few weeks before entry into the Deed; and (c) the Deed made no reference to the payment to Bibby being made by Citadel (but stated the consideration to be an assignment fee of $2.00), the failure to prove by direct evidence the fact of a particular payment said to have been made by Citadel to Bibby at a particular time as part of a settlement that included the Deed loomed large.

25    As to the payments, the only direct evidence was copies of two bank cheques which were said to have been provided 'at settlement' to Bibby. One was for $90,000 and the other was for $47,301. Being bank cheques, they did not reveal the identity of the source of funds or the party on whose order the cheques had been drawn by the bank. Remarkably, there was no other documentary evidence to show who had provided the funds to pay out Bibby at settlement even though the total amount said to have been paid was the much greater amount of $704,301.

26    It was claimed that Citadel had paid the amounts as guarantor of Action's liability to Bibby, but before the application for leave to re-open no guarantee document was produced and there was no reference in the Deed to payment having been made by Citadel as guarantor. Even when the application for leave to re-open was made, the evidence was to the effect that the bank cheques had been drawn against funds provided by third parties, not funds provided by Citadel. Further, the affidavit of Mr Maiolo did not state squarely that Citadel had paid $704,301 to Bibby as guarantor. Rather, it was expressed in the following terms:

On or about 5 June 2012, Action, [Citadel], myself and others entered into a deed of settlement with Bibby and the Receivers ('Deed of Settlement'). Annexed … is a copy of the Deed of Settlement.

Pursuant to the Deed of Settlement:

(a)    Action was required to deliver to Bibby or its solicitors, bank cheques payable to Bibby or cash in the sum of $704,301 ('Settlement Amount'); and

(b)    Action or the Guarantors could make payment of the Settlement Amount.

If the Settlement Amount was paid, Bibby agreed not to take any further enforcement steps and retire the Receivers.

Part of the Settlement Amount was procured by [Citadel] by way of [Citadel] borrowing funds from third parties including as follows:

(a)    $47,301 by Panomeli Pty Limited … ;

(b)    $90,000 by Emanuel Kekatos …

27    Significantly, there was no evidence about payment of any other amount and the Deed of Settlement provided for Action, not Citadel, to deliver bank cheques to Bibby at Settlement.

28    The Deed of Settlement did not recite payment to be made by Citadel. It stated that the parties entered into the Deed in order to settle the Dispute and all other claims the Action Parties and the Bibby Parties may have against each other.

29    Clauses 2.2 and 2.3 of the Deed of Settlement provided:

On or before the Settlement Date, Action must deliver to Bibby or its solicitors, cash or bank cheques payable to Bibby and/or Action in the Settlement Amount.

If Action or the Guarantors have fully performed their obligations under Clause 2.2, Bibby and the Receivers agree that they will not take any further steps to enforce the Facility and/or Securities …

30    The Deed of Settlement also provided that on the Settlement Date, if the Settlement Amount is paid, 'Bibby will also deliver to Action or as directed by it, a Deed of Assignment of Charge in the form contained in Schedule 2 with the details of the assignee completed as required by Action'. Citadel was a party to the Deed of Settlement as one of a number of guarantors of the indebtedness of Action to Bibby. The terms of the Deed of Settlement do not indicate that it was Citadel that was contemplated as the party who would pay out Bibby.

31    The Deed of Settlement included a release, amongst other things, of the 'Engagement' defined to mean:

[E]ngagement, through the Receivers, of:

(i)    Panomeli for the provision of labour hire services;

(ii)    [Citadel] for the provision of scaffolding;

32    Expressed in those terms, the affidavit of Mr Maiolo and the Deed of Settlement raised more questions than it answered. In the context of the history of the dispute where the liquidators had requested direct evidence of payment, it fell well short of establishing that Citadel had made payment as guarantor. In particular, the terms of the Deed of Settlement related to a wider settlement. They contemplated payment by Action delivering bank cheques, including cheques payable to Action. If Citadel delivered cheques payable to Action then that would amount to payment to Action so it could then pay Bibby, not a payment by Citadel as guarantor.

New contention raised by the liquidators in closing submissions

33    Before the primary judge the application for leave to re-open was sought to be justified on the basis that a new point had emerged in closing. The new point was said to be whether Citadel had paid monies to Bibby as guarantor in June 2012. It was claimed that up until that point the proceeding had been opposed by Citadel on the basis that the issue was whether Citadel was a creditor of Action at the time of liquidation (December 2012). The same argument was advanced on appeal.

34    The primary judge recited at [17] the contention that was put on behalf of Citadel concerning the scope of the new point. Her Honour then dealt with that contention (at [21]-[22]). Her Honour found that Citadel's case at trial was not confined to the factual question of the net indebtedness of Action to Citadel at the time of entry into possession of Action's assets (at [23]-[24]). The primary judge accepted that there was a point that was not raised by the liquidators until closing submissions (at [26]). However, it was found not to be a point about whether Citadel had paid out Bibby. Rather, it was a claim that the purported assignment of the Charge to Citadel under the Deed 'was ineffective because Bibby, having been paid out, had no rights to assign under the charge (at [26]).

35    If the primary judge was correct to so hold, the new contention was really of no moment if Citadel could not establish that it was the party who had paid out Bibby. If Citadel had not discharged Action's debt to Bibby, then the Charge would not secure any amount payable to Citadel. The party who had actually paid out Bibby may be entitled to be subrogated to the rights under the Charge. Possibly, Citadel would hold security if it made further advances to Action after the assignment that were covered by the terms of the Charge (the unchallenged finding of the primary judge being that there were no such advances). All the new contention exposed was that if Citadel had not discharged Action's debt to Bibby then the assignment of the Charge to Citadel did not, of itself, confer upon Citadel the position of being a creditor of Action. It was a legal point that flowed from the determination of the factual issue that had always existed between the parties, namely whether Citadel paid Bibby the amount that Action owed to Bibby. If that issue was determined in favour of Citadel then subrogation principles applied and it was of no moment that the parties reflected the subrogated rights by thereafter assigning the Charge. On the findings of the primary judge, what the new contention certainly did not raise was some new factual point about whether Citadel had paid out Action's debt to Bibby.

36    For the following reasons, the primary judge was correct to find that the new contention was a confined one and did not extend to raising for the first time an issue as to whether Citadel had paid out Bibby in June 2012. The issue as to whether Citadel had made such a payment was squarely in issue in the correspondence between the parties that gave rise to the dispute and the application by Action and the liquidators for declarations. Thereafter, one of the liquidators stated in her affidavit that was filed in support of the originating process and which therefore served the purpose of alerting Citadel to the case that it had to meet, that Citadel had failed to furnish any evidence that it had 'paid any amount to Bibby on behalf of Action (which would potentially entitle [Citadel] to rely on the right of subrogation)'.

37    Further, the new contention was squarely raised in written opening submissions for Action and the liquidators which picked up on what the liquidator had stated in her affidavit. Those submissions, that were filed nearly a month before the trial, stated in terms:

[Citadel] has failed to provide … any evidence that …

i)    Action is indebted to [Citadel] for any amount; and

ii)    CFC paid any amount to Bibby on behalf of Action (which would have potentially entitled [Citadel] to rely on the right of subrogation); and

iii)    the charge relied upon by [Citadel] to appoint itself as controller secured any amount owed by Action to [Citadel].

38    It was further submitted that having regard to those specific grounds the burden of proof shifts to Citadel to demonstrate that the purported appointment was a valid appointment. It was then submitted that there was no evidence advanced by Citadel to demonstrate that it was a secured creditor. In context, in order to respond to the basis for the claim that Citadel was not a secured creditor, Citadel had to deal with the claim that it had failed to provide any evidence that it had paid out Bibby.

39    The additional matter raised by Action and the liquidators in closing (as stated in supplementary submissions) was that Bibby could only assign its rights under the Charge and at the time of the purported assignment there were no rights under the Charge to assign because the secured money had been repaid. However, the supplementary submissions concluded by stating that there was 'no evidence that [Citadel] paid (on Action's behalf) any funds owed by Action to Bibby under the facility arrangements that would provide some evidentiary basis for subrogation'.

40    The written opening submissions for Citadel did seek to characterise the primary thrust of the submissions for Action and the liquidators as relating to 'a purported lack of indebtedness at the time of [Citadel's] appointment as controller' (see para 31). However, the submissions stated that the assertion of doubt as to the existence of the debt was 'squarely addressed' by evidence which it was submitted established a number of matters. The terms of that submission show that Citadel recognised, as indeed must have been very plain, that Citadel had to demonstrate that it paid out Bibby in order to establish a claim based upon subrogation to the rights of Bibby under the Charge. The submissions said (at para 36) that the evidence of Citadel establishes:

(i)    that the audited financials of [Citadel] disclose a debt owed by Action to [Citadel] as at 30 June 2012 which, represents a reversal of the position prior to the alleged payment to Bibby (where [Citadel] was indebted to Action) in the requisite amount;

(ii)    the debt to Bibby was discharged on or about 5 June 2012;

(iii)    the discharge of debt did not occur as a result of a payment made directly by Action to Bibby;

(iv)    the evidence of the assignment of the charge from Bibby to [Citadel] is wholly inconsistent with the existence of the debt on account of the payment to Bibby by [Citadel].

Point 1: Leave to re-open

41    The primary judge refused leave to re-open on the basis that it was not in the interests of justice to do so because:

(1)    It was not a case of fresh evidence (at [20]);

(2)    The contention that was first raised in closing was an argument based on the recitals in the Deed to the effect that the purported assignment was ineffective because Bibby, having been paid out, had no rights to assign under the Charge (at [26]);

(3)    The case advanced for Citadel at trial was to the effect that it had paid $704,301 to Bibby in settlement of Action's liability to Bibby (at [23]);

(4)    The evidence was principally directed to bolstering Citadel's very weak evidence on the issue of whether Citadel had paid any part of Action's debt to Bibby (at [25]) - even though that was a matter that had been squarely in issue;

(5)    There was no evidence on affidavit to verify that the application was solely or even primarily a response to the liquidators' new contention in closing and the primary judge did not accept that to be the case (at [25]);

(6)    The proposed new evidence did not include contemporaneous records of the alleged loans to Citadel pursuant to which Bibby was provided with the bank cheques or how the balance of Action's debt to Bibby was paid (being the majority of the debt) (at [27]);

(7)    If leave were granted to re-open and adduce the evidence then that would necessitate a further adjournment to allow the liquidators to make further investigations to test the new evidence (at [27]);

(8)    There was a public interest in finalising the proceedings and the liquidation (at [28]); and

(9)    Citadel had been given an ample opportunity to put to the liquidators all relevant information to demonstrate its alleged payments to Bibby (at [28]).

42    The primary judge set out with some care the relevant principles to be applied where leave is sought to re-open and no issue is taken with her Honour's statement of those principles (at [18]-[19]).

43    The primary judge accurately summarised the evidence that was sought to be adduced in the following way at [13]-[14]

In summary, Mr Maiolo's affidavit provides evidence that:

(1)    [Citadel] guaranteed Action's obligations to Bibby.

(2)    On 5 June 2012, Bibby, Action, [Citadel], Mr Maiolo, Citadel Group Holdings Pty Ltd and the then receivers appointed to Action by Bibby entered into a written deed of settlement pursuant to cl 2.2, of which Action was obliged to deliver to Bibby or its solicitors, cash or bank cheques payable to Bibby and/or Action in the 'Settlement Amount' of $704,301.00. Clause 2.3 of the deed of settlement was premised on the possibility that 'Action or the Guarantors have fully performed their obligations under Clause 2.2'.

(3)    Part of the 'Settlement Amount' was procured by [Citadel] by way of [Citadel] borrowing funds from third parties including $47,301 by Panomeli Pty Ltd and $90,000 by Mr Kekatos. [Citadel] obtained bank cheques from Panomeli Pty Ltd and Mr Kekatos in favour of Bibby. The $90,000 bank cheque was tendered by [Citadel] to Bibby 'at settlement of the Deed of Settlement'.

(4)    At 'settlement', the charge was assigned by Bibby to [Citadel] as guarantor of the debt owed by Action to Bibby.

Mr Kekatos is the brother of Mr Maiolo's brother in law. Mr Kekatos' affidavit provides evidence that Mr Maiolo asked him to lend [Citadel] some money to assist in it paying out Bibby; and that Mr Kekatos subsequently lent $90,000 to [Citadel] that was repaid by [Citadel] over a period of 6-12 months.

44    The first point is to be determined by the application of the principles in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504-505. For the following reasons, when assessed through that lens, no error has been demonstrated.

45    The decision to refuse leave to re-open is challenged primarily on the basis of a contention that the liquidators reframed their case in closing. However, for reasons already given, the primary judge was correct to conclude that the evidence that was sought to be adduced related to the issue whether Citadel had paid out Action's liability to Bibby (an amount which Citadel maintained was over $700,000). This was the main issue in the proceedings. The new affidavits were not confined to evidence that was consequential upon the narrow point raised for the first time in closing submissions to the effect that there could be no valid assignment if the payment had occurred before the assignment of the Charge. Rather, the evidence was properly characterised as an attempt to bolster the weak evidence of Citadel on the issue of whether Citadel paid any part of Action's debt to Bibby. That was not an issue on which Citadel could justify an application for leave to re-open given the forensic approach that had been adopted by Citadel to conduct the trial as to that issue without calling evidence from Mr Maiolo.

46    The separate point that the application for leave to re-open might be allowed as to only part of the materials (namely what are said to be undisputed contemporaneous documents) is a matter that was not raised before the primary judge. However, it is wrong to characterise the documents as undisputed contemporaneous documents. For reasons already given, the contents of the documents, particularly the Deed of Settlement and the documents produced concerning the two bank cheques raised further questions and the primary judge was correct in concluding that they would invite an adjournment and further forensic inquiry if leave to re-open was granted. The result would be that Action and the liquidators would face a duplication of the hearing. The first conducted without evidence from Mr Maiolo and the second conducted with that evidence.

47    In the course of the appeal it was made plain that the subject matter of the dispute was the competing claims to an amount of $104,553.59 that had been received as a GST refund. There was no other property of Action in contest. That is a further reason why it would not be in the interests of justice to allow the matter to be re-opened, all the more so on the basis of contentions not advanced before the primary judge in support of the application and raised for the first time on appeal.

48    As the primary judge correctly found, allowing the application would have resulted in an adjournment to allow the liquidators to make further investigations. Significantly, until the application for leave to re-open, the position of Citadel was that it had paid an amount of over $700,000, but the affidavits did not verify that claim and instead provided evidence about the circumstances of the two bank cheques (now said to have been drawn against third party funds, but nevertheless provided by Citadel to pay out Bibby). There would have been a consequent further delay in the proceedings and the conclusion of the winding-up. These are matters of prejudice and injustice. When it comes to evidence of the alleged payments by Citadel, it had been given years to bring forth direct evidence of those payments. It provided no explanation as to why that had not occurred earlier (other than the claim that the case had been reframed in closing submissions, which was a contention that was properly rejected by the primary judge).

49    There was ample reason in the interests of justice for the application for leave to re-open to be refused. It has not been demonstrated that there was error in the evaluative judgment made by the primary judge or that matters material to the decision were disregarded or misunderstood.

50    Point 1 was said to raise two House v The King errors. First, it was claimed that the primary judge did not ascribe sufficient weight to the importance of new evidence in the context of the issues between the parties. Second, it was said that the primary judge erred in failing to find that the new evidence was responsive to a new case advanced by Action and the liquidators. For reasons given, these claims were premised upon an incorrect foundation of the nature of the issues joined between the parties from the outset. The alleged errors are not made out.

51    In oral argument a further error was asserted, namely that her Honour misdirected herself in stating (at [25]) that it was significant that there was no evidence on affidavit to verify that the application to re-open was solely or even primarily a response to the liquidators' contention that Bibby had no rights to assign under the Charge once the Action debt was fully repaid. It was said that such an affidavit is not necessary if, on the material put before the Court and the way the case is conducted, the true reason for the application is apparent. For the reasons already canvassed, the claimed reason for the application was not apparent, in particular because the premise on which it was based, namely to respond to a new contention, was unfounded.

52    Therefore, the grounds of appeal summarised in Citadel's first point should not be upheld.

Point 2: Alleged inferential factual error as to whether Citadel had paid Bibby

53    Citadel claims that the findings by the primary judge together with other undisputed evidence should have led to the conclusion that Citadel had paid Bibby the amount claimed and was therefore subrogated to that extent. Significantly, it is not contended that there was any error in any of the direct factual findings of the primary judge or those findings which might be said to depend upon an evaluation of the credibility of any witness. Rather, what was submitted was that the primary judge should have inferred from the evidence as found (and other undisputed evidence) that Citadel had paid out Bibby in early June 2012. On that basis, it was submitted that even though the appeal ground raised an alleged error of fact, the Court was not constrained in the manner set forth in Robinson Helicopter Company Incorporated v McDermott [2016] HCA 22 at [43] relying upon the observations in Dincel Constructions Systems Pty Ltd v AFS Systems Pty Ltd [2018] FCAFC 157 at [48]. There was no submission to the contrary on behalf of Action and the liquidators.

54    The primary judge was invited to make findings aided by application of the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 but did not do so. Rather, as to the claim that it was Citadel who paid Bibby, her Honour found that there was no satisfactory evidence as to who paid out Action's debt to Bibby(at [110]). Her Honour also found as to the bank cheques that there was no evidence beyond assertion (at [111]). The circumstances of payment to Bibby were described by her Honour as 'matters that should have been able to be proved readily with contemporaneous business records' (at [112]). Ultimately, her Honour's conclusion was expressed in terms that there was insufficient evidence to be satisfied that Citadel paid any amount to Bibby on or about 5 June 2012 or that it paid any amount to Bibby in settlement of Action's debt to Bibby (at [115]).

55    So, the findings rejecting the claim that Citadel had paid out Action's debt to Bibby were expressed in terms of an insufficiency of evidence to establish the factual position that was the necessary foundation for the subrogation-based claim by Citadel to rights under the Charge. These findings manifest a conclusion that Citadel did not discharge the onus to support its claim which depended upon showing that it had paid out Action's debt to Bibby.

56    It was accepted by Citadel that it was the party with the onus on the issue of whether Citadel had paid Action's debt to Bibby. Therefore, for present purposes, Citadel must discharge both the evidential burden and the burden of proof. To meet the evidential burden there must be sufficient evidence. The test to be applied is whether the evidence, if uncontradicted, would justify persons of ordinary reason and fairness in affirming the proposition maintained by the proponent having regard to the standard of proof to be applied: Wentworth v Rogers [1984] 2 NSWLR 422 at 436. The nature of the evidence that may meet the requirement for a sufficiency of evidence to discharge the evidential burden will depend upon the precision of proof permitted by the subject matter. Persons of reason and fairness will consider the modes of proof available as to a particular fact and the quality of evidence that was actually advanced in concluding whether the burden has been discharged. Therefore, they are aspects to be brought to account.

57    Then, the Court must be further satisfied that on the whole of the evidence the factual matter the subject of the proposition advanced by the party with the onus is more likely to have occurred than not to have occurred. There must be an actual persuasion. In deciding whether the burden of proof has been met, matters such as '[t]he seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding' are considerations that affect whether an issue has been proved to the requisite standard: some propositions, by reason of their nature, do not meet the standard unless there is evidence of a particular character because the nature of the issue affects the process by which reasonable satisfaction is attained: Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336.

58    So, where, as here, there are modes of proof such as accounting information, bank records and direct evidence from those who were involved in the dealings at the time (such dealings being of a character that they are likely to be well remembered) and all those modes are within the control of the party advancing the proposition (Citadel) but not availed of, those are all matters to be brought to account in deciding whether the onus has been discharged by the evidence actually adduced when considered in the context of other evidence that otherwise raises doubt as to the correctness of the proposition. These are matters that arise from the onus, not from the application of the particular principles in Jones v Dunkel.

59    In reaching the conclusion that Citadel had not established its contention about payment to Bibby, her Honour did find that it 'was notable that Mr Maiolo, who must have knowledge of the circumstances of the payment of that debt, chose not to give evidence (until the application for leave to re-open)': at [112]. Expressed in those terms, it was not a Jones v Dunkel conclusion that the failure to call Mr Maiolo would enable the Court to infer that the uncalled evidence would not have assisted the party's case and conclude with greater confidence any inference unfavourable to Citadel. No view was expressed by her Honour concerning what might be concluded about the evidence that Mr Maiolo might have given. Further, there was no finding by the primary judge that inferences that might be drawn favourably to Action and the liquidators might be more confidently drawn in the absence of evidence from Mr Maiolo. Nor was it a finding of the kind overturned by the High Court in Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 to the effect that other evidence that was led could be diminished on the basis of a failure to call a witness. Rather, the finding was confined to a conclusion that Mr Maiolo must have knowledge as to the circumstances of the payment and he chose not to give evidence. It is a finding made to support the conclusion that the evidence as a whole was insufficient. There were sources of evidence that might be called to prove the case to the requisite standard, but that evidence was not called.

60    The finding concerning Mr Maiolo has two parts. First, on all the evidence Mr Maiolo must have known what happened with the payment of Action's debt to Bibby. Second, Mr Maiolo chose not to give evidence. The findings are not challenged. It is difficult to see how they could be in circumstances where (a) Mr Maiolo was the sole director of each of Citadel and Action at the relevant time; (b) the payment to Bibby was made in circumstances where receivers and managers had been appointed to Action by Bibby; (c) there was a settlement at which a large amount of money (in the scheme of the evidence as to the overall financial position of Action was concerned) was paid to secure the withdrawal of the receivers and managers, an event which is inherently memorable in its significance for Action; (d) the books and records of Citadel were deficient and evidence of its general ledger was adduced by reference to a reconstruction undertaken years after Bibby was paid out; and (e) Mr Maiolo was present during the course of the proceedings.

61    In response to a submission for Action and the liquidators on appeal, it was submitted for Citadel that it could not be concluded for the purposes of the application for leave to re-open that there was a forensic choice not to call Mr Maiolo. It has not been necessary to determine that point in dealing with that aspect of the appeal. The grounds of appeal that are summarised in Citadel's second point on appeal are advanced on the express basis that there is no challenge to the findings of the primary judge, only a contention about the inferences that might be drawn from those findings. Therefore, there is no challenge to the finding about the choice not to call Mr Maiolo. However, even assuming, for present purposes, that the failure to call Mr Maiolo was not the result of a forensic choice, the finding that Mr Maiolo must have known what happened remains. It is support for the finding by the primary judge that the evidence did not rise to the required level to support the case advanced for Citadel.

62    Although there was some debate in the course of oral argument as to the extent to which this Court on appeal might call in aid the principle in Jones v Dunkel in determining the challenge to the primary judge's finding (having regard to the way the grounds are expressed and in the absence of a notice of contention), it is not necessary to determine that point because, for the following reasons, no error has been demonstrated in the finding by the primary judge that there was an insufficiency of evidence to establish that Citadel paid out Bibby.

63    The matters relied upon by Citadel may be summarised as follows:

(1)    Citadel was engaged in the business of providing finance, including to entitles controlled by Mr Maiolo;

(2)    Citadel maintained a loan account with Action;

(3)    Citadel would frequently lend funds to Action, usually by paying invoices on Action's behalf;

(4)    Action would repay Citadel as and when it was able to do so;

(5)    Action had a finance facility with Bibby that was secured by the Charge;

(6)    In the Deed, Citadel, Citadel Group Holdings Pty Ltd and Mr Maiolo were referred to as guarantors of the liability of Action to Bibby and the recitals recorded that they denied that Action was in default of its obligations to Bibby;

(7)    The Deed assigned the Charge to Citadel;

(8)    As at 5 June 2012, it was reasonably likely that an amount of $704,301 was paid to Bibby to pay out Action's debt to Bibby;

(9)    The bank cheques referred to above (dated 4 and 5 June 2012) were provided to Bibby in part payment of Action's debt to Bibby;

(10)    Citadel possessed copies of the bank cheques;

(11)    Action did not pay Bibby;

(12)    No party had lodged a proof of debt asserting that they had paid out Bibby and the time for lodgement had expired;

(13)    Citadel gave notice of assignment of the Charge;

(14)    When issues were raised by the liquidator, Citadel immediately stated that it was subrogated to the rights of Bibby as a guarantor of Action's debt to Bibby.

64    It was submitted for Citadel that, in the above circumstances, the liquidators could not offer any alternative explanation as to why there would be an assignment of the security to Citadel to the explanation that Citadel had paid out Action's debt. The Court was taken to evidence that emerged in cross-examination of Ms Kelly-Anne Lavina-Trenfield, one of the liquidators, when pressed as to whether she knew of any alternative explanation as to why Bibby would have assigned the security interest to Citadel. Ms Lavina-Trenfield first maintained that there could be many alternatives and she could not comment on where funds came from to pay Bibby. She then said that there are other possibilities but she was not able to provide evidence. She was then asked whether the most likely explanation was that Citadel paid out the loan to Bibby to which she answered 'as a matter of commercial reality'. However, the evidence of Ms Lavina-Trenfield did not operate as an admission. Her answer was given as to factual matters not known to her and was stated in a context where she maintained that there were other possibilities but she did not have the evidence. There was no suggestion that the liquidators were actually disposed to forming a view as to whether Citadel had paid out Action's debt to Bibby on the limited information advanced by Citadel. In those circumstances, the evidence was not an admission against the interests of Action or the liquidators, a position that senior counsel for Citadel ultimately accepted. The opinion of Ms Lavina-Trenfield as to whether, in ordinary commercial circumstances where there has been the assignment of a security to a party who claims to be a guarantor, the most likely explanation is that the party paid out the debt does not assist. The Court is not invited to determine the case on the basis that the only evidence that might be available to determine what was likely to have happened was the fact of the assignment. There is no basis to claim that it was the only available evidence. On the contrary, as the primary judge reasoned, there may be expected to be other evidence that was readily available if indeed Citadel had paid out Action's debt to Bibby. It was the absence of such evidence that meant that Citadel did not discharge its burden.

65    It was further submitted that the absence of documentary records to demonstrate payment was to be explained by the unchallenged evidence of Mr Lissa, a certified practising accountant with considerable experience as an auditor, that Citadel 'had maintained poor records' that were in his opinion 'unreliable and inadequate to meet the requirements of the ATO audit'. It is to be noted that the opinion expressed by Mr Lissa was in the context of an audit of Citadel that was conducted in 2014. The audit led to a reconstruction of the accounts of Citadel commencing with the financial year ended 30 June 2006.

66    However, Mr Lissa went on to depose to a data entry process by Ms Rosa Maiolo (the bookkeeper and administrative assistant for Citadel) by which 22,000 individual financial transactions were entered based upon invoices, contracts and loan documents and the bank account statements of Citadel. The result of those entries was information that Mr Lissa was satisfied was sufficient for the purposes of preparing financial accounts and income tax returns for Citadel for the period 30 June 2006 to 30 June 2016. The general ledger from those accounts for the 14 individual accounts (together with balance sheet extracts) for the period 1 July 2011 to 30 June 2013 were in evidence. It appears that the material was advanced to support an argument (not pressed on appeal) that there was a further advance of monies after the Charge was assigned to Action that were secured by the Charge (see findings of the primary judge at [114]).

67    However, on appeal it was submitted that the general ledger records also showed that there was no payment by Citadel to Bibby as guarantor of Action at or about the time of entry into the Deed. Therefore, far from showing an insufficiency in records, by the time of the hearing before the primary judge the accounts of Citadel had been reconstructed and contained no entry presented to the Court that supported the claim of payment to Bibby by Citadel.

68    To these matters may be added the following:

(1)    In the ordinary course, proof of a large payment alleged to have been made by Citadel on a particular identifiable date would not be expected to be a difficult matter;

(2)    The Deed did not recite that Citadel had made the payment, nor did it state the amount that had been paid;

(3)    The Deed referred to the assignment being provided in consideration of an assignment fee of $2.00;

(4)    There was no evidence from Bibby of receipt of any payment from Citadel at the time of entry into the Deed;

(5)    Citadel and Action were not at arm's length. They were both controlled by Mr Maiolo;

(6)    The bank cheques were not identified as having been drawn on funds provided by Citadel.

69    As to the submission that no other possibility had been identified as to what might have occurred, it was not necessary for there to be conjecture as to what might have happened in order for the primary judge to reason that there was not enough evidence to establish that Citadel had paid out Action's debt to Bibby. It was enough to reason based upon the fact that payment was a matter which was capable of ready proof, there had been requests for provision of further information that had not been answered and Mr Maiolo was a person who could have given evidence about any payment but did not do so. These matters informed an understanding as to what might be sufficient evidence in all the circumstances to be advanced to prove the position on the balance of probabilities and why the evidence that was advanced was insufficient. It was not necessary for the primary judge to conclude that there were possibilities other than that Citadel had paid out Action's debt to Bibby where Citadel had put forward insufficient evidence to discharge its onus. To do so would be to reason to a conclusion from an insufficiency of evidence.

70    In any event, there do appear to be other possibilities, including:

(1)    As Citadel was not identified as the only guarantor in the Charge, it was possible that payment was made by other guarantors;

(2)    Citadel could have provided funds to Action which were then used to pay Bibby and the Charge was assigned in the mistaken belief that Citadel could claim security under the Charge for its advance;

(3)    Citadel repaid indebtedness to Action by providing bank cheques payable to Action which were then presented by Action to Bibby at settlement;

(4)    The Charge was assigned to Citadel on the understanding that it would secure future advances by Citadel to Action.

71    Finally, there was evidence before the primary judge that supported the conclusion that there was insufficient evidence in all the circumstances to establish that Citadel had paid out Action's debt to Bibby because there was evidence that was inconsistent with that position, namely:

(1)    The content of the report as to affairs;

(2)    Citadel had not provided further documentation to support its claim despite its solicitors indicating in 2013 that inquiries were being made;

(3)    The reconstructed general ledger accounts of Citadel (to the extent that only part of those accounts were presented in evidence) showed payments being made to Bibby by Citadel but not payments at the time or in the amount alleged to have been made in June 2012;

(4)    Before the primary judge was an affidavit of Mr Maiolo that had been provided in other court proceedings in which he produced a balance sheet for Action 'as at June 2012' and a draft balance sheet for Action as at 30 June 2011 and a profit and loss statement for Action for the year ended 30 June 2011. The profit and loss showed that Action was trading profitably with a net profit of more than $800,000 in each of the 2010 and 2011 financial years. Both balance sheets showed a non-current asset being a loan by Action to 'CFC' (being Citadel) of $1,056,640.57. The 2010 balance sheet showed an indebtedness of Action to Bibby of $1,057,466.35, but there was no debt to Bibby shown on the 2011 balance sheet. There were no other changes to explain the source of those funds (such as a liability shown to Citadel in the 2011 balance sheet which would have arisen if Citadel had discharged Action's liability to Bibby). However, retained earnings had increased by about $800,000 from 2010 to 2011 indicating that an amount of about that sum had been used in the activities of the business, possibly to pay down the debt to Bibby.

72    In all the circumstances, the findings of the primary judge were reasonably open and no error has been demonstrated in her Honour's reasoning.

Point 3: The finding as to subrogation and assignment

73    For reasons already given, once it is concluded that there was no error in the finding that Citadel had not demonstrated that it paid out Action's debt to Bibby, it followed that there was no subrogation and, therefore, no effectual assignment of the Charge.

74    It was contended that the primary judge found that even if Citadel had demonstrated that it paid out Action's debt to Bibby then Bibby had no rights to assign. For reasons already given, in such a case there would be no separate basis for an assignment other than to aid the right of subrogation. Put another way, absent subrogation there could be no valid assignment because the debt due by Action to Bibby had been discharged by payment (as expressly acknowledged by all parties to the Deed). The primary judge's conclusion in relation to the claim based upon assignment was premised on her Honour's finding that there was no subrogation. So much is clear from [118] of the reasons of the primary judge where her Honour found squarely that Citadel, having failed to prove payment of Action's debt, had no right of subrogation. What followed was a consideration as to whether, despite that finding, Citadel could nevertheless claim to be able to enter into possession under the Charge on the basis of the alleged assignment. Her Honour found correctly that the rights under the Charge could not be exercised if Citadel had not been the source of the funds by which the debt to Bibby was extinguished.

Conclusion

75    It follows that each of the points raised by Citadel should not be accepted and the appeal must be dismissed. Citadel accepted that if it was unsuccessful costs should follow the event. The appeal having failed entirely, there should be an order that Citadel pay the costs of the appeal.

Associate:

Dated:    27 August 2019