FEDERAL COURT OF AUSTRALIA

Reches Pty Limited v Tadiran Limited [2001] FCA 1486

CONTEMPT – penalty for breach of undertaking to the Court – where contemnors believed other party not intending to rely on the undertaking – where contemnors insolvent.

RECHES pTY LIMITED V TADIRAN LIMITED

NG 606 OF 1996

MOORE J

24 OCTOBER 2001

SYDNEY

THE COURT ORDERS THAT:

1.         Save for the orders made on 11 April 2001, the application otherwise be dismissed.

2.         Mr Isaac Reches and Mrs Yael Reches be jointly and severally liable to pay the costs of the Registrar of prosecuting the contempt proceedings.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

Introduction

1                     On 11 April 2001 I gave judgment in this matter and declared that Mr Isaac and Mrs Yael Reches had committed a contempt of court.  No orders as to penalty were made.  Rather the matter was stood over until 27 April 2001 to enable the parties to make submissions on penalty.  This occurred on 27 April and 19 July 2001 (Mrs Reches was overseas on the first occasion).

Background

2                     The Reches committed a contempt by breaching an undertaking to the Court.  The undertaking was given on 16 July 1998 and accepted by the Court on 20 July 1998.  The Reches breached it by removing from unit 12/442 Edgecliff Road, Edgecliff, New South Wales property listed in the schedule to the bill of sale attached to the undertaking. The undertaking was intended to establish a mechanism for the Reches to provide $120,000 as security for costs in the action of Reches Pty Ltd against Tadiran Ltd (“Tadiran’”).  The circumstances in which that undertaking was given and subsequently breached are detailed in the reasons for judgment of 11 April 2001: [2001] FCA 415.

3                     The evidence led by both parties at a hearing on 3 April 2001 was relied on, in so far as it was relevant, both in relation to the question of whether the Reches had breached the undertaking and, in the event it was found they had, in relation to the question of penalty.  Further evidence was adduced by Mr Reches in an affidavit sworn by him on 23 April 2001 on which he was cross-examined on 27 April 2001and by Mrs Reches in an affidavit sworn by her on 10 July 2001 on which she was cross-examined on 19 July 2001.

The primary evidence

4                     It has never been in issue that the Reches disposed of property in a manner inconsistent with the undertaking given by them to the Court. However the Reches have persistently claimed that, when they disposed of the property, they believed they had been effectively released from the undertaking by Tadiran. This belief apparently arose as a result of a series of conversations involving Mr Yakov Shulman, a past employee of Tadiran who had previously been Mr Reches’ primary contact point with the company.

5                     The Reches gave evidence, both in their affidavits and repeated orally, that following judgment against Reches Pty Ltd which included a costs order, the Reches contacted Shulman and asked him to approach Tadiran on their behalf with the aim of limiting their liability to pay costs.  The Reches said that Shulman subsequently contacted Ms Layla Chertow, Tadiran’s general counsel, who assured Shulman that Tadiran was not interested in the Reches’ property secured by the undertaking.  Tadiran only intended to seek payment of an amount of $25,000 paid into court by the Reches pursuant to the security for costs arrangement as satisfaction of their costs.  Shulman, who the Reches regarded as a close personal friend, passed on this assurance to the Reches and repeated it on several occasions.  As a result, the Reches considered themselves free to disperse the property that was the subject of the undertaking.

6                     The Registrar took issue with this account.  The Registrar adduced evidence of correspondence (which Mr Reches acknowledges receiving) in which Tadiran, through its Australian solicitors, sought satisfaction of the costs order against Reches Pty Ltd.  One piece of correspondence, dated 16 November 1999 and addressed to Mr Reches personally, had attached to it a letter from Chertow (dated 15 November 1999) which stated that Tadiran had not changed its position in relation to the costs order and that Tadiran’s instructions to its Australian solicitors were to seek $100,000 as satisfaction of its costs.  The letter said:

“Mr. Philip Brand

Marshall Marks Kennedy – Lawyers

Fax. No:  00612 9950 2650

Dear Philip,

The letter is pretty amazing:

1.      Neither myself nor anyone in my department has ever spoken to Mr. Isaac Reches or anyone acting on his behalf.

2.      My instructions I have sent to you in writing and they have not been changed or revoked.

                                                                                    Best regards,

                                                                                    [signed]

                                                                                    Layla Chertow, Adv.”

This letter from Chertow was in response to a letter dated 8 November 1999 which Mr Reches had sent to Tadiran’s Australian solicitors.  In the letter of 8 November Mr Reches wrote:

“Advocate David Austin gave me your letter of 13/10/99.  [demanding payment of the costs]

I would like to advise that upon receiving the judgment, we got in touch with the legal department of Tadiran, and they advised us that the instructions given to you are to collect the $25,000 and not to take any further steps against us.

Upon receiving your letter dated – 2/9/99, we again got in touch with the legal department of Tadiran, and they again advised that the instructions given to you have not been changed.

Best regards,

[signed]

ISAAC RECHES

Managing Director”

7                     In his evidence, Mr Reches said that on receipt of correspondence from Tadiran’s Australian solicitors in November 1999, his wife and he again contacted Shulman who assured them that Tadiran was not interested in their personal property and that the letters were probably part of the formal procedures necessary to recover the $25,000. Mr Reches, in his affidavit of 23 April 2001, said that in his last conversation with Shulman, Shulman advised him that Chertow had told him that to resolve the problem once and for all the Reches probably had to fill in some legal forms in Australia and deliver them to her.

8                     In evidence was a further letter from Chertow to her Australian solicitors.  In that letter, dated 7 December 2000, Chertow acknowledged that she was contacted by Shulman about the Reches’ situation on two occasions.  She wrote that in informal discussions she mentioned that Tadiran was reluctant to undergo costly attempts to recover costs. However, in the letter she denied ever making any promises or waiving Tadiran’s right to collect the costs in any way available by law.  The letter said:

“I guess in view of our previous experience with Mr. Reches I shouldn’t be surprised.

1)         In any event, as I told by phone and in my previous correspondence, neither myself nor (as far as I could find out) anyone in Tadiran Communications was approached at any time by Mr. or Mrs. Reches regarding release of the security, and if they were, they would have received a negative answer.

2)         At some time (I don’t remember the dates) I received a phone call from Yacov Shulman, who is not employed by Tadiran for at least 5 years [sic], does not represent Tadiran nor is engaged by Tadiran in any capacity, and was Tadiran’s witness at the trial.  He told me that Mr. Reches is bothering him, calling his home endlessly trying to induce him to talk to Tadiran and beg Tadiran on his behalf not to proceed with the realization of his security.

3)         I told Mr. Shulman, that I can not waive Tadiran’s right to collect the costs and it would require an approval from our CEO, and we are definitely going to collect the $25,000 deposit.  I explained to him that I was told (by you) that any collection would require first of all to tax our costs, which is a fairly lengthy procedure and if Mr. Reches wants to reach some kind of a deal, he, first of all, has to agree to an amount of costs without dragging us through the tax process.

4)         Since Mr. Shulman did not represent Reches, I know him very well personally and he was also our witness at the trial, I also had an informal personal discussion with him on the whole issue of collecting the costs.  I told him that as I understand, in order to collect the costs in excess of the court deposit, we would have to go through a public sale of pledged assets, which might prove to be a lengthy and expensive procedure and before we go into anything like that we have to be sure that the assets are really valuable and our effort is going to be worthwhile.

5)         I also told Mr. Shulman that in view of this situation if Mr. Reches agrees on the amount of costs and cooperates regarding the court deposit, we will be willing to discuss a settlement regarding the rest, because I would like very much to avoid the procedure of a public sale in Australia, since it would mean additional costs for us.

6)         At no time did I say that we waive our right to collect the costs in any way available by law.  I also made very clear that in any event the decision was not mine to make.

7)         At no time did Mr. Shulman mention a release of the pledged security and I did not (directly or indirectly) give him any indication that Tadiran might agree to release the security.

8)         As I understood from Mr. Shulman, Reches called him because he was nearly hysterical and expected bailiffs to call upon his home any day to take away the pledged assets.  He wanted Shulman to ask us not to do it or to start bankruptcy procedure against him.  As I described above, I made no specific promises in that regard.

9)         A few weeks later I received another call from Yacov Shulman.  He complained again that Reches is bothering him [sic] and wants him to lobby on his behalf.  I explained to him again that the situation hasn’t changed.

10)       At no time did I appoint Mr. Shulman to represent Tadiran or to give Mr. Reches any answers.  In both cases he explained to me that he did not want to get involved, but Reches sounded pitiful and he felt awful that a person could come to this kind of a situation.

As I said I made no specific promises and the question of a release of the security was never even raised or discussed.

…”

9                     Reference should be made to some additional evidence.  In his affidavit of 23 April 2001, Mr Reches adduced evidence about his deteriorating health. He stated that these legal proceedings have had a severe adverse effect on his health such that he can barely walk normally, suffers from acute weakness, and is largely confined to his home for need of rest. Attached to Mr Reches affidavit was a medical certificate signed by Dr Sylvia Terkasher and dated 18 November 2000. In that certificate, Dr Terkasher certified that Mr Reches suffers from extreme fatigue, shortness of breath, insomnia, an inability to concentrate and memory loss. She also noted that Mr Reches complained of chest pain and of limited mobility caused by arthralgia and stated that he suffered from coronary heart disease, hypertension, depression, osteo-arthritis, chronic lymphatic leukemia and non-insulin dependent diabetes mellitus.

10                  In her affidavit of 10 July 2001, Mrs Reches adduced evidence concerning her poor health and in particular the severe emotional toll the proceedings with Tadiran have had on her. Attached to her affidavit was a medical certificate issued by Dr Sylvia Terkasher on 23 April 2001. The certificate attests that Mrs Reches suffers from depression and severe anxiety, that she has a long standing history of supra ventricular tachicardia which is exacerbated by stressful situations, that she is on daily medication for hypertension and that once or twice a month she suffers from migraine attacks which require intramuscular injections.

The submissions

11                  The principal factual issue arising in relation to penalty concerns what the Reches were told about the attitude of Tadiran to the property to which the undertaking related and whether they received the assurances from Shulman as they claimed.  Mr Reches submitted that Chertow’s version of events was both inconsistent and unreliable. First, Mr Reches drew attention to what he regarded as an inconsistency between the two letters from Chertow to Tadiran’s Australian solicitors.  In her letter of 15 November 1999, Chertow advised her Australian solicitors that neither she, nor anyone in her department had ever spoken to Mr Reches or anyone acting on his behalf.  In the later letter of 7 December 2000 Chertow advised her Australian solicitors that she had spoken to Shulman on two occasions about the Reches’ situation. Mr Reches submitted Shulman had no incentive to lie to the Reches about his discussions with Chertow.  However Chertow might well have been motivated by a desire to protect her position and save face, particularly in a situation where she had made promises that she was not in fact authorised to make.

12                  While the Reches conceded that they received correspondence from Tadiran’s solicitors seeking $100,000 in satisfaction of the costs order against Reches Pty Ltd, they submitted that they understood that the letters were just part of the legal process necessary to recover the $25,000 held by the Court.

13                  Counsel for the Registrar took issue with this analysis of the correspondence and the evidence.  He submitted that it is not credible that Tadiran’s general counsel would have given instructions to its Australian solicitors to seek $100,000 in costs while at the same time representing to the Reches, through Shulman, that Tadiran would settle for the $25,000 held by the Registry of this Court and simply abandon the remainder of its security.

14                  Counsel for the Registrar also submitted that Chertow’s recollection of her dealings with Shulman, contained in her letter of 7 December 2000, is a more credible and consistent version of events.  Counsel for the Registrar submitted that it was not possible that the Reches, particularly a man of Mr Reches commercial experience, could have believed, in light of the correspondence they received, that they were released from the undertaking. Moreover, it was argued that if the Reches had received such contradictory information from Tadiran they should have sought confirmation of the company’s position in writing. The fact that they did not, it was contended, demonstrated that the Reches never received the assurances from Tadiran which they claimed to have received. Counsel for the Registrar submitted further that, even on Mr Reches’ own version of events, the advice that he received from Shulman was that he should make some legal application for release.

15                  Counsel for the Registrar submitted that strict enforcement of undertakings and orders is necessary to ensure public confidence in the Court’s processes.  It was submitted that in order to guarantee future compliance with orders and undertakings, persons with limited assets and limited capacity to satisfy a Court order other than through secured property, must be aware that a breach of an undertaking to the Court or an order of the Court will be regarded seriously and dealt with firmly.

16                  Counsel for the Registrar made no express and specific submission as to what was an appropriate penalty.  He did point out, however, that because Mr Reches is bankrupt and Mrs Reches is effectively insolvent, neither a fine nor attachment of property might be appropriate penalties, even if they were otherwise appropriate for a serious contempt such as that committed by the Reches.  Reference was made to Registrar of South Australian Supreme Court v Temple [No.3] (2000) 77 SASR 8 where, in what were said to be similar circumstances, Perry J imposed a penalty of six months imprisonment, with execution of the sentence suspended for six months on the condition that before that date the sum of $50,000, being the value of the interest which the contemnor had assigned in breach of a court order, be paid to the contemnor’s trustee in bankruptcy. Two decisions of this Court where similar orders were made were also referred to: Australian Securities and Investment Commission v Matthews (1999) 32 ACSR 404 and Australian Competition and Consumer Commission v Hughes [2001] ATPR ¶41-807.

17                  Finally, counsel for the Registrar noted that although the property secured under the undertaking had been dispersed, none of the persons to whom it was given had a legal entitlement to it, and as such, it was asserted that there is no barrier to the Court making an order referrable to that property.

Conclusion

18                  The contempt committed by the Reches was serious. Reches Pty Ltd has been unable to satisfy the costs order against it and, without recourse to the secured property, Tadiran is unlikely to recover any costs beyond the $25,000 paid into Court by the Reches. Although Tadiran’s costs have not been taxed, they would exceed that amount by a considerable margin.  I am satisfied the Reches were aware when they disposed of the property that they had no other immediate means by which to satisfy the costs order made in Tadiran’s favour. In effect, the Reches were aware that their actions in disposing of the property would render as substantially illusory the benefit to Tadiran of the costs order. It was precisely that outcome that the security for costs arrangement ordered by this Court was designed to avoid and for which the undertaking was procured.  The Reches have approached compliance with their undertaking with what could be described, at the very least, as a cavalier approach to this Court.  They treated compliance with the undertaking as optional or discretionary. However, in determining the appropriate penalty, there are several mitigating factors which must, in my opinion, be taken into consideration.

19                  As noted already, the Reches have persistently submitted that Tadiran’s general counsel represented to them, through Shulman, that Tadiran had no interest in satisfying the costs order by forcing the sale of the property to which the undertaking related.  I cannot, on the evidence, be affirmatively satisfied about the contents of representations Chertow actually made to Shulman concerning Tadiran’s intentions in respect of  the secured property and the costs order which plainly would have impacted on what Shulman then told the Reches.  I accept, up to a point, the submission of Mr Reches about the letters from Chertow.  The letter of 15 November 1999 was an unequivocal denial by Chertow that she had spoken to Mr Reches or anyone acting on his behalf.  It is clear, having regard to her later letter of 7 December 2000, that she had been speaking to Shulman.  It is also clear that Shulman discussed with her matters of the type that are consistent with the Reches’ account of their conversations with Shulman.  While I would not wish to overstate it, the general tenor of the later letter is not inconsistent with Chertow feeling some embarrassment and difficulty about explaining to Tadiran's Australian solicitors dealings she had had with Shulman which were inconsistent with her dealings with the solicitors.  I am left with some real doubt about the contents of the discussions between Chertow and Shulman.  Accordingly, I cannot discount the possibility that the Reches did have discussions with Shulman of the type the Reches gave evidence about.

20                  Having regard to the nature of these proceedings and the evidentiary standard that the Registrar must meet, the Reches are entitled to the benefit of this doubt.  It is possible that there existed, on the Reches’ part, a belief that a compromise had or would be reached concerning their obligation to Tadiran.  It is also possible that the Reches were operating under the belief that Tadiran regarded the effort required to sell their property as disproportionate to any benefit that would be gained.  Accordingly it is possible that, although the Reches were aware when they disposed of the property that they were acting in breach of their undertaking, they believed that the party for whose benefit the undertaking was given did not intend to rely on it and therefore would suffer no disadvantage.

21                  I am also satisfied that the Reches have experienced a degree of humiliation, stress and anxiety by these contempt proceedings.  Further, I am satisfied the Reches have demonstrated genuine contrition for their actions and that they are remorseful.

22                  The Court has discretion to impose a wide range of penalties for contempt, including a fine: see for example Australasian Meat Industry Employees Union v Mudginberri Station Pty Ltd (1986) 161 CLR 98 and Re Arnot; Ex parte Deputy Commissioner of Taxation (NSW) (1989) 20 ATR 1554; imprisonment, which includes a power to suspend on condition any term of imprisonment imposed: see for example Australian Securities Commission v MacLeod [No3] (1993) 40 FCR 475, Australian Securities and Investment Commission v Matthews (1999) 32 ACSR 404 and Australian Competition and Consumer Commission v Hughes [2001] ATPR ¶41-807; a community service order: see for example Registrar of the Court of Appeal v Maniam [No.2] (1992) 26 NSWLR 309; and an order that the contemnor pay the costs of the contempt proceedings on an indemnity basis or otherwise: see for example Sun Newspapers Pty Ltd v Brisbane TV Ltd (1989) 92 ALR 535 and Australian Competition & Consumer Commission v Australian Business Reports Pty Ltd [1997] ATPR ¶41-577. In certain circumstances, an admonishment may be regarded as sufficient with no penalty ordered against the contemnor: see for example Pacific Basin Exploration Pty Ltd v XLX (NL) (1984) 2 IPR 489.

23                  I have considered imposing a fine or a term of imprisonment suspended on condition that the Reches recover the property or pay a sum in lieu thereof. However, there would be little point in adopting either course having regard to the fact that the Reches do not appear to be in a position to meet such orders. Imprisonment is a punishment of last resort (see Deputy Commissioner of Taxation v Hickey (1999) 42 ATR 229) and, in view of the mitigating circumstances discussed above, is a penalty which I do not regard as appropriate in these circumstances. Notwithstanding the gravity of the Reches’ contempt, I do not consider it necessary to impose any penalty upon them beyond a general admonishment. I am satisfied the Reches are unlikely to disobey court orders or breach undertakings in the future.

24                  I do, however, propose that the Reches pay the costs of this application and that they be jointly and severally liable for the costs.  If the costs order is not satisfied I will consider what further orders should be made to secure payment of the Registrar’s costs.

Associate:

Dated:              24 October 2001

The Reches appeared in person.