FEDERAL COURT OF AUSTRALIA

Royal v El Ali (No 4) [2017] FCA 299

ORDERS

THE COURT ORDERS THAT:

1.    The application filed by the third respondent on 13 October 2016 be dismissed.

2.    The third respondent pay the applicants’ costs of the application referred to in paragraph 1, such costs to be taxed in default of agreement.

3.    The application filed by the fourth respondent on 16 January 2017 be dismissed.

4.    The fourth respondent pay the applicants’ costs of the application referred to in paragraph 3, such costs to be taxed in default of agreement.

5.    Pursuant to section 29(1)(a) of the Federal Court of Australia Act 1976 (Cth) and rule 36.08(2) of the Federal Court Rules 2011, the execution of order 11 of the orders made on 23 September 2016 be stayed until 5:00 pm on 13 April 2017.

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

ORDERS

THE COURT ORDERS THAT:

1.    The application filed by the fourth respondent on 16 January 2017 be dismissed.

2.    The fourth respondent pay the applicants’ costs of the application referred to in paragraph 1, such costs to be taxed in default of agreement.

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

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    There are two applications for determination. Application has been made by Mahmoud Zreika (“Mr Zreika”) for an order pursuant to s 29(1)(a) of the Federal Court of Australia Act 1976 (Cth) (“the FCA Act”) and r 36.08(2) of the Federal Court Rules 2011 (“the Rules”) for a stay of execution of Order 11 of the orders made by the Court on 23 September 2016 in proceeding NSD 1731 of 2013 pending the determination of any appeal filed by Mr Zreika (“Mr Zreika’s application”). The other application has been made by the liquidator of Saracen Holdings Pty Ltd (in liq) (“Saracen”) for the Court’s approval pursuant to s 477(2A) of the Corporations Act 2001 (Cth) (“the Corporations Act”) for the compromise of:

(a)    the debt owed to Saracen by Mr Zreika in the amount of $800,000 pursuant to Order 8 of the orders made by the Court on 23 September 2016 in proceeding NSD 1731 of 2013; and

(b)     the debt owed to Saracen by John Rene Nazloomian (“Mr Nazloomian”) in the amount of $10,000 pursuant to Order 9 of the orders made by the Court on 23 September 2016 in proceeding NSD 771 of 2014.

(“the liquidator’s application”).

2    For the reasons that follow, the applications must be dismissed.

background

3    On 16 December 2011 Nathan El Ali (“Mr El Ali”) was made bankrupt on the petition of Peter Royal and Judith Royal (“the Royals”) in respect of a judgment debt obtained against Mr El Ali in the sum of $1,099,456.74 together with costs. Michael Jones (“the Trustee”) is the trustee of Mr El Ali’s bankrupt estate and in that capacity, the Trustee, together with the Royals, (collectively “the Applicants”) instituted these proceedings against, amongst others, Mr El Ali, Mr Zreika, Saracen, Ottoman Investments Pty Ltd (“Ottoman”), and Mr Nazloomian seeking declarations that various transactions in which they were involved were void or voidable as against the Trustee pursuant to s 37A of the Conveyancing Act 1919 (NSW) and/or s 121 of the Bankruptcy Act 1966 (Cth). The transactions included:

(a)    the transfer by Saracen of the property at 1 Sirius Road, Voyager Point (“the Voyager Point property”) to Mr Zreika on 8 December 2011;

(b)    the transfer by Ottoman of the property at 2 Woodlands Road, Taren Point (“the Taren Point property”) to Mr Zreika on 21 April 2011; and

(c)    the transfer by Saracen of the property at 1A McDonald Lane, Potts Point (“the Potts Point property”) to Mr Nazloomian on 22 November 2012.

4    The Court held that the Trustee and the Royals were entitled to the relief sought against those respondents: see Royal v El Ali [2016] FCA 782 (“Royal v El Ali” or “the reasons for decision”).

5    On 23 September 2016 the Court made various orders giving effect to the reasons for decision which included declarations that the impugned transactions were void. Other orders were made with the intended effect of putting Saracen and Ottoman back in the position they would have been had the property transfers not taken place. Saracen and Ottoman were the corporate vehicles through which Mr El Ali acquired and owned properties including the three properties the subject of the above impugned transactions. In addition, the Court ordered that Ottoman be wound up on the just and equitable ground pursuant to s 461(1)(k) of the Corporations Act. It was unnecessary to obtain a similar order against Saracen, as that company had gone into liquidation after judgment was delivered in Royal v El Ali but before final orders were pronounced.

6    The final orders pronounced in NSD 1731 of 2013 included the following relevant orders:

1.    …

2.    …

3.    Pursuant to s 471B of the Corporations Act 2001 (Cth), leave is granted to the applicants to proceed with these proceedings against Saracen.

4.    Pursuant to s 175 of the Corporations Act 2001 (Cth), the register of members of Saracen and Ottoman be corrected to record that the shares presently registered in the name of Mahmoud El Ali be registered in the name of Michael Gregory Jones as trustee of the bankrupt estate of Nathan El Ali.

5.    …

6.    Ottoman be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth).

7.    …

8.    Mahmoud Zreika account for the value of the Voyager Point property in the sum of $800,000 by paying the said sum to the official liquidator of Saracen.

9.    …

10.    …

11.    The amount of $250,000 paid by Mr Zreika into Court, pursuant to the Orders made on 26 May 2016 in substitution of the claim to the Taren Point property, be paid to the official liquidators of Ottoman.

7    The final orders pronounced in NSD 771 of 2014 included Order 9 as follows:

Mr Nazloomian account to the official liquidator of Saracen in regard to the value of the Potts Point property by paying the liquidator the sum of $10,000.

8    On 26 September 2016 the Court ordered pursuant to s 29(1)(a) of the FCA Act and r 36.08(2) of the Rules that Order 8 and Order 11 in NSD 1731 of 2013 be stayed until 11 November 2016. On 13 October 2016, the interlocutory application was filed on behalf of Mr Zreika seeking the stay of Order 8 and Order 11 pending the outcome of a foreshadowed appeal of those orders by Mr Zreika. The application was listed for hearing on 11 November 2016 together with the costs hearing in the substantive matter.

9    Mr Zreika filed a notice of appeal on 14 October 2016.

10    On 2 November 2016, Mr Zreika and Mr Nazloomian entered into a deed of settlement and release with the liquidator of Saracen (“the Deed”). The terms of the Deed included the following recitals and terms:

RECITALS:

A.    Zreika and Saracen are party to proceedings NSD 1731 of 2013 in the Federal Court of Australia (the 2013 Proceedings).

B.    Saracen has the benefit of Order 8 in the 2013 Proceedings which requires that Zreika accounts for the value of 1 Sirius Road, Voyager Point, NSW, 2172 described in certificate of tile folio identifier Lot 72 in Deposited Plan 661069 in the sum of $800,000 by paying the said sum to the official liquidator of Saracen (Order 8).

C.    Zreika and Saracen wish to compromise and resolve Order 8.

D.    Nazloomian and Saracen are party to proceedings NSD 771 of 2014 in the Federal Court of Australia (the 2014 Proceedings).

E.    Saracen has the benefit of Order 9 in the 2014 proceedings which requires that Mr Nazloomian account to the official liquidator of Saracen Holdings Pty Ltd (In Liquidation) in regard to the value of the Potts Point property by paying to the said liquidator the sum of $10,000 (Order 9).

F.    Nazloomian and Saracen wish to compromise and resolve Order 9.

G.    …

H.    On 14 October 2016 Zreika lodged an appeal in respect to the 2013 Proceedings seeking, amongst other things, that Order 8 be set aside and that the respondents to the appeal including Saracen pay Zreika’s costs of the 2013 Proceedings and the appeal.

I.    …

OPERATIVE PROVISIONS

It is agreed:

1.    Zreika and Nazloomian together agree that they will pay to Saracen the sum of $70,000 in accordance with Operation Provision 9 below (Settlement Sum).

2.    Saracen agrees that it will accept the Settlement Sum in full and final settlement of Order 8 subject to creditor approval of the Settlement Sum pursuant to section 477(2A) of the Corporations Act 2001.

3.    Saracen agrees that it will accept the Settlement Sum in full and final settlement of Order 9 subject to creditor approval of the Settlement Sum pursuant to section 477(2A) of the Corporations Act 2001.

4.    …

5.    …

6.    …

7.    …

8.    Zreika and Nazloomian acknowledge that the terms of this Deed are or may be subject to approval by the creditors of Saracen.

9.    The Settlement Sum will be paid to the Trust Account of the liquidator of Saracen within seven business days after this Deed becomes binding, and may not be distributed to Saracen until the creditors meeting has resolved to approve the compromises provided for in this Deed…

10.    …

11.    …

12.    Upon both the receipt of the Settlement Sum by the liquidator of Saracen in accordance with Operative Provision 9, and the approval by creditors of Saracen of the compromises contained in this deed …, each party releases and discharges the other from all actions, suits, causes of action, claims, claims for retention and demands whatsoever both at law and at equity which it now has or at any time had, or at any time may have had but for the execution of this Deed, could or might have had against the other for and in respect of the enforcement of Order 8 and Order 9 …

13.    …

14.    …

15.    Zreika will discontinue the appeal against Order 8 within 7 days of the date of this Deed and neither he or Nazloomian will lodge any further appeal in relation to Order 8.

16.    …

17.    …

18.    …

19.    …

11    On 11 November 2016 Saracen received a payment of $60,000 and a further $10,000 on 28 November 2016. Those funds are currently being held in the liquidator’s trust account.

12    On 8 November 2016 the solicitors for Mr Zreika wrote to the solicitors for the Applicants advising that Mr Zreika was withdrawing his appeal against Order 8 requiring him to pay Saracen $800,000. Mr Zreika’s appeal against Order 11 remains on foot.

13    On 11 November 2016, the Court was informed that Mr Zreika was only seeking a stay of Order 11 by reason of the settlement reached with the liquidator of Saracen in respect of Order 8. The Applicants stated that they would be opposing the stay because Mr Zreika had failed to comply with Order 8. The hearing was adjourned to 7 December 2016 and an order was made staying the execution of Order 11 until that date. As the interlocutory application did not proceed on 7 December 2016, the stay of Order 11 was extended until the determination of Mr Zreika’s interlocutory application dated 13 October 2016.

14    On 16 January 2017, the liquidator of Saracen filed the application for approval of the compromise pursuant to the Deed of the debt owed to Saracen by Mr Zreika in the amount of $800,000 pursuant to Order 8 of the 23 September 2016 orders in NSD 1731 of 2013 and the debt owed to Saracen by Mr Nazloomian in the amount of $10,000 pursuant to Order 9 of the 23 September 2016 orders in NSD 771 of 2014. In his supporting affidavit, the liquidator explained that whilst the Deed was made subject to creditor approval, not court approval, he decided that it would be preferable for the Court to be asked to approve the compromise in place of the creditors of Saracen because of concern, following the issue being raised by the Applicants, that the liquidator did not have the power under s 477(1)(d) to compromise Order 8 in the manner provided for in the Deed and that the Deed may be of no legal effect.

15    Both interlocutory applications were heard on 10 February 2017 and opposed by the Applicants.

16    It is convenient to consider the liquidator’s application first, which was the order in which the parties argued the applications.

the liquidator’s application

Issues in dispute

17    Section 477(2A) of the Corporations Act provides as follows:

Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than:

(a)    if an amount greater than $20,000 is prescribed—the prescribed amount; or

(b)    otherwise—$20,000.

18    But for the terms of the Deed, the liquidator would not require the Court’s approval for the compromise of Mr Nazloomian’s liability to pay Saracen $10,000 pursuant to Order 9 in NSD 771 of 2014 because the amount of the liability is less than the prescribed amount under the Corporations Regulations 2001 (Cth): see reg 5.4.02. However, as the compromise is conditioned on Mr Zreika and Mr Nazloomian together agreeing to pay the liquidator $70,000, the liquidator submitted that the question whether or not to approve the compromise with Mr Nazloomian would follow the decision in respect of the compromise of Mr Zreika’s liability to pay Saracen $800,000 and thus, did not need to be the subject of separate consideration.

19    Counsel for Saracen framed the primary matters for the Court to determine as being whether:

(a)    Order 8 in NSD 1731 of 2013 constitutes a “debt to the company” within the meaning of s 477(2A) of the Corporations Act; and

(b)    If yes, whether the Court should exercise its discretion under s 477(2A) to approve the compromise contained in the Deed.

20    The liquidator’s application was supported by three affidavits, two by Timothy Atkin, the solicitor for the liquidator, and the third affidavit by David Mansfield, the liquidator of Saracen. Objections were made to the following parts of Mr Atkin’s affidavit sworn 6 February 2017: paragraphs [9], [11]–[12], [16], [21]–[23] and pages 17–18, 24–25, 28–33 of Ex TAA1; and also to paragraph [19(b)] of Mr Mansfield’s affidavit sworn 9 February 2017. The objections were put on the basis that those paragraphs and pages contain evidence concerning “without prejudice” correspondence and communications which are prima facie inadmissible under s 131(1) of the Evidence Act 1995 (Cth) (“the Evidence Act”). Counsel for Saracen did not press paragraphs [21]–[23] or pages 28–33 but otherwise maintained the admissibility of the evidence. Apart from asserting that various exceptions set out in s 131(2) of the Evidence Act applied, counsel had not come to Court ready to argue the admissibility of the evidence and justify why the exceptions applied. I reserved on the question of admissibility and made orders giving leave to the parties to file short written submissions on the admissibility of the evidence under s 131 of the Evidence Act. Having considered those submissions, I have formed the view that none of the exclusions in s 131(2) relied on by counsel for Saracen applies and the contested evidence is not admissible under s 131(2) of the Evidence Act. But if I am wrong, I have concluded that nothing turns on that evidence in any event as the determination of the application under s 477(2A) does not depend on the admission of that particular evidence. The following reasons explain why.

21    The oft cited authority on the Court’s power to authorise a liquidator to compromise a debt is Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83. At 85–86, Giles J stated with respect to a predecessor provision of s 477(2A):

In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his [or her] powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his [or her] own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.

Section 477(2A) is a supervisory power of the Court in relation to the exercise by liquidators of their power to compromise debts granted by s 477(1) of the Corporations Act. The requirement imposed by s 477(2A) to obtain the Court’s approval for the exercise of that power is a protective measure against error or misconduct by a liquidator: Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; 35 ACSR 167; cited with approval in Re HIH Casualty & General Insurance Ltd (in liq) [2002] NSWSC 1036; and Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq) formerly known as Petrolink Pty Ltd v Smith [2015] FCA 870 (“Boné v Smith”). In considering whether to grant approval, the primary concern of the Court is whether the compromise is a proper exercise of power and for the benefit of the creditors within the overall context of the liquidation: Boné v Smith, at [22]; Re Hughes [2016] FCA 423 at [20]. A court will generally not interfere with a liquidator’s commercial judgment to compromise a debt unless there is good reason, such as the identification of a legal issue or where the propriety or reasonableness of the liquidator’s decision to compromise the debt has been called into question. As stated by Brereton J in Re One.Tel Ltd (in liq) [2014] NSWSC 457; 99 ACSR 247:

The role of the court is to grant or deny approval to the liquidator’s proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up

A court should not grant its approval under s 477(2A) if a case against the exercise of the power has been sufficiently shown.

Applicants’ submissions

22    The Applicants did not claim that there was any impropriety on the part of the liquidator in deciding to compromise the debts, nor that the liquidator should not have taken into account in making that decision, as he did, matters that were the subject of the “without prejudice” correspondence and communications that are detailed in Mr Atkin’s affidavit. The Applicants have advanced the following reasons why the Court should not grant its approval of the Deed.

23    The Applicants’ primary contention is that the Deed cannot have the legal effect of releasing and discharging Mr Zreika from his obligation to comply with Order 8, without the order also being set aside. Mr Zreika has not applied to set aside the order, but if such an application were to be made, the Applicants contend that the order could not be set aside in the absence of the Applicants’ consent as the order was made in their favour: see r 39.05(f) of the Rules. Furthermore, the Applicants say they would not consent to Order 8 being set aside.

24    Secondly, one of the matters taken into account by the liquidator in deciding to compromise the debt was that real property searches had revealed that Mr Zreika was not the registered proprietor of any real property in Australia. The Applicants have furnished evidence to show that Mr Zreika, nonetheless, is the sole shareholder of various companies that do own real property.

25    Thirdly, another reason given by the liquidator was his view that “even if Mr Zreika did have funds to pay the $800,000 it was likely that he would seek to arrange his financial affairs to make recovery from him legally difficult”. It was submitted that the apprehension that Mr Zreika would seek to frustrate the recovery and enforcement of the liability was not a proper reason for entering into a compromise with him.

26    Fourthly, if the Deed is legally effective to release and discharge Mr Zreika from his obligation to comply with Order 8, the Deed deprives the Applicants of the fruits of their litigation when there is some evidence to indicate a capacity to pay.

Objections to evidence

27    Dealing first with the objections to evidence, s 131 of the Evidence Act relevantly provides as follows:

(1)      Evidence is not to be adduced of:

(a)      a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

(b)      a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.

(2)      Subsection (1) does not apply if:

(a)     the persons in dispute consent to the evidence being adduced in the proceeding concerned or, if any of those persons has tendered the communication or document in evidence in another Australian or overseas proceeding, all the other persons so consent; or

…

(f)      the proceeding in which it is sought to adduce the evidence is a proceeding to enforce an agreement between the persons in dispute to settle the dispute, or a proceeding in which the making of such an agreement is in issue; or

(g)      evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence; or

…

(i)      making the communication, or preparing the document, affects a right of a person; or

…

28    The argument based on s 131(2)(a) was that the Applicants should be taken to have consented to the use of the “without prejudice” correspondence and communications on the basis that the Applicants “have positively advanced a case that the liquidator should not have entered into the deed and have directly put in issue the veracity of the matters the liquidator said he relied upon as set out in paragraph 19 of his affidavit”. The short answer is that the matters which the liquidator took into account in deciding to compromise the debt are not in issue. Rather what is in issue is whether the compromise is a proper exercise of power.

29    The argument based on s 131(2)(f) was that the making of the Deed was directly in issue but reliance upon the exclusion in s 131(2)(f) is misplaced. The application by the liquidator is an application for the Court’s approval of the compromise of the debts owed by Mr Zreika and Mr Nazloomian to Saracen and the “making of” the agreement is not in dispute. The issue is whether the Court should approve that agreement.

30    Likewise, the reliance on s 131(2)(g) is misplaced as the content of the “without prejudice” correspondence and communications are not in issue and nor is it in issue as to the matters that the liquidator took into account in making his decision to compromise the debt.

31    Section 131(2)(i) also does not apply. The argument that it does was premised on an assertion that the liquidator relied on statements made by the Applicants’ solicitor in entering into the compromise which were misleading or deceptive in contravention of s 18 of the Australian Consumer Law (NSW). It was put that “the evidence in question is therefore evidence of communications that affected the subsisting and continuing right of the liquidator not to be the victim of conduct in breach of s 18 of the Australian Consumer Law (NSW)”. Apart from being tendentious, this argument lacks any merit as there is no “right” of the liquidator “affected” by the making of the communications in question in respect of which such evidence would be relevant for determination by the Court in the liquidator’s application.

32    Accordingly I uphold the Applicants’ objections. But if I am wrong and the evidence should not be excluded, I am of the view that the debt compromise, nonetheless, should not be approved because a case against the granting of approval has been sufficiently shown for other reasons that have been brought to the Court’s attention by senior counsel for the Applicants.

Is there a debt to the company?

33    At this point I should also deal with the issue raised by counsel for Saracen that the $800,000 that Mr Zreika is liable to pay Saracen pursuant to Order 8 may not constitute a “debt to the company” within the meaning of s 477(2A). The issue was said to arise because the order was not made on Saracen’s application but upon the application of the Applicants, raising the question as to whether Saracen has a judgment debt for that amount in its favour. It was posited that if the Court concluded that Order 8 is enforceable by Saracen under s 53 of the FCA Act or r 41.01 of the Rules, then this would tend to support the proposition that it is a debt of Saracen within the meaning of s 477(2A). But the more pertinent question, rather, is whether a debt arose by force of Order 8. Since Order 8 binds Mr Zreika as an order against him, he became legally obliged by force of that order to pay the amount of $800,000 to Saracen and the obligation to pay that amount to Saracen is therefore a debt to Saracen: Webb v Stenton (1883) 11 QBD 518 at 526; Young v Queensland Trustees Limited (1956) 99 CLR 560 at 567. I am accordingly satisfied that the $800,000 that Mr Zreika is liable to pay Saracen pursuant to Order 8 is a “debt to the company” within the meaning of s 477(2A).

Approval of the Court pursuant to s 477(2A)

34    My reasons for not granting approval of the debt compromise are as follows.

35    First I accept the submission advanced on behalf of the Applicants that the Deed cannot have the legal effect of releasing and discharging Mr Zreika from his obligation to comply with Order 8, without also having the order set aside: Deputy Commissioner of Taxation v Leaver [2016] FCA 1028 at [7]–[11]. Unless and until set aside, there is a subsisting order that is binding on Mr Zreika, requiring him to pay $800,000 to Saracen. The Court’s power to set aside an order is contained in r 39.05 of the Rules but, in the present case, it would require the Applicants’ consent. Rule 39.05 provides:

The Court may vary or set aside a judgment or order after it has been entered if:

(a)     it was made in the absence of a party; or

(b)    it was obtained by fraud; or

(c)    it is interlocutory; or

(d)     it is an injunction or for the appointment of a receiver; or

(e)     it does not reflect the intention of the Court; or

(f)     the party in whose favour it was made consents; or

(g)    there is a clerical mistake in a judgment or order; or

(h)    there is an error arising in a judgment or order from an accidental slip or omission.

36    The only relevant provision is r 39.05(f). It is undoubted that Order 8 was made in favour of the Applicants in order to give them an effective remedy under s 121 of the Bankruptcy Act 1966 (Cth) and s 37A of the Conveyancing Act 1919 (NSW) in respect of the disposition of the Voyager Point property by Saracen to Mr Zreika which the Court declared void under those provisions. It is a material and substantial consideration in determining whether to grant approval of the Deed that the Applicants, in whose favour the order was made, are not parties to that deed and do not give their consent to the order being set aside to give effect to the debt compromise. As Order 8 is not capable of compromise in the absence of the Applicants’ consent for it to be set aside under r 39.05(f), the Deed, in consequence, cannot operate to effect a compromise of the amount that Mr Zreika must pay Saracen pursuant to Order 8 or release and discharge Mr Zreika in respect of the enforcement of Order 8. Similarly Order 9 of proceeding NSD 771 of 2014 against Mr Nazloomian is not capable of compromise in the absence of the Applicants’ consent for it to be set aside under r 39.05(f). As the Deed cannot achieve its purpose, court approval of the debt compromise that the liquidator reached with Mr Zreika and Mr Nazloomian should not be given under s 477(2A) of the Corporations Act.

37    I also reject the submission for Mr Zreika that the effect of the Deed, if approved by the Court, is that it will be an accord and satisfaction of the debt created by Order 8 as against the Applicants. That cannot be so, as the Applicants, in whose favour the order was obtained, are not a party to that Deed, and have not contracted to release Mr Zreika from his obligation to pay Saracen the amount of $800,000.

38    Secondly, whilst for the purposes of this application I am prepared to accept that Mr Zreika does not own any real property in his own name, there is evidence that he is the sole shareholder of two companies that do own real estate, namely a company called 37 York Road Pty Ltd and a company called Clutch1 Pty Ltd. ASIC searches were tendered on behalf of the Applicants evidencing Mr Zreika’s shareholding in both those companies and an “owner enquiry” of real property owned by 37 York Road Pty Ltd in New South Wales was tendered which showed that the company has an interest in a series of lots in strata plan 87058. It is uncontroversial that Clutch1 Pty Ltd now owns the Taren Point property, being one of the properties the subject of the orders made in NSD 1731 of 2013 and, specifically the fact that Clutch1 Pty Ltd now owns the Taren Point property is the reason for Order 11 which is the subject of Mr Zreika’s stay application. It appears from the liquidator’s affidavit that he was not aware of these matters when he made the decision to compromise the $800,000 payment order for an amount of $70,000. These are matters that warrant further investigation by the liquidator in the interests of the creditors.

39    Further, I accept the submission for the Applicants that the liquidator’s apprehension that Mr Zreika would seek to frustrate the recovery and enforcement of the liability was not a proper reason for entering into a compromise with him.

40    In all the circumstances, good reason has been shown as to why the Court should not grant its approval under s 477(2A) of the Corporations Act.

Mr Zreika’s application

41    The basis upon which Mr Zreika has applied for a stay of Order 11 is that he has filed a notice of appeal from that order and a stay is sought pending the outcome of the appeal. The Applicants have opposed the stay on the ground that Mr Zreika has failed to comply with Order 8 and in that circumstance, there should be no stay. Reference was made to Malek Fahd Islamic School Limited v Australian Federation of Islamic Councils Inc [2016] NSWSC 672 at [18] where Pembroke J, quoting from the decision of the New South Wales Court of Appeal in Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241, stated:

Failure to comply with orders of the court amounts to contempt of court. There is a general principle that, until any contempt is purged, a party guilty of contempt should not be heard on any application for relief beyond an application to set aside or vary an order (or undertaking to the court) in respect of which he, she or it is in contempt, or an appeal designed to set aside or vary that order or undertaking: Young v Jackman (1986) 7 NSWLR 97 at 101…

Pembroke J referred to the underlying policy consideration which was explained in Hadkinson v Hadkinson [1952] P 285 at 288 by Romer LJ (Somervell LJ concurring):

It is the plain and unqualified obligation of every person against, or in respect of whom, an order is made by a court of competent jurisdiction, to obey it unless and until that order is discharged. The uncompromising nature of this obligation is shown by the fact that it extends even to cases where the person affected by an order believes it to be irregular or even void. ‘A party who knows of an order, whether null and void, regular or irregular, cannot be permitted to disobey it …. It would be most dangerous to hold that the suitors, or their solicitors, could themselves judge whether an order was null and void – whether it was regular of irregular’. (Per Lord Cottenham LC in Chuck v Cremer).

Pembroke J also referred to other authorities to the effect that the rule is not absolute but a discretion and much will always depend on the nature of the application and the seriousness of the disobedience, including whether it has impeded the interests of justice.

42    In the present case, Mr Zreika has filed an affidavit in which he deposed that he understood by entering into the Deed he was not required to take any further steps in respect of Order 8 unless and until creditors did not approve the compromise and that it was never his understanding that the Deed was subject to reaching a settlement with the Applicants. Mr Zreika deposed that this was never communicated to him by the Applicants or the liquidator of Saracen at any time before he entered into the Deed. Nonetheless Mr Zreika has been on notice since about 9 November 2016 that the Applicants disputed that the Deed operated to release and discharge Mr Zreika from compliance with Order 8. Further, the argument that counsel for Mr Zreika put that the Applicants were estopped from relying on, and/or enforcing, Order 8 by reason of the Applicants’ asserted acquiescence to the proposed Deed in not objecting to it during a period of settlement negotiation is simply not to the point. The present situation is that Order 8 has not been complied with and although Mr Zreika has provided an explanation as to why he did not comply with Order 8 he has not indicated that he will comply with Order 8 if the Court does not grant approval of the Deed. In the circumstances, and as there is no present appeal against Order 8, I am not persuaded that there should be a stay of Order 11 pending appeal of that order.

Associate:

Dated:    23 March 2017

SCHEDULE OF PARTIES