Federal Court of Australia

Lo Pilato, in the matter of Barrallier Street Holdings Pty Ltd (in liq) v Waters [2025] FCA 1170

ORDERS

THE COURT:

1.    Orders that pursuant to rule 30.21(1)(b) of the Federal Court Rules 2011 (Cth), the proceeding proceed in the absence of the first and second defendants.

2.    Declares that the Settlement Deed entered on 7 December 2023 and described as being between Tristan Waters and Sian Waters on the first part and Damien Hadzic, Magenta Byrne, Edward Hadzic, Barrallier Street Holdings Pty Ltd (in liquidation) as trustee for the Barrallier Street Holdings Trust and the liquidators of Barrallier Street Holdings Pty Ltd (in liquidation) as trustee for the Barrallier Street Holdings Trust on the second part was from inception of no binding effect on the plaintiffs, the third defendant and the creditors of the third plaintiff.

3.    Orders that the Settlement Deed be set aside as void ab initio.

4.    Orders that the plaintiffs’ costs be paid by the first and second defendants.

5.    Orders that there be no order as to costs other than as provided for in order 4.

THE COURT NOTES THAT:

A.    The third defendant undertakes not to plead any defence of issue estoppel or res judicata or any defence of limitation of actions in answer to any new proceeding in the District Court of New South Wales commenced by Sian Waters and to consent to an order that the costs of Sian Waters in District Court proceeding number 2021/247537 become her costs in any new proceeding brought by her in the District Court, in the event that a costs order is made in her favour in that new proceeding.

B.    The first plaintiff undertakes not to plead any defence of issue estoppel or res judicata or any defence of limitation of actions in answer to any new proceeding in the District Court by Sian Waters and to consent to an order that the costs of Sian Waters in District Court proceeding number 2021/247537 become her costs in any new proceeding brought by her in the District Court, in the event that a costs order is made in her favour in that new proceeding.

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

REASONS FOR JUDGMENT

CHEESEMAN J:

INTRODUCTION

1    These reasons concern an application in connection with the administration of Barrallier Street Holdings Pty Ltd (in liquidation), the third plaintiff.

2    The circumstances giving rise to this proceeding are relatively commonplace in many respects, but the procedural course is unusual. In addition to this proceeding, there are other relevant proceedings, including a separate proceeding in this Court concerning the review of a decision of the Administrative Appeals Tribunal (the AAT) stemming from an objection to a tax assessment and a proceeding in the District Court of New South Wales, which resolved mid-hearing.

3    The primary relief sought by the plaintiffs is to set aside or vary a Settlement Deed and Release entered into between the liquidators and Barrallier amongst others on 7 December 2023. The plaintiffs contend that the Settlement Deed is a Deed of Company Arrangement (DOCA) and as such is liable to be set aside or varied pursuant to s 510(4) of the Corporations Act 2001 (Cth). The Settlement Deed arises from the settlement of the District Court proceeding, the parties to which are described below. The plaintiffs also seek various ancillary relief.

THE PARTIES

4    Frank Lo Pilato and Jonathan Colbran are the first plaintiffs in their capacity as joint and several liquidators of Barrallier. They are also the second plaintiffs. As the second plaintiffs, they describe themselves as the joint and several liquidators of the Barrallier Street Holdings Trust, but they are Court-appointed receivers to the property of the Trust: order made on 14 September 2018 in Federal Court proceeding no. NSD466/2018 (Perram J).

5    Tristan Waters, the first defendant, is a builder and operated a building business through his company Triswat Constructions Pty Ltd. His wife, Sian Waters, is the second defendant. Mr Waters is serving a long term of imprisonment in New South Wales for various convictions for drug importation under the Crimes Act 1914 (Cth). Neither Mr or Ms Waters appeared at the hearing of this application and the hearing proceeded in their absence.

6    Damien Hadzic, the third defendant, is an electrician and building project manager who previously worked with Mr Waters on various construction projects. His wife, Magenta Byrne, is the fourth defendant. Mr Hadzic’s father, Edward Hadzic, is the fifth defendant. To distinguish between them I will refer to Damien Hadzic and Edward Hadzic by their first names.

7    Damien, Ms Byrne and Edward have each filed submitting notices, including that they do not wish to be heard on costs.

8    Damien and Mr Waters were involved in the incorporation of Barrallier and the establishment of the Trust. I address their respective involvement below.

EVIDENCE

9    The plaintiffs rely on the following evidence:

(1)    affidavits of Damien Hadzic sworn on 9 May 2024 and 15 October 2024;

(2)    affidavits of Dr Terence Dwyer, solicitor for the plaintiffs, sworn on 20 February 2024, 9 May 2024 and 22 May 2024;

(3)    affidavit of Edward Hadzic sworn on 9 May 2024;

(4)    affidavit of Mr Lo Pilato sworn on 9 May 2024;

(5)    affidavit of Mr Colbran sworn on 9 May 2024;

(6)    affidavit of Ms Byrne sworn on 9 May 2024;

(7)    affidavit of Gerald Santucci, solicitor for the plaintiffs, sworn on 2 October 2024; and

(8)    a central exhibit of documents.

10    The plaintiffs have explained the fact that they have not led evidence from the barrister who was retained by Dr Dwyer and appeared for Damien and Barrallier at the District Court hearing by tendering evidence that the barrister declined to provide an affidavit when requested to do so.

HEARING PROCEEDED IN ABSENCE OF MR AND MS WATERS

11    As mentioned, Mr and Ms Waters did not appear at the final hearing. Earlier in the proceeding, they had played an active part. A “notice of acting – appointment of lawyer” was filed pursuant to which Mr Salem Kassem, solicitor, went on the record as their lawyer. Mr Kassem had previously represented Mr Waters and Ms Waters in the District Court proceeding. At a case management hearing on 15 August 2024, counsel for the plaintiffs informed the Court that Mr Kassem was no longer acting for Mr and Ms Waters, and that Mr Torik Dib, solicitor, had been appointed to act for them, despite no notice of acting having been filed. That same day, I made orders providing for Mr Dib to take steps to file a notice of acting if, as indicated in the communications between the parties, Mr Dib was acting as solicitor for Mr and Ms Waters in this proceeding. By notice dated 26 August 2024, Mr and Ms Waters terminated Mr Kassem’s retainer and purported to appoint Mr Dib to act for them. Mr Dib has not at any time filed a notice of acting in this proceeding.

12    On 15 October 2024, Mr Dib sent an email to the Court stating that he does not act for Mr Waters with respect to this proceeding. The email does not refer to Ms Waters. For completeness, the plaintiffs continued to copy Mr Dib into email correspondence in relation to the proceeding. At the case management hearing on 17 October 2024, counsel for the plaintiffs confirmed that Mr Dib had informed the plaintiffs that he was not acting for Mr or Ms Waters.

13    As at the date of the hearing, there was no solicitor on the record for Mr and Ms Waters. I am satisfied that Mr and Ms Waters were on notice of the hearing. They did not comply with any of the case preparation orders which had earlier been made. The matter was called outside and there was no appearance for or by either Mr or Ms Waters. In these circumstances, I ordered pursuant to rule 30.21(1)(b) of the Federal Court Rules 2011 (Cth), that the proceeding proceed in the absence of Mr and Ms Waters.

BACKGROUND

14    The circumstances in which Damien and Mr Waters agreed to form a joint venture to build or renovate a residential premises at 47 Barrallier Street, Griffith, Australian Capital Territory (ACT) (the Barrallier Street property) and created a unit trust, the Trust, are somewhat opaque on the evidence before me.

15    There is a dispute as to the purpose of the joint venture. The plaintiffs submit that the joint venture was established to resell the Barrallier Street property. Damien, however, gave affidavit evidence that the purpose of the joint venture was to remediate the Barrallier Street property to avoid Mr Waters being sued by Trudie Moraschi and Lee Moraschi, the purchasers of the Barrallier Street property, in relation to defects in the building works, and also to avoid the potential for Mr Waters to lose his builder’s licence as a consequence. Damien says he also hoped to profit from the joint venture and to reside in the house after it had been repurchased from the Moraschis and while he was carrying out remediation work. For the purpose of the present proceeding, it is not necessary to resolve the factual dispute about the purpose of the joint venture.

16    The Trust was established by a deed executed on 14 September 2016 (the Trust Deed). Damien and Mr Waters each subscribed for half the units in the Trust. Barrallier became trustee of the Trust. Damien and Mr Waters each held half the shares in Barrallier. The ASIC search in evidence reflects that Damien was the sole director of Barrallier throughout the relevant period. On 20 October 2016, Mr Waters transferred all his units in the Trust to Damien with the result that Damien became the sole unitholder of the Trust. On 20 June 2017, following a sale on 26 May 2017, a transfer was completed in respect of all of Mr Waters shares in Barrallier to Damien and Damien became the sole shareholder in Barrallier.

17    On 29 March 2018, this Court made freezing orders at the suit of the Commissioner of Taxation against Mr Waters, Ms Waters and various companies in which they had an interest (Perry J). The freezing orders extended to include Barrallier, notwithstanding that by this time Mr Waters had sold his shares in Barrallier to Damien. The Commissioner sought to secure recovery of $5,779,460.73 and $2,981,728.57 owed by Mr Waters and Ms Waters respectively on default income tax assessments which, by September 2018, were the subject of default judgments against Mr Waters, Ms Waters and their companies. The freezing orders were ultimately dissolved by consent in early 2024 with no orders as to costs and the release of the Commissioner from his undertaking as to damages.

18    The plaintiffs contend that as a result of the freezing orders, Barrallier became insolvent.

19    On 6 August 2018, Barrallier was placed into voluntary administration by resolution of its sole director, Damien. As mentioned, Mr Lo Pilato and Mr Colbran were appointed as liquidators of Barrallier. Each of the liquidators practice through RSM Australia Pty Ltd.

20    The voluntary winding up of Barrallier relevantly constituted an event of default under the Trust Deed for the Trust. As a consequence, the office of trustee of the Trust was vacated, leaving Barrallier in the position of a bare trustee. Damien applied for an order appointing the liquidators of Barrallier as the joint and several receivers and managers of the property of the Trust. On 14 September 2018, the Court made orders appointing the liquidators as joint and several receivers and managers without security to the property, assets and undertakings of the Trust (Perram J).

21    On 30 August 2021, Ms Waters lodged a proof of debt dated 28 August 2021 for $495,000 in the liquidation of Barrallier. On that same day, Ms Waters filed a Statement of Claim in the District Court of New South Wales in respect of that debt. The District Court proceeding is described below.

22    On 27 May 2022, the liquidators rejected Ms Waters’ proof of debt on the following grounds (as written):

a)     You have failed to provide evidence substantiating that the purported loan was between the Company and yourself including but not limited to an executed loan agreement and communications whether written or in electronic format between yourself and the Company to document the terms of the purported loan.

b)     The financial records of the Company do not identify you as a creditor.

c)     The sole director of the Company, Mr Damien Hadzic, has provided my office with copies of his evidence in the District and Supreme Court denying that you were ever a creditor of the Company.

PROCEDURAL HISTORY

23    The background to the present proceeding is informed by three separate but interrelated proceedings. First, in 2021, Damien and Barrallier (in its own capacity and as the trustee of the Trust) filed separate applications for review against an assessment of income tax made in respect of the 2017 income year in the AAT. Second, those AAT decisions are currently the subject of an appeal in this Court, which has been heard but is presently reserved. Third, as mentioned above, on 30 August 2021, Ms Waters filed a statement of claim in the District Court, later amended, seeking to recover $495,000 from Damien and Barrallier pursuant to an alleged oral loan agreement. The parties in the District Court proceeding reached a settlement and executed the Settlement Deed, which the plaintiffs contend is a DOCA and which is the object of the relief sought in the present proceedings.

24    I will first address the AAT proceeding and the appeal therefrom before turning to the District Court proceeding.

AAT proceeding

25    In 2018, the Australian Taxation Office conducted an audit of the financial affairs of Damien and the Trust for the 2017 income year. At this time, neither had lodged an income tax return for that financial year.

26    On 25 June 2018, the Commissioner notified Damien and Barrallier (in its own capacity and as the trustee of the Trust) of the audit and issued default notices of assessment. Following the assessments, the Commissioner issued a notice of assessment of penalty to both Damien and Barrallier, for failing to lodge an income tax return. The Commissioner determined that Damien’s entitlement to a share of the net income of Barrallier was $449,169. In relation to Barrallier, the Commissioner raised an “alternative assessment” which assessed Barrallier’s taxable income to be $898,338.

27    On 17 May 2019, Damien lodged an objection to the assessment decision and penalty assessment.

28    On 5 September 2019, Barrallier lodged an objection to the notice of assessment decision. On that same date, Barrallier provided the Commissioner with an income tax return, prepared by Mr Simon Oliver, Barrallier’s accountant, which it submitted, would have been lodged in the absence of the default assessment.

29    On 28 January 2021, the Commissioner disallowed Damien’s objections (the Damien Objection Decision) and allowed Barrallier’s objections in full (the Barrallier Objection Decision).

30    In relation to the Barrallier Objection Decision, the Commissioner accepted that Barrallier purchased the Barrallier Street property for the purpose of providing Damien with a home, and that the Barrallier Street property was not rented out. However, the Commissioner was not satisfied that the deposits from Ms Waters and Damien (together, totalling $643,000) were loans and therefore, continued to characterise that amount as income of Barrallier. The Commissioner then assessed the tax liability on the basis that the income was distributed in accordance with the Trust Deed to Damien as the sole unitholder.

31    The result of the Damien Objection Decision was that the Commissioner determined that Damien’s taxable income was $697,638.19.

32    On 19 February 2021, the Commissioner issued amended notices of assessment to reflect both the Objection Decisions. The amendments included a refund of $53,469.90 to Damien, from the reduction in penalty which resulted in a reduction of his taxable income, and Barrallier’s income was amended to $0 and Barrallier received a reduction of penalty to nil.

33    On 26 March 2021, Damien filed an application for review of the Damien Objection Decision, and Barrallier filed an application for a review of the Barrallier Objection Decision in the AAT.

34    On 4 July 2023, the AAT affirmed decisions of the Commissioner which inter alia concluded that the $495,000 alleged to be a loan advance was assessable income. In reaching this determination the Commissioner rejected the assertion that this sum of money was a loan made by Ms Waters as part of the acquisition of the Barrallier Street property (AAT Decision).

35    The AAT Decision is subject to an appeal to this Court, which as mentioned is presently reserved.

District Court proceeding

36    Ms Waters instituted the District Court proceeding against four defendants: Barrallier (in its own capacity and as the trustee of the Trust); RSM; and Damien. They each filed a defence and were each represented by Dr Terence Dwyer, the solicitor acting for the liquidators in the present proceeding.

37    The Statement of Claim comprised one operative paragraph (as written):

The Plaintiff has leant $495,000 from her bank account into the Defendant’s company account. The Defendant, Damien Hadzic, made an agreement with the Plaintiff that he would remortgage his house and repay her within 6 months of the loan.

Ms Waters does not appear to have had legal representation at the time she lodged the Statement of Claim.

38    By its defence, Barrallier, in its capacity as trustee of the Trust (as the named first defendant) and in its own right (as the named second defendant), denied that Ms Waters lent it any money.

39    The thrust of the defence filed by RSM was that the facts as pleaded did not disclose any cause of action against it. RSM in its defence asserted, as was the case, that it was not a trustee of the Trust.

40    In his defence, Damien noted that he was the sole director of Barrallier, which was in liquidation. In substance, amongst other things, Damien denied that Ms Waters ever lent $495,000 to Barrallier in any capacity. He denied that he ever made any agreement of any kind as to, or in connection with, any alleged loan made by Ms Waters to him or to any company of which he was a director or shareholder. He further denied that he ever told Ms Waters that he would remortgage “his house and repay her” within 6 months of any alleged loan (the making of which was denied). He denied that he was ever the trustee of the Trust.

41    Ms Waters subsequently obtained leave from the Supreme Court of New South Wales to proceed against Barrallier in liquidation.

42    Ms Waters also obtained leave to amend her Statement of Claim. By the time she filed her Amended Statement of Claim, Ms Waters had obtained legal representation. She dropped the claim against RSM. She claimed only against Barrallier in its capacity as trustee (not in its own right) and against Damien. In her Amended Statement of Claim, Ms Waters alleged a wholly oral loan agreement between herself, Barrallier and Damien.

43    Ms Waters alleged that the oral loan agreement had the following terms:

(1)    Ms Waters would advance the sum of $495,000 to Barrallier, for it to purchase the Barrallier Street property;

(2)    the amount of $495,000 would be repaid to Ms Waters within six months by Barrallier and/or Damien;

(3)    there would be no interest for the initial six month term; and

(4)    if the loan was not repaid within six months, interest would be payable by Barrallier and/or Damien at 10% per month.

44    Barrallier and Damien each denied the existence of the alleged oral agreement.

45    Ms Waters also broadened her claim against the liquidators to include a claim against the property of the Trust. In doing so, Ms Waters proceeded on the assumption that Barrallier remained the trustee of the Trust notwithstanding the terms of the Trust which facilitated removal from office upon it becoming insolvent. In her claim Ms Waters did not refer to the appointment of the liquidators to act as receivers of the Trust property (see paragraph [18] above).

46    The District Court proceeding was listed for trial on 6 December 2023 before Newlinds DCJ (the District Court Judge). For Ms Waters, a barrister appeared instructed by Mr Kassem. A barrister appeared for Barrallier and Damien instructed by Dr Dwyer.

47    On that day, after a brief hearing in the morning, in which the District Court Judge expressed strident views about the merits of the claim, the proceeding was adjourned to enable settlement negotiations to occur. The proceeding was given a marking of 2.30pm for further mention or resumption.

48    The plaintiffs’ claim to set aside or vary the Settlement Deed relies on detailed evidence of what transpired during the initial hearing. The transcript of 6 December 2023 is in evidence.

49    At the outset, the District Court Judge expressed concern that the same barrister and solicitor was acting for both Damien and Barrallier in circumstances where both parties had been sued for a failure to repay a loan under the same loan agreement:

[DISTRICT COURT JUDGE]: What's his defence because you're telling me that Mr [Hadzic's] position is that it was a loan to him? Am I missing something because apart from anything, don't you have enormous conflict between the position of these two defendants? The company is trying to push the liability onto Mr [Hadzic], right? You act for Mr [Hadzic]. How could you act for the company and Mr [Hadzic] at the same time, because their interests are diametrically opposed. It's not good for [Mr Hadzic] for the company to prove that he owes this money, is it; that's not in his interest?

[DEFENDANTS’ COUNSEL]: Quite right.

[DISTRICT COURT JUDGE]: So how do you act for both of them and discharge your duty to both of them?

[DEFENDANTS’ COUNSEL]: In those circumstances, I can't, your Honour.

50    I interpolate to note that in the materials that are before me, the characterisation placed on the intersection of the defences of the company and Damien by the District Court Judge as involving an intractable position of conflict is not readily apparent. It is not clear why counsel appearing for the defendants acceded to that proposition but counsel did attempt to expose that the company and Damien were defending the proceeding on the basis that the alleged loan was in fact a contribution to the joint venture made by Ms Waters for Mr Waters and not repayable as such. A review of the transcript reveals that attempts were made to do so, but those attempts were either not effective in assisting the District Court Judge to understand the defendants’ position or were brushed aside. The District Court Judge pressed the parties to use the time that had been set aside for the hearing to settle the case under the threat of forcing the defendants to continue the hearing the next day with (or without) separate and entirely new representation. That is evident from the following exchanges.

51    The District Court Judge criticised the defendants for what the District Court Judge perceived to be an attempt by them to run an unpleaded claim in the nature of a set-off. Counsel for the defendants was attempting to respond to the District Court Judge’s question about the defendants’ defence by reference to the mutual dealings between Mr Waters and Damien in connection with what he described as the activation of the joint venture involving Barrallier to undertake the substantial remediations on the Barrallier Street property when the District Court Judge interrupted. Again, the defendants’ counsel acceded to propositions put by the District Court Judge when pushed without clearly exposing the way in which the defendants sought to defend the claim. At no stage did the defendants make an application for recusal:

[DISTRICT COURT JUDGE] I've flicked through the affidavits. This is not a concluded view and I must say it's cursory, it just looks to me that there's an obvious money flow after the conversation from the plaintiff to the company, not to Mr [Hadzic], goes to the company. I'd like to know what you say about that.

[DEFENDANTS’ COUNSEL]: Mr Damian [Hadzic] has mutual dealings with Tristan Waters and--

[DISTRICT COURT JUDGE]: None of this is pleaded.

[DEFENDANTS’ COUNSEL]: None of that is pleaded.

[DISTRICT COURT JUDGE]: None of that is even hinted at in the pleading and nor do I see it in his evidence, do I, or do I? I must say I've read the plaintiff's affidavits more carefully than the defendant. That would have to be pleaded.

[DEFENDANTS’ COUNSEL]: That would have to be.

[DISTRICT COURT JUDGE]: If he wanted to plead a set-off, that would have to be pleaded. I'm not going to allow you to amend now because it sounds to me like this has been made up by the person next to you as we go along, no criticism of you. But I am worried, … it's not my job to satisfy myself that you do or don't have a conflict.

[DEFENDANTS’ COUNSEL]: No.

[DISTRICT COURT JUDGE]: I have to say sitting here only having heard what I'm heard, I'm a little bit concerned.

[DEFENDANTS’ COUNSEL]: I am.

[DISTRICT COURT JUDGE]: I have to ask you: are you satisfied that you can act for both these defendants at the same time?

[DEFENDANTS’ COUNSEL]: No, I can't in any circumstance. I purport to act on the record because that is how the record is presented at the moment. It's a bit more than an academic conflict.

[DISTRICT COURT JUDGE]: It's a serious conflict.

[DEFENDANTS’ COUNSEL]: Serious conflict.

[DISTRICT COURT JUDGE]: Because it sounds like the company defendant and the director defendant both want to say if there is a liability, it's on the other one.

52    The characterisation of the defendants’ defence as being predicated on there being an extant loan against which an unpaid joint venture liability was to be set-off appears to be a characterisation of the defendants’ defence that is not pleaded and which does not accord with the defence that the defendants filed. The defendants’ defence was that there was no loan. There was a payment of a joint venture contribution which was not repayable. I apprehend this to be consistent with the way in which the defendants responded to the taxation decisions in relation to the treatment of the receipt of the $495,000.

53    As the above extracts of the transcript make plain, particularly when read against the whole of the transcript, the defendants’ counsel appears to have been overborne into agreeing with propositions made by the District Court Judge which could have been rebutted had counsel had the temerity and been afforded an opportunity to explain. The District Court Judge based his observations on his admittedly one-sided review of the evidence before the hearing commenced in which he focussed on the plaintiff’s evidence. It appears that after the District Court Judge made his views known that the defendants negotiated on the alternative basis that even if the $495,000 was a loan it was from Mr Waters, not Ms Waters, and there was a set-off against an amount owing to Damien from Mr Waters for work done by Damien for Mr Waters for which he had not been paid (see paragraph [65] below).

54    The District Court Judge indicated that he intended to take an adjournment but would bring the matter back for mention at 2.30pm that same day. In doing so, the District Court Judge made it clear that if the defendants were not able to secure new and separate representation before the next day, that the hearing would proceed on the following day, even if the defendants were not legally represented.

55    In bringing the matter back for an update at 2.30pm, the District Court Judge said that his purpose was to keep counsel on their toes. The exchanges between the District Court Judge and the parties made it clear that the District Court Judge expected the parties to engage in settlement negotiations during what was to be a short adjournment. The District Court Judge made it plain that the parties should conduct their negotiations informed by the remarks that the District Court Judge had expressed during the course of the morning. Those remarks included that the District Court Judge knew the liquidator, who should be informed of the District Court Judge’s preliminary view that the matter was really a proof of debt matter on which Ms Waters would prevail against Barrallier. In relation to this last topic, the District Court Judge said (at T618.6-24):

[DISTRICT COURT JUDGE] I know the liquidator. You can tell him that my preliminary view, and it's only a preliminary view but having flicked through the file, is the company looks to me to be liable, the director looks to me to have a solid defence. Probably, if you ask me for some sort of evaluation, I'd think that that defence was weighted in favour of the plaintiff losing that case, but let's leave that to one side because that's probably the real issue in the case, but as against the company, I just don't understand how there could be a defence. Just make sure he understands that if I were to enter a judgment against the company, it would be stayed pending further order of the Supreme Court which means all the plaintiff can do with it, if they don't go to the Supreme Court and they're not going to get leave to enforce, they can just use it to staple to a proof of debt.

[DEFENDANTS’ COUNSEL]: Of course.

[DISTRICT COURT JUDGE]: Today was the day to have the decision about that. This is effectively a proof of debt case against the company, and it sounds to me like the only defence you wanted to run was some sort of set-off and he hasn't run it.

56    The last topic was addressed repeatedly and in strident terms, albeit qualified by a comment that it was a preliminary view and an acknowledgement by the District Court Judge that he had “probably said way too much”: T18.29.

57    The District Court Judge invited the parties to communicate with his chambers if they reached the view that they were wasting time and in which case the hearing would resume. The District Court Judge made it clear that unless he made consent orders during the day, that the parties could “expect that at whatever point we adjourn for the day, the orders will be: adjourned until 10 o'clock tomorrow for hearing, defendants to pay the costs of the plaintiff thrown away by this adjournment on an indemnity basis”: T19.20-24.

58    During the adjournment the parties communicated by email. Some of the communications were expressly stated to be on a without prejudice basis. Without prejudice correspondence or negotiations are admissible in exceptional circumstances, including if the issue is whether or not the negotiations resulted in an agreed settlement and to ascertain the true construction of the settlement agreement: Harrington v Lowe [1996] HCA 8; 190 CLR 311 at 326 (Brennan CJ, Dawson, Toohey, Gaurdron, McHugh and Gummow JJ); Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44; 3 WLR 1424 at [30], [41] and [46] (Lord Clarke). See also Evidence Act 1995 (Cth) s 131(2)(f). The essential features of the email exchange between the parties were as follows.

59    During the adjournment, Dr Dwyer sent an email at 12:49pm to the District Court Judge’s associate, stating that the parties expected to appear at 2.30pm to announce in principle settlement.

60    Dr Dwyer then sent an email to Mr Kassem at 1.38pm, in which he indicated that the defendants had accepted an offer put by the plaintiff – that Ms Waters be accepted as a creditor for $550,000. The offer was an oral offer made during the adjournment. Mr Lo Pilato deposes to discussing the settlement offer directly with Mr Kassem and Ms Waters’ counsel. He says he agreed to admit Ms Waters as an unsecured creditor in the liquidation for $495,000 and to compromise her costs by accepting a total liability for $550,000 in his capacity as liquidator of Barrallier. He says he did not agree that Ms Waters had any priority as a creditor of the company. Dr Dwyer asked for assistance from the plaintiff to prepare a deed of mutual releases and communicated that he expected to inform the District Court Judge that the matter is “settling in principle” when the Court resumed at 2.30pm.

61    Mr Kassem responded to Dr Dwyer by way of email at 1.43pm. Mr Kassem expressly communicated that his email was without prejudice and confirmed that “there is no agreement until it is documented”, and that he would send through formal documentation shortly. He also explained that the plaintiff’s counsel had to leave for personal reasons and that Mr Kassem would personally attend Court at 2.30pm to indicate whether the matter is likely to settle before 10.00am the next day (7 December 2023).

62    Mr Kassem followed up this email with a further email to Dr Dwyer at 2.17pm. In the email, he confirmed that he had been in contact with the plaintiff’s counsel and that they would send the Settlement Deed to Dr Dwyer by 4.00pm that day. Mr Kassem asked for confirmation as to whether Dr Dwyer could sign and return the Settlement Deed by 5.00pm that same day.

63    When the proceeding resumed at what I infer to have been around 2.30pm (based on the time stamps of the email correspondence), Mr Kassem appeared for Ms Waters instead of counsel. The same barrister appeared for the defendants. Mr Kassem informed the Court that the plaintiff’s counsel had left to attend to a personal emergency. The following exchange then occurred (T19.39-51):

KASSEM: But on better news, we have agreement in principle, it just needs to be documented. … we'll have that document to my friend by 4pm today.

[DISTRICT COURT JUDGE]: Can I do this: stand it over to 10am tomorrow. If you have short minutes that dispose of the matter, send them up by email before and I'll make them in chambers, but otherwise if there's a problem or it hasn't happened, I'll see you here at 10. I know what agreement in principle means but, fundamentally, it means you don't have an agreement but it means you think you're close. So I want to keep the pressure on and if it hasn't settle by10am, the case runs. You're obviously doing well, so that's all I have to say. I'll adjourn till 10am unless I make other orders in chambers.

64    Mr Lo Pilato gave evidence that the in principle settlement agreement was in the following terms:

I agreed to admit Sian Waters as an unsecured creditor in the liquidation for $495,000 and to compromise her costs by accepting a total liability for $550,000, on behalf of Barrallier (in liquidation), in my capacity as a Liquidator of Barrallier. I did not agree that she had any priority as a creditor of the [Barrallier].

I said to Mr Kassem “I will admit Sian Waters as an unsecured creditor for $550,000 which is the claimed amount of $495,000 plus $55,000 for her costs. Is that agreed to?” or words to that effect. Mr Kassem said “OK. That's agreed,” or words to that effect. Mr Kassem then said “I will draft a settlement deed to implement the agreement” or words to that effect.

Given what I had been told, by my solicitor, Dr Dwyer, about how the morning's hearing had gone with [the District Court Judge], I believed that I had no choice but to concede the matter and agree that the liquidators would accept Sian Waters’ claim of $495,000 as a creditor in the liquidation. I did not agree to Mrs Waters becoming a secured creditor nor did I understand her to be so claiming and, in any case, no evidence of any secured creditor status on her part had been ever provided to me by Sian Waters. At no stage would I have knowingly agreed to Sian Waters being accepted as a secured creditor of Barrallier for any amount of security for her alleged loan of $495,000 to Barrallier and Damien Hadzic jointly.

65    Dr Dwyer gave evidence that when trying to reach an in principle agreement, he said to Mr Kassem words to the effect of: “The $495,000 was owed by Damien to Tristan and there are set offs for some $369,000 for unpaid work done by Damien for Tristan. The transfers from the bank account are marked TW – they were from Tristan Water”, and that Mr Kassem refused to engage and replied: “It's owed to Sian Waters”.

66    Dr Dwyer also deposed that the in principle settled agreement was to admit “Sian Waters as an unsecured creditor in the liquidation of Barrallier for $550,000 representing $495,000 plus Mrs Waters costs”.

67    As I have said, the defendants did not appear to defend this proceeding. They did not read any evidence, including from Mr Kassem. I infer that such evidence as was available to them on the extent of the oral agreement would not have assisted their case.

68    Later that day, during the period when the proceeding had been stood over until 7 December 2023, Dr Dwyer sent an email to Mr Kassem at 5.12pm inquiring after the draft Settlement Deed that the defendants had not yet received. Having not yet received a response from Mr Kassem, Dr Dwyer followed up at 6.02pm, reiterating that they had not received the relevant document and “given distance and timing it will take time to get things signed and settled and His Honour effectively wants it done now”. Mr Kassem responded at 6.03pm, explaining that he was experiencing IT issues and would therefore send the draft Settlement Deed by phone. He instructed Dr Dwyer to “confirm agreement, enter the personal detail for your clients and let me know it is ok to sign”. At 6.27pm, Mr Kassem sent the draft Settlement Deed to Dr Dwyer.

69    The draft deed attached to the email was framed to be between Mr and Ms Waters on the first part (described as the plaintiffs) and Damien, Ms Byrne, Edward and Barrallier as Trustee (described as the defendants) on the second part and the liquidators of Barrallier as trustee (described as the Liquidators). Notwithstanding that Ms Byrne and Edward are designated as “Defendants” there is no suggestion in the draft deed that they were parties to the District Court proceeding. To the contrary, the District Court proceeding is expressly acknowledged in the draft deed to have been commenced by Ms Waters (not Ms Waters and Mr Waters) against Barrallier and Damien (and not Damien, Ms Byrne, Edward and Barrallier).

70    Dr Dwyer gave evidence that upon reviewing the draft document, he was puzzled by cl 3 which related to the subordination of debts. In particular, he was concerned with cl 3.2, which forms part of cl 3:

3. Subordination of Debts

3.1    The Defendants subordinate any debts they are owed by the Company (whether jointly or separately) to the debt referred to in clause 2 above claimed by Sian Waters.

3.2    The Defendants, the Liquidators and the Company agree and acknowledge that as a result of this Deed, any debts that the Company may owe to any or all of the Defendants will only be paid after the debt owed to Sian Waters has been paid in full and in cleared funds.

71    According to Dr Dwyer, this clause did not reflect what the liquidators had agreed to, namely, to accept Ms Waters’ claim to be admitted as an ordinary creditor in the liquidation for her alleged loan plus $55,000 for her costs. Instead, cl 3.2 sought to convert Ms Waters into a priority creditor ahead of all other creditors of Barrallier (in its capacity as Trustee), despite no such claim having been pleaded by her in the District Court. Mr Lo Pilato similarly gave evidence that cl 3.2 went beyond what he had agreed to.

72    At 6.44pm on 6 December 2023, Dr Dwyer forwarded the proposed Settlement Deed, with suggested edits in track changes to the defendants’ counsel who had appeared at the hearing in the morning. Dr Dwyer proposed that Edward be removed from the draft deed, as he was not a party to the litigation, and cl 3.2 also be removed, which Dr Dwyer thought to be contrary to “the law of liquidations”. Counsel did not reply to this or previous emails that Dr Dwyer had sent to him seeking his advice.

73    Dr Dwyer sent an email to Mr Kassem at 6.56pm asking for the same amendments to be made to the draft deed explaining that “Mr Edward Hadzic is not a party to anything and the liquidators have to follow the law as regards paying creditors and, of course, taxation authorities and disputes may require the deed be produced as evidence.”

74    At 7.52pm, Dr Dwyer sent a further email to Mr Kassem, this time with amendments marked up in track changes. In his email, he again questioned the priority given to Ms Waters, noting that “Clause 3.2 seems impossible as a matter of law” and indicated that he “put Edward Hadzic back in (though it is strange as he is not defendant)”.

75    Dr Dwyer sent an updated version of the draft Settlement Deed to Mr Kassem at 8.30pm with “Ed Hadzic back in it”. Mr Kassem responded shortly afterwards at 8.40pm, noting that cl 3.2 had been omitted and that “3.2 needs to stay in”. In response, Dr Dwyer sent through the draft Settlement Deed with cl 3.2 in the document, stating “though legally ineffective as regards liquidators”.

76    During this exchange, Dr Dwyer sent a draft of the Settlement Deed for signing to Mr Lo Pilato, Edward and Damien, as well as counsel who had appeared for Barrallier and Damien at the hearing. In that version, Dr Dwyer deleted cl 3.2. No response was received from counsel regarding the proposed draft deed or to Dr Dwyer’s requests for advice and queries about cl 3.2.

77    At 8.57pm on 6 December 2023, Dr Dwyer emailed Mr Lo Pilato, Edward and Damien again, sending a copy of Mr Kassem’s version of the Settlement Deed. He again included counsel in his communication. Dr Dwyer re-sent that email at 9.57pm that evening. In the email, he communicated that Mr Kassem was insisting that cl 3.2 go back into the draft deed and again indicated that he thought the clause would be legally ineffective as against the liquidators. Dr Dwyer deposed that:

However, the Settlement Deed was being presented by Mr Kassem on a "take it or leave it" basis on the night before the matter was due to go to back Court and Mr Kassem refused to accept my removal of Clause 3.2. In the circumstances, given the hostility that [the District Court Judge] had shown towards the merits of the defence case, in the absence of any response from [counsel] as to the inclusion in the Settlement Deed of Clause 3.2, Mr Lo Pilato and Mr Hadzic agreed with me that they had no choice but to sign the Settlement Deed as presented to them.

I acquiesced in that stance by my clients, regardless of the draft Settlement Deed's failure to implement the actual oral agreement made by Mr Lo Pilato with Mr Kassem to admit Sian Waters as an unsecured creditor in the normal way including her agreed legal costs in the District Court (which was her pleaded claim) and regardless of the apparent conflict of the Settlement Deed with company law as I understood the law.

In fact, the Settlement Deed was only signed the next day, 7 December 2023, around 8.00 am, a couple of hours before the matter was due back to Court before [the District Court Judge].

78    Although Dr Dwyer remained concerned over the inclusion of cl 3.2, he deposed that he was less concerned with cl 3.1 because Barrallier “was no longer the trustee of the Trust with a right of indemnity against trust assets for debts incurred after its removal from office as trustee under cl 85 of the Trust Deed when it went into voluntary liquidation”. Dr Dwyer gave evidence that he took the view that, in dealing with Mr Kassem, Barrallier had ceased to be a trustee when it went into voluntary liquidation on 6 August 2018.

79    Mr Lo Pilato gave evidence that prior to signing the document, he was advised that Mr Kassem had refused to alter the proposed Settlement Deed, that the conversion of Ms Waters to a secured creditor status had no effect under corporations law and that the District Court Judge was demanding “a capitulation of the Waters claim”. It is on this basis that Mr Lo Pilato felt he had no practical alternative but to sign the document and instead, would seek further advice about its efficacy by briefing new counsel, experienced in corporations law matters.

80    Ms Byrne gave evidence that she also believed she had no choice but to agree to the terms of the Settlement Deed. She deposed that she told Damien: “I can’t understand why I am being made a party to a deed to settle a District Court proceeding to which I am not a party. Recovery of the loan of money, has got nothing to do with me. Recovery of the loan from me seems to be now sought by Sian and Tristan.” She also gave evidence that Damien had told her that he, his father and the liquidator, Mr Lo Pilato, had all agreed to settle the case.

81    At 10.15pm on 6 December 2023, Dr Dwyer received his first and only response from his counsel that evening: “Thanks all”.

82    The next day, on 7 December 2023, Dr Dwyer emailed a copy of the Settlement Deed to Mr Kassem at 7.49am with the liquidators’ signature. Mr Kassem responded at 8.20am indicating that he had his client’s copy but was “waiting to receive the deed signed by Damien, Magenta and Edward”.

83    At 8.48am Damien emailed a copy of page seven of the Settlement Deed to Dr Dwyer, which included the signatures of Damien, Edward and Ms Byrne. Dr Dwyer forwarded the signature page to Mr Kassem soon after. At 8.55am, Mr Kassem provided the Settlement Deed to Dr Dwyer with the signatures of Mr and Ms Waters by way of email.

84    In its final iteration, the Settlement Deed included cl 3. Under the heading “Subordination of Debts”, cl 3 provides:

3.1    The Defendants subordinate any debts they are owed by the Company (whether jointly or separately) to the debt referred to in clause 2 above claimed by Sian Waters.

3.2     The Defendants, the Liquidators and the Company agree and acknowledge that as a result of this Deed, any debts that the Company may owe to any or all of the Defendants will only be paid after the debt owed to Sian Waters has been paid in full and in cleared funds.

85    The Settlement Deed was executed by:

(1)    Mr Lo Pilato;

(2)    Mr Waters;

(3)    Ms Waters;

(4)    Damien;

(5)    Ms Byrne; and

(6)    Edward.

As noted above, Mr Lo Pilato, Ms Byrne and Edward were not parties to the District Court proceeding.

86    On that same day, consent orders were made by which the District Court proceeding were dismissed with no order as to costs.

87    It is convenient at this point to summarise the plaintiffs’ contentions as to the differences between the terms of the in principle oral agreement and the terms of the Settlement Deed as executed. The differences are all variations on a theme, namely that whereas the oral agreement was limited to admitting the debt claimed by Ms Waters as an unsecured debt in the original amount claimed inflated to provide an allowance for costs, the Settlement Deed went further in that it extended to subordinating all other creditors’ claims to Ms Waters’ claim and in this way effected what the plaintiffs characterise as a de facto DOCA. The plaintiffs parse the key differences between the oral agreement and the Settlement Deed as follows.

88    First, cl 3 of the Settlement Deed gives Ms Waters priority over all other creditors by subordinating the claims of all other creditors of Barrallier to her claim. Pausing there, the plaintiffs contend that Ms Waters had not sought any relief to this effect in the District Court proceeding. Further, that the District Court did not have jurisdiction to grant such relief. That would not foreclose the parties agreeing to a settlement that was broader in parameter than that which could have determined by a judgment in the District Court proceeding.

89    Secondly, the Settlement Deed was framed so as to bind the Hadzic defendants, as unsecured creditors of Barrallier, to the subordination of their debts to that of Ms Waters. Again, the plaintiffs contend that Ms Waters had not sought relief to this effect in the District Court proceeding and that the District Court did not have jurisdiction to grant such relief. As I have said, if the Settlement Deed was otherwise effective, that would not be an impediment of itself.

90    Thirdly, as mentioned the plaintiffs contend that the effect of the Settlement Deed was to implement a DOCA without the requisite approvals required under the Act (which are addressed below) and was therefore contrary to s 510 of the Act. This is the point of substance raised by the plaintiffs.

This proceeding

91    The present proceeding was commenced by originating application filed on 28 December 2023, three weeks after the execution of the Settlement Deed on 7 December 2023, seeking to set aside the Settlement Deed and various ancillary relief. The proceeding was commenced within the 21 day time frame contemplated by s 510(4) of the Act.

CONSIDERATION

92    The plaintiffs submit that there are seven issues arising for determination and that those issues should be framed through the prism of the categories of agreement identified in Masters v Cameron [1954] HCA 72; 91 CLR 353 at 360-363 (Dixon CJ, McTiernan and Kitto JJ).

93    First, whether the oral agreement to compromise the District Court proceeding made between Mr Lo Pilato (on behalf Barrallier) and Mr Kassem (on behalf of Mr Waters and Ms Waters) on 6 December 2023 constituted a binding and enforceable contract involving the payment of money by Barrallier to Ms Waters out of the property of Barrallier, either in its own right as an insolvent company out of the company’s property or as former trustee of the Trust out of the trust property, within the meaning of category 1 in Masters at 360-363.

94    Secondly, if the answer to issue 1 is yes, then is the Settlement Deed between the parties to the District Court proceeding an accurate written record or confirmation of the oral contract entered into on 6 December 2023.

95    Thirdly, if the answer to issue 1 is no, then is the Settlement Deed upon its proper interpretation a valid and enforceable independent contract for the payment of money to Ms Waters by Barrallier, subject to any other questions about the circumstances of its making.

96    Fourthly, if the answer to issue 2 is yes, the Settlement Deed accurately records the oral contract, then:

(a)    does the Settlement Deed comply with s 510 of the Act; and

(b)    if not, then what are the statutory consequences of statutory non-compliance?

97    Fifthly, if the answer to issue 2 is no, the Settlement Deed does not accurately record the oral contract, and having regard to the circumstances in which the Settlement Deed was entered into, what are the consequences for the enforcement or enforceability of the Settlement Deed against Barrallier?

98    Sixthly, having regard to the answers to the preceding questions, should the Settlement Deed:

(a)    be set aside and, if so, upon what grounds; and/or

(b)    be found to be valid and enforceable as recording an obligation to make a payment to Ms Waters:

(i)    by the liquidators out of the property of Barrallier if any; or

(ii)    by the receivers out of the trust property of the Trust?

99    Seventhly, having regard to issue 6, which party or parties should bear the costs of this proceeding?

100    To the extent it is necessary to do so, I will address these issues in turn.

Issues 1, 2 and 5: Whether the oral agreement was a binding and enforceable contract and if so, does the Settlement Deed constitute an accurate written record or confirmation of that oral agreement?

101    The issue of whether the oral agreement made on 6 December 2023 was a binding and enforceable contract engages the well-known principles identified in Masters as to the three categories of case in which parties have been in negotiation and agreed on terms of a contractual nature, but also agreed that those terms will be dealt with by way of subsequent formal documentation. Briefly, the categories identified in Masters are:

(1)    First category: where the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect;

(2)    Second category: where the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document; and

(3)    Third category: where the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

102    In Baulkham Hills Private Hospital v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628, McLelland J explained that there is in reality a fourth class of case additional to the Masters categories, namely, “one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms”.

103    It is well established that in the first two categories, there is a binding contract, but in the third there is not: Masters at 360-361. The fourth category similarly gives rise to an immediately binding contract on the agreed terms.

104    The categories of cases in Masters are not to be applied as strict “categories” into which such cases must fall: Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313; 90 NSWLR 605 at [69] (Beazley P), citing Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; 209 CLR 95 at [25] (Gaudron, McHugh, Hayne and Callinan JJ). Rather, the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan [1973] HCA 38; 129 CLR 629 at 638 (Walsh J); Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-334 and 337 (McHugh JA); G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634 (McHugh JA, with whom Kirby P and Glass JA agreed).

105    The question of whether the parties reached an agreement is to be decided objectively. That is, it is to be decided by reference to what the parties’ words and conduct would be reasonably understood to convey, not upon their actual beliefs and intentions: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; 218 CLR 471 at [34] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).

106    The plaintiffs submit that the oral exchange was a binding agreement that came into existence on 6 December 2023. The plaintiffs further submit that the agreement was that the liquidators would admit Ms Waters for a debt of $550,000 as an unsecured creditor of Barrallier in its own right as a body corporate in liquidation without any priority over any of the other creditors of Barrallier. The plaintiffs submit that the Settlement Deed was required to reflect the agreement that had been reached and was not an occasion to renegotiate what had been agreed. The plaintiffs contend that Mr Kassem perceived an opportunity to renegotiate the agreement overnight on 6 December 2023 in favour of Ms Waters after the agreement had already become binding and used the requirement for a deed to be prepared in order to do this. The plaintiffs submit that the Settlement Deed did not reflect what had been agreed orally. They point to the following various features of the Settlement Deed as departures from the terms of the oral agreement. They also contend that the oral agreement was supported by valuable consideration in the form of the mutual promises between Ms Waters and the defendants to the District Court proceeding because the District Court Judge dismissed the proceeding with no order as to costs on 7 December 2023 as a term of this in principle agreement which they submit displaced the oral loan agreement sued upon by Ms Waters.

107    I am unable to accept the plaintiffs’ submissions that the oral agreement made on 6 December 2023 was immediately binding. Determined objectively, the oral agreement was subject to a written settlement deed being agreed. My reasons are as follows:

108    First, the agreement was consistently described as an in principle agreement including by Dr Dwyer. That is one indication that the parties had reached a broad understanding but did not intend to be bound until the deed was executed. Without more, it is not decisive.

109    Secondly, the contemporaneous correspondence tendered in evidence supports the conclusion that the oral agreement was not immediately binding but was subject to a deed being executed. Dr Dwyer himself said in correspondence that he expected to inform the District Court Judge that the matter is “settling in principle” – he did not say it had settled (past tense). This is a minor indication that the parties were in the process of agreeing, but had not yet agreed. While I do not place much weight on this description, it does tend to support that the in principle agreement was subject to entry into the Settlement Deed. More significant is the fact that Mr Kassem repeatedly caveated his client’s position in his written contemporaneous communications with Dr Dwyer, including by communicating before the proceeding resumed before the District Court Judge at 2.30pm that “there is no agreement until it is documented”. He repeated statements to like effect in subsequent communications.

110    Thirdly, I place considerable weight on what was said when the proceeding resumed at 2.30pm. The relevant passage of transcript is extracted at paragraph [63] above — Mr Kassem said “we have agreement in principle, it just needs to be documented”. The District Court Judge in response said “I know what agreement in principle means but, fundamentally, it means you don’t have an agreement but it means you think you're close. So I want to keep the pressure on and if it hasn’t settle[d] by 10am, the case runs. You’re obviously doing well, so that’s all I have to say. I’ll adjourn till 10am unless I make other orders in chambers.” No contrary submission was made on behalf of the defendants by their counsel who appeared when the hearing resumed.

111    Finally, the plaintiffs did not seek to enforce the oral agreement they now contend was immediately binding. Instead, they signed the Settlement Deed believing the oral agreement would not be legally enforceable. Their evidence is that they did this in response to the way in which the proceeding had been conducted on 6 December 2023 and in the fear of the hearing resuming on 7 December 2023. They then promptly commenced this proceeding asserting the right they claim to have the Settlement Deed set aside.

112    I interpolate to note that there was an obvious risk inherent in this approach if the plaintiffs’ stance as to the enforceability of the Settlement Deed was not made good. As will be seen in what follows, I have not found it to be necessary to determine whether the Settlement Deed is enforceable other than by reference to the operation of s 510 of the Act, which does not turn on the circumstances that led to the execution of the Settlement Deed.

113    I find that the oral agreement to between Mr Lo Pilato (on behalf of Barrallier) and Mr Kassem (on behalf of Mr Waters and Ms Waters) on 6 December 2023 did not constitute a binding and enforceable contract for the payment of $550,000 by Barrallier to Ms Waters out of the property of Barrallier, within the meaning of category 1 in Masters. Given this conclusion, it is not necessary to address issues 2 and 5.

Issues 3 and 4: Is the Settlement Deed a valid and enforceable contract or is it liable to be set aside for non-compliance with s 510(4) of the Act?

114    It is convenient to addresses issues 3 and 4 together. In doing so, I will first address issue 4. If the Settlement Deed is within the ambit of s 510 of the Act and the conditions to it becoming binding have not been met, it will not be necessary to separately consider issue 3.

115    I will start with the relevant statutory framework. Section 510 of the Act is located in Division 4 of Part 5.5 headed “Voluntary Winding Up Generally”.

116    Section 510 provides:

(1)     An arrangement entered into between a company about to be, or in the course of being, wound up and its creditors is, subject to subsection (4):

(a)     binding on the company if sanctioned by a special resolution; and

(b)     binding on the creditors if sanctioned by a resolution of the creditors.

(1A)     The company must lodge a copy of a special resolution referred to in paragraph (1)(a) with ASIC within 14 days after the resolution is passed.

(2)     A creditor must be accounted a creditor for value for such sum as upon an account fairly stated, after allowing the value of any security interests held by the creditor and the amount of any debt or set‑off owing by the creditor to the company, appears to be the balance due to the creditor.

(3)     A dispute about the value of any such security interest or the amount of any such debt or set‑off may be settled by the Court on the application of the company, the liquidator or the creditor.

(4)     A creditor or contributory may, within 3 weeks after the completion of the arrangement, appeal to the Court in respect of the arrangement, and the Court may confirm, set aside or modify the arrangement and make such further order as it thinks just.

117    The relevant legal principles in relation to s 510 of the Act were set out by Barrett J (as his Honour then was) in Kassem v Sentinel Properties Ltd (in liq) [2005] NSWSC 403; 53 ACSR 724 at 727-731 [11]-[28] and the authorities cited therein. Briefly they may be summarised as follows.

118    A resolution of creditors for the purposes of s 510(1)(b) may be passed by a majority on the voices or by a majority in number and by reference to the value of the debt on a poll: Kassem at [21]-[23] (Barrett J); Re Switch Telecommunications Pty Ltd (in liq); ex parte Sherman [2000] NSWSC 794; 157 FLR 158 at [34] (Santow J).

119    For an arrangement to be binding on non-voting or dissenting creditors under s 510, they must be paid pari passu with creditors who voted in favour of the arrangement, otherwise the non-voting or dissentient creditors need to consent to the arrangement: Switch at [27]-[45]; Dean-Willcocks v Soluble Solutions Hydroponics Pty Ltd (1997) 42 NSWLR 209; 24 ACSR 79 at 215 (Young J).

120    The Settlement Deed on its face answers the description of being an arrangement that is entered into between Barrallier and its sole shareholder and its creditors. Barrallier is in the process of being voluntarily wound up — s 510 only applies to voluntary liquidations: Re Contal Radio Ltd [1932] 2 Ch 66 at 68–69 (Maugham J). The liquidators point to the fact that Damien is the sole shareholder of Barrallier and submit that the creditors of Barrallier are Damien, Edward, the liquidators and Ms Waters who are each parties to the Settlement Deed.

121    The concept of an ‘arrangement’ is to be liberally construed and can embrace any proposal “such as a reasonable business man might carry out bona fide in the course of his business”: see Switch at [34(iii)], citing Re E D White Ltd (1929) 29 SR (NSW) 389 at 391 (Harvey CJ). An arrangement may include a compromise: see Switch at [34(iv)], citing Young J in Soluble Solution at 214 following E D White. The agreement embodied in the Settlement Deed purports to subordinate all debts which are or may be owed by Barrallier to its creditors to the debt of $550,000 to Ms Waters that is the subject of the deed. It is an arrangement within the meaning of s 510 of the Act.

122    As such, s 510 of the Act applies to the Settlement Deed. It is an arrangement that will only be binding on the company once it is sanctioned by a special resolution of its members (s 510(1)(a)) and binding on the creditors once it is sanctioned by a resolution of its creditors (s 510(1)(b)). The word “resolution” is defined in s 9 of the Act in relation to creditors or contributories, to mean a resolution passed at a meeting of the creditors or contributories. The definition therefore applies to produce the result that there will be no resolution unless there is “a meeting of the creditors” at which it is “passed”.

123    The Settlement Deed has not been the subject of the requisite resolutions required to be passed under s 510(1)(a) or (b) at a duly convened meeting. In these circumstances, the Settlement Deed being within the ambit of s 510 of the Act, is not binding on the Company or on its creditors as the conditions in s 510(1)(a) and (b) have not been fulfilled.

124    A creditor or contributory may apply to this Court within three weeks of the completion of an arrangement to set it aside or modify its terms: s 510(4). In subsection 510(4), “completion of the arrangement” has been understood to mean the date of passing the last of the sanctioning resolutions under s 510(1) and not completion of the implementation steps set out in the arrangement: Switch at [5]. In the present context, the date of completion is 7 December 2023, being the date on which the Settlement Deed was executed and exchanged. The procedural requirements of s 510(4) are satisfied ⸻ the originating application was filed on 28 December 2023, three weeks after the completion of the DOCA on 7 December 2023.

125    Being satisfied that the Settlement Deed is an arrangement within the meaning of s 510 of the Act and that the conditions in s 510(1)(a) and (b) have not been met, I find that the Settlement Deed is not binding on Barrallier or its creditors. It is not necessary to address issue 3.

Issue 6: Should the Settlement Deed be set aside and if so, on what terms?

126    For the reasons I have given, I am satisfied that the Settlement Deed is not binding on Barrallier, its liquidators, its sole shareholder or its creditors. I have considered whether the Settlement Deed should be varied or set aside. I have decided that in the present circumstances, there would be difficulties attendant in the Court making orders to vary the Settlement Deed. It would not be a simple matter of striking through the subordination clause. Nor would it be a simple matter to modify the mutual irrevocable releases given in the Settlement Deed. Complexities arise as to whether the Settlement Deed binds the liquidators in their capacity as receivers of the property of the Trust. In addition, I am not satisfied that it would be appropriate for the Court to vary the Settlement Deed and give it effect in circumstances where there has been a wholesale failure to comply with s 510 of the Act. It is not appropriate in the present circumstances to “cure” this by simply striking through cl 3 of the Settlement Deed. The Settlement Deed should be set aside.

127    The question then arises as to whether it should be set aside on terms. Relevant to that question are the undertakings that have been offered to the Court by the liquidators and Damien. The liquidators and Damien have in bringing this application formally given to the Court undertakings that they will not raise any defences that may otherwise have been available to them arising under the Limitation Act 1969 (NSW), the Act (in particular s 1317K) or the principles of res judicata or issue estoppel in answer to any fresh claim by Ms Waters in the District Court to recover her alleged debt of $495,000. It is appropriate to formally note the undertakings that have been given as they have assuaged the concern I would otherwise have had in relation to relevant prejudice occasioned by the defendants in the District Court proceeding executing the Settlement Deed and consenting to the District Court proceeding being dismissed.

Issue 7: Which party or parties should bear the costs of this proceeding?

128    Mr and Ms Waters have not actively participated in the proceeding and did not attend the hearing. The plaintiffs have been successful in obtaining the principal relief which they sought. They will have the benefit of a costs order against Mr and Ms Waters. There will be no order as to costs against the parties that filed submitting appearances.

CONCLUSION

129    I will make orders to give effect to these reasons.

Associate:

Dated:    23 September 2025

SCHEDULE OF PARTIES