Judgment
1By Originating Process filed on 5 July 2013, Mr Adam Farnsworth ("liquidator") in his capacity as liquidator of Dungowan Manly Pty Ltd ("Company") and the Company apply for directions under ss 479(3) and 511 of the Corporations Act 2001 (Cth). Those directions address several possible outcomes as to claims over a unit that is presently registered in the name of the Company ("Property"). Broadly, the parties with potential claims over the Property are the Company, its administrators and liquidators so far as they assert an equitable lien, the First and Second Defendants, Mr and Mrs McLaughlin, and the Third Defendant, Turner Freeman, who formerly acted for Mr and Mrs McLaughlin in the proceedings to which I will refer below.
Background to the application
2Before turning to the nature of this application, I should set out something of the very unfortunate events that lead to this application and Mr and Mrs McLaughlin's Cross-Claim in it. The Company was the owner of a company title home unit building situated in Manly and, under the Company's articles of association, a shareholder's holding of a specific class of shares in the Company conferred a right to occupy a specific unit within the building. Mr and Mrs McLaughlin purchased a share entitling them to occupy unit 4 in the building in 1996. A proposal to renovate and redevelop the building, including the construction of additional lots, and to convert it from company to strata title, was put to the Company's members in September 2006 and the Company struck a special levy in 2007 to partly fund that proposal, which was also funded by borrowed monies. That proposal was opposed by Mr and Mrs McLaughlin.
3Several proceedings were brought by Mr and Mrs McLaughlin against the Company in the period from 2006 in respect of issues in relation to the proposed redevelopment. Broadly, Mr and Mrs McLaughlin alleged that the Company's conduct was oppressive to them and sought relief under s 232 of the Corporations Act and also alleged that there were breaches of the Company's articles of association in respect of several matters. Mr and Mrs McLaughlin were successful, albeit on relatively narrow grounds, in proceedings at first instance in which judgment was delivered in February 2010 (McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187).
4In the meantime, the development and conversion of the property to strata title had been completed. The Company and its shareholders subsequently sought to implement arrangements by which shares in the Company would be surrendered by its shareholders in exchange for transfer of strata title units to them. On 21 January 2010, Mr and Mrs McLaughlin's then solicitors wrote to the Company's then solicitors, objecting to the Company and its shareholders entering into the agreements to surrender those shares and transfer the strata units to shareholders and raising a concern that that course would undermine any judgment of the Court entered in Mr and Mrs McLaughlin's favour. Mr and Mrs McLaughlin's solicitors sought, alternatively, an undertaking from each individual shareholder, in the proposed share surrender agreements, to contribute any amount that the Company owed Mr and Mrs McLaughlin pursuant to any judgment in their favour. As will emerge below, an undertaking substantially to that effect was included in the share surrender agreements ultimately executed between the Company and its shareholders.
5By motion filed on 29 January 2010, Mr and Mrs McLaughlin sought orders restraining the Company from entering into the share surrender agreements. That motion was heard by Ward J on 10 February 2010 and, in her judgment dated 18 February 2010 ([2010] NSWSC 89), Ward J did not grant the relief sought but noted that the Company had acceded, in effect, to the demand made by Mr and Mrs McLaughlin that each shareholder who exchanged their share in the Company for an individual strata title unit would be required to undertake contribute any shortfall as between the Company's assets and the amount it owed to Mr and Mrs McLaughlin in respect of the proceedings. Her Honour also observed (at [123]-[124] and [126]) that:
"It seems to me that the decisive factor on the balance of convenience point is that the company has been prepared to put in place arrangements pursuant to which a judgment debt can be met by calls upon the former members in due course if necessary. Criticism was made of the proposed agreement insofar as the operative parts contemplated a completion date of 28 February and there was no provision for the payment of costs of the company in relation to the proceedings or for any liability for the proceedings. However, the company has expressly acknowledged to the McLaughlins, and has openly submitted to the court, that liabilities in these proceedings are to be included as liabilities of the company on a reconciliation process as contemplated by the agreement.
It must be incumbent in my view, on the company and its directors, to ensure that all shareholders entering into the share surrender agreements understand that this is the position and are bound to accept responsibility for any share of any judgment debt/costs attributable to their proportionate share of the company's shareholding which they held before the surrender of their shares.
In summary Mr Priestley [then appearing for the Company] submits that it is not open on the evidence on this application to say that the defendant is going to strata title the property for the purpose of frustrating the judgment. I accept that, but in any event I consider that the McLaughlins' position is protected to a large extent by the fact that the company is nevertheless prepared to obtain undertakings from departing members; that there will be a reconciliation of liabilities and that former members will remain liable to meet any claim made in that regard. It seems to me that the acknowledgement of the debt and the undertaking leaves the plaintiffs in very close to the position in which they presently stand and I consider it significant that this is what was first demanded by their lawyers from the company. The company has acceded to that demand. It should not be exposed to the threat of a forced winding up where there are arrangements it has or proposes to put in place which should protect the plaintiffs to a very large extent."
6In about June 2010, the share surrender agreements were entered into by the Company and shareholders except Mr and Mrs McLaughlin and strata title units were subsequently transferred to shareholders other than Mr and Mrs McLaughlin. The circumstances in which Mr and Mrs McLaughlin did not enter, or did not have the opportunity to enter, such an agreement will be a matter of importance in this application. Clauses 8 and 9 of the share surrender agreements relevantly provide:
"8. Notwithstanding clause 7, the Company may from time to time perform a further reconciliation, taking account only of the matters referred to in clause 9 or monies owing to or becoming owing between the parties to proceedings number 4924 of 2006 in the Supreme Court of New South Wales (McLaughlin v Dungowan Manly Pty Ltd) in consequence of the judgment pronounced therein on 26 February 2010 (including any revision thereof at first instance, or reversal thereof on appeal, and including in respect of any order for costs therein at first instance or on appeal), and if on any such further reconciliation:
...
(b) A balance is owed by the Company, the Shareholder shall pay to the Company the proportion thereof which corresponds with the proportion of the levy struck by the Company on 16 January 2010 which the Shareholder was obliged to pay;
(c) Any party liable to make payment on another on the said reconciliation shall make payment within 14 days of receiving notice to do so.
For the purpose of making a reconciliation in accordance with this clause or the preceding clause, the Company may take and act upon professional advice as to the quantum of any item to be taken into account in the reconciliation.
9.This Agreement does not displace or otherwise affect:
...
(c) Any debt or liability of the Company or any Shareholder the subject of any action in any proceeding to bring which on behalf of the Company leave is granted in the action for any debt or liability which may arise from any judgment in the action, including any judgment on appeal;
(d) Any obligation of the Shareholder to contribute to the Company's costs and expenses of the action or any appeal of the costs and expenses of compliance of any judgment in the action or on appeal or its costs and expenses of any proceeding (including any appeal) to bring which leave is granted in the action, by way of levy or otherwise under the Company's constitution."
Broadly, the effect of these clauses was to preserve a continuing liability of shareholders who executed share surrender agreements to contribute to outstanding liabilities of the Company in the specified circumstances, although they had surrendered their shares under those agreements, and specifically to preserve their obligation of the shareholders to fund the amount of the judgment and costs payable to Mr and Mrs McLaughlin in these proceedings. That was, on its face, consistent with the operation of the agreement as represented by the Company to the Court and Mr and Mrs McLaughlin in the application to which I referred in paragraph 5 above.
7The Company appealed the decision against it at first instance, and Mr and Mrs McLaughlin brought a cross-appeal. The Court of Appeal dismissed the appeal and allowed the cross-appeal (Dungowan Manly Pty Ltd v McLaughlin [2012] NSWCA 180; (2012) 90 ACSR 62). In a second judgment, the Court of Appeal ordered judgment in the amount of $632,038.95 in favour of Mr and Mrs McLaughlin, on a basis agreed between the parties, apparently reflecting the difference between the value of their shares in the Company in late 2006 if no breach had occurred and the estimated value of their shares at the date of the hearing (Dungowan Manly Pty Ltd v McLaughlin (No 2) [2012] NSWCA 258). That approach assumed that Mr and Mrs McLaughlin would have the continued benefit of that shareholding and, implicitly, the strata unit that would substitute for them since it did not include any amount referable to the loss of those shares or that unit.
8On 18 December 2012, the Company's then directors ("the Directors") passed a resolution under s 436A of the Corporations Act appointing Mr Adam Shepard and Mr Adam Farnsworth as administrators to the Company. Such an appointment could only be made where the Directors held the opinion that the Company was insolvent or was likely to become insolvent at some future time.
9On 19 February 2013, the administrators issued a special levy notice to shareholders to enable the Company to meet liabilities owing to Mr and Mrs McLaughlin in respect of the judgment debt and costs arising from the Court of Appeal's judgment. The total amount of the special levy was $1,274,499.61, which included an amount of $1 million to be paid to Mr and Mrs McLaughlin in respect of their judgment and estimated costs and an amount of approximately $274,500 to meet payment of the administrators' remuneration, costs, fees and expenses. The letter sent by the administrators' solicitors to shareholders containing notice of that levy referred to the terms of the Company's articles of association that provided for a levy on holders of shares in the Company and to the Company's power to undertake a reconciliation and require amounts to be paid by shareholders under cll 8 and 9 of the share surrender agreements. A second special levy notice was issued on 15 April 2013 claiming additional amounts, as a result of an increase in the level of costs claimed by Turner Freeman, the former solicitors for Mr and Mrs McLaughlin, in respect of the conduct of the proceedings. The total amount of the second special levy was $254,201.
10On 28 February 2013, the Company's chairman, who is a member of the senior bar in another state, wrote to the administrators' solicitors contending that the administrators had no power to strike the levy and had done so taking into account "many incorrect considerations". His letter put, variously, arguments as to the terms of the cost agreement between Mr and Mrs McLaughlin and their solicitors; denied that the Property was held on constructive trust for Mr and Mrs McLaughlin and suggested that such a claim was not available to them, not having been raised in the earlier proceedings; and contended that the Company's articles of association did not authorise the relevant levy. That letter did not address the Company's right to recovery of the relevant amounts under share surrender agreements or the position taken by the Company as to the effect of those agreements before Ward J in February 2010.
11By letter dated 4 March 2013, the administrators' solicitors responded to the Company's chairman, observing that:
"Under clause 8 of the Share Surrender Agreement, the company may from time to time perform a further reconciliation, taking account only of the matters referred to in clause 9 or moneys owing or to become owing between the parties to proceedings 4924 of 2006 (McLaughlin v Dungowan Manly Pty Ltd) and any appeals therefrom and including any costs orders.
Clause 9 in turn provides that certain debts or liabilities can be the subject of a special levy. This includes any debts or liability of the company which may arise from any judgment.
It is quite plain that all shareholders agreed under the Share Surrender Agreement that they would be liable to pay a proportionate share of any judgment awarded in favour of the McLaughlins, including costs."
12Further email correspondence followed, in which the Company's chairman continued to dispute the validity of the levy. It may be that correspondence paid insufficient attention to the question whether the terms of the share surrender agreements were sufficient in themselves to authorise the Company (acting, relevantly, by its administrators) to make such a levy and oblige the relevant shareholders or former shareholders to pay it. It is not necessary or appropriate to say anything further as to that matter at this point. In their report to creditors dated 7 March 2013, the administrators noted that no shareholders had then paid the levy struck by them and noted the correspondence received from the Company's chairman claiming that the levy was invalid or legally unenforceable.
13No evidence was led in this application as to steps subsequently taken by the liquidator to seek to enforce the special levy or the second special levy. Mr Golledge, who appears for the liquidator, submitted that the liquidator had not been on notice of the fact that that question may arise, given the manner in which Mr and Mrs McLaughlin had formulated their application, and indicated from the bar table that there was further evidence which could have been led by the liquidator as to that matter, including evidence as to steps which had been taken by the service of creditor's statutory demands against corporate shareholders in the Company and that there were constraints on the liquidator's ability to take further action by reason of lack of funding. Given the manner in which the application proceeded, the liquidator should be given an opportunity to lead further evidence of those matters if he considers it necessary or desirable for him to do so.
14On 13 May 2013, the second meeting of creditors did not pass a resolution that the Company execute a deed of company arrangement proposed by the Directors and resolved that the Company be wound up and Mr Shepard and Mr Farnsworth were appointed as its joint and several liquidators.
15In summary, and subject of course to any submissions that might be made by any parties who are later joined to the proposed Amended Cross Claim, it might seem that shareholders in the Company had acknowledged, in the share surrender agreements, the Company's entitlement to levy them for the amounts necessary to meet the amount of a judgment and costs in favour of Mr and Mrs McLaughlin; the Company had relied on that acknowledgement in resisting injunctive relief restraining entry into the share surrender agreements and a Judge of this Court had drawn attention to the importance of that acknowledgement and the need for shareholders to understand their obligations under it in her judgment declining such an injunction; the Court of Appeal had awarded damages and costs in favour of Mr and Mrs McLaughlin; none (or possibly one) of the Company's shareholders have paid the amounts levied under the share surrender agreements and the Company's chairman has contended hat they have no obligation to pay those levies; the liquidator may have taken some steps, but he has not yet taken proceedings to recover the levies under the share surrender agreements; and the Company has not satisfied the judgment against it where it has disposed of the units in the block (other than Mr and Mrs McLaughlin's unit) to its shareholders and they have not put it in funds to satisfy that judgment.
16Turner Freeman have also issued bankruptcy notices to Mr and Mrs McLaughlin in respect of costs payable to them in respect of the conduct of the proceedings, which would plainly have been more readily paid by Mr and Mrs McLaughlin had the Company met its obligations under the Court of Appeal's judgment had its shareholders paid the levies made by the administrators under the share surrender agreements to permit it to do so.
The present state of the proceedings
17With this background, the directions sought by the liquidator are addressed to several possibilities, namely that:
- the liquidator would be justified in treating the Property as belonging legally and beneficially to the Company such that it may be realised as property in the liquidation with the net sale proceeds to be distributed in accordance with s 556 of the Corporations Act;
- alternatively, the liquidator would be justified in transferring the Property to Mr and Mrs McLaughlin on the basis that it is held by the Company for them on a constructive or resulting trust;
- in the further alternative, directions as to how the liquidator should proceed to resolve the issue as to which party holds the legal and beneficial interest in and to the Property;
- if the Property is found to be legally and beneficially owned by the Company, that the liquidator would be justified in rejecting a claim by Turner Freeman that they hold an equitable lien, charge or mortgage over the Property to secure payment of legal costs owing to them by Mr and Mrs McLaughlin; and
- alternatively, if the Property is found to be beneficially owned by Mr and Mrs McLaughlin, the liquidator would be justified in asserting a lien over the Property to secure payment of costs, fees and expenses incurred in his capacity as liquidator and former voluntary administrator of the Company.
18The liquidator recognised, in the course of submissions, that there may be a question whether these matters are properly resolved by way of a direction to the liquidator, or whether they ought to be resolved by the making of declarations so far as cross-claims have now been brought by at least some of the parties claiming an interest in the Property. A further complexity may arise in respect of the last of these directions, so far as any lien held by the liquidators over trust property would ordinarily extend only to the costs of dealing with trust assets (relevantly, the Property) as distinct from costs of the administration or liquidation generally: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 at [206]-[210], [213]. These questions will need to be resolved but it is not necessary to resolve them in this judgment. These directions will not resolve the position as to other matters, including the claims that the Company may have against its shareholders or former shareholders under the share surrender agreements or its articles of association.
19The Originating Process is supported by Mr Farnsworth's affidavit filed 5 July 2013, which sets out the history of the redevelopment of the unit block and the associated disputes between Mr and Mrs McLaughlin and refers to the appointment of Mr Farnsworth and Mr Shepard as administrators on 18 December 2012 and subsequently as liquidators in the Company's voluntary liquidation. Mr Farnsworth's affidavit indicates the Company's only asset, as disclosed in the report as to affairs submitted by the Directors, is its interest in the Property. The Directors' approach in the report as to affairs appears to assume that the Company is not entitled to enforce its rights under share surrender agreements to which I have referred above and does not establish the correctness of that assumption.
20On 22 August 2013, Mr and Mrs McLaughlin, who were then legally represented, filed a Cross-Claim ("First Cross-Claim") seeking a declaration that the Property was held on trust by the Company for them, subject to a Deed of Mortgage of Company Title Unit between them and Turner Freeman, and an order for the transfer of the Property to them, subject to that mortgage. By paragraph 8 of the First Cross-Claim, they also pleaded the existence of the Mortgage of Company Title Unit between them and Turner Freeman. By an Interlocutory Process filed on 2 September 2013, Turner Freeman applied for, inter alia, a declaration that the Property was held on trust by the Company for that firm and an order that the Company must transfer the property to Turner Freeman. A Second Cross-Claim filed by Turner Freeman on 17 April 2014 pleaded the matters on which they relied for that claim.
21The firm of solicitors that acted for Mr and Mrs McLaughlin at the time they filed the First Cross-Claim ceased to act for them in March 2014. When the matter was listed before me for directions on 26 May 2014, Mr and Mrs McLaughlin orally applied for leave to amend that Cross-Claim in substantial respects. That application was opposed by the liquidator and Turner Freeman. I made orders for the filing of further evidence and submissions and set the application down for hearing. Mr and Mrs McLaughlin have since clarified the amendments they seek to make by a further version of the Cross-Claim that was purportedly filed on 19 June 2014. That document should not have been accepted for filing by the Registry, since no leave had then been granted to amend the Cross-Claim, and whether it is permitted will depend on the application for leave to file it that is now made by Mr and Mrs McLaughlin.
The principles applicable to an amendment of the Cross-Claim
22I should identify the applicable principles to the exercise of my discretion whether to permit the amendment sought to be made by Mr and Mrs McLaughlin. This application involves questions both as to the proper scope of a cross-claim and when leave to amend such a cross-claim should be permitted. Section 22(2) of the Civil Procedure Act 2005 (NSW) permits relief to be granted, by way of cross-claim, against a person who is not a plaintiff if the relief relates to, or is connected with, the subject of the proceedings. The authors of Ritchie's Uniform Civil Procedure NSW note (at [s22.10]) that the degree of connection required for a cross-claim against a third party is prescribed in generous terms that do not expressly require a substantial degree of similarity, although the presence or absence of such similarity is likely to be relevant to the exercise of the Court's discretion. Rule 9.8 of the Uniform Civil Procedure Rules 2005 (NSW) in turn allows the Court to make directions to facilitate a cross-claim, including an order that it or any question in or arising on it is to be heard separately and to direct generally the extent to which the usual procedures of a trial or hearing are to be modified because of the joinder of the cross-defendant.
23In AON Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175, the High Court, in the context of an amendment application, emphasised the significance of delay for the opposing party and the fact that a costs order should not be treated as an automatic solution to problems created by failures to conform to the objectives of case management. The principles identified by the Court in AON above are, of course, also to be applied having regard to the statutory context established by the Civil Procedure Act. Section 64 relevantly provides that:
"(1) At any stage of the proceedings, the court may order:
(a) that any document in the proceedings be amended, or
(b) that leave be granted to a party to amend any document in the proceedings.
(2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings."
24Section 58 in turn requires the Court, in the management of proceedings including dealing with amendments, to act in accordance with the dictates of justice. For the purpose of determining what are the dictates of justice, the Court must have regard to ss 56 and 57 and may have regard to other specified matters. Section 56 requires the Court, and the parties, to have regard to the overriding purpose which is the just, quick and cheap resolution of the real issues in the proceedings. Section 57 deals with case management and in particular requires the Court's practice and procedure to be regulated to ensure specified objectives are met, including the just determination of the proceedings, the efficient disposal of the Court's business, the efficient use of available judicial and administrative resources and the timely disposal of the proceedings and all other proceedings in the Court at a cost affordable by the respective parties.
Mr and Mrs McLaughlin's proposed amended Cross-Claim
25Mr and Mrs McLaughlin had originally suggested that they sought to abandon the First Cross-Claim and replace it by their proposed Amended Cross-Claim. In the course of submissions, Mr and Mrs McLaughlin's position developed to the point that they wish to maintain the First Cross-Claim and seek to pursue the proposed Amended Cross-Claim in the alternative to, rather than instead of, the First Cross-Claim. Both the liquidator and Turner Freeman oppose leave to Mr and Mrs McLaughlin to file the proposed Amended Cross-Claim. It will be convenient to address the grounds of that opposition in respect of particular paragraphs of the proposed Amended Cross-Claim.
26The first paragraph of the relief sought by Mr and Mrs McLaughlin in the proposed Amended Cross-Claim is as follows:
"1. A Declaration that [the Company] have and continue to breach our rights as members/shareholders of [the Company]."
It does not seem to me that the Court could make a declaration in that form, by reason of its lack of specificity. That declaration appears also to overlap with matters that have previously been determined by the Court of Appeal, so far as it is not restricted to particular events that have occurred since the Court of Appeal's judgment. I could not grant leave for an amendment in the form of this paragraph.
27The second paragraph of the relief sought in the proposed Amended Cross-Claim is as follows:
"2. A Declaration that the appointment of Farnsworth Shepard by [the Company] breaches our rights as members/shareholders and is void."
Mr McLaughlin addressed this contention in oral submissions and also contended that the liquidator lacked standing to bring this application and attacked the validity of his appointment, by reference to the provisions contained in the Company's articles of association that provided for the division of the Company's assets among its contributories on a winding up with the sanction of an extraordinary resolution, and noted that no such extraordinary resolution had been passed. Mr McLaughlin submitted, in oral submissions, that he and Mrs McLaughlin considered that the Company's articles of association prevailed over the provisions in the Corporations Act permitting the appointment of an administrator and the appointment of a liquidator when a company in administration passes into voluntary liquidation. It does not seem to me that that proposition is seriously arguable as a matter of law. First, there is nothing in the Company's articles of association that seeks to exclude the operation of Pt 5.3A of the Corporations Act dealing with the appointment of administrators and, second, the articles take effect as a contract between the Company and its members, including pursuant to s 140 of the Corporations Act, and cannot prevail over the Corporations Act.
28It also does not seem to me that any factual matter pleaded in the proposed Amended Cross-Claim is capable of supporting a declaration that the appointment of the administrators or the liquidators is void. The administrators were initially appointed in the manner provided by the Corporations Act and they became liquidators when the Company passed to voluntary liquidation in the manner provided in the Corporations Act. It may be that a question could have been raised, when the administrators were first appointed, as to whether the Directors could properly have formed an opinion that the Company was insolvent or likely to become insolvent at a future time, for the purposes of s 436A of the Corporations Act, given its rights against shareholders under the share surrender agreements, but Mr and Mrs McLaughlin did not then seek an order terminating the administrators' appointment on that basis. It is very likely that such an order is no longer open to them given the passage of time and the fact that the administration has now passed into a voluntary liquidation, and they do not in any event seek such an order in their proposed Amended Cross-Claim. I could not grant leave for an amendment in the form of this paragraph.
Joinder of Directors and shareholders
29The third paragraph of the relief sought by in the proposed Amended Cross-Claim is as follows:
"3. A Declaration [the Company] be substituted by the members/shareholders of [the company] and or [the Directors] as directors in this case."
The twelfth paragraph of the relief sought in the proposed Amended Cross-Claim raises somewhat similar issues, as follows:
"12. An order for [the Directors] to appear in this case."
30It does not seem to me that the third paragraph seeks a proper form of declaration, although I infer that it is intended to bring about the result that the Company is dismissed from the proceedings and that its members and shareholders are substituted in its place. It does not seem to me that such an order could be made, where the liquidator has properly joined the Company as co-plaintiff in the proceedings so far as he seeks directions, and other parties seek declarations, as to matters in which the Company has a legal interest and as to which it ought to be bound by the outcome of the proceedings. It also seems to me that, if shareholders or Directors were to be joined as party to these proceedings, Mr and Mrs McLaughlin would need to seek leave to join them as named defendants, on the basis of properly identified causes of action. I could not grant leave for an amendment in the form of these paragraphs.
Claim for events since 1 October 2006
31The fourth paragraph of the relief sought in the proposed amended Cross-Claim is as follows:
"4. A Declaration that individual shareholders and/or [the Directors] as directors are personally liable for all costs and damages of the McLaughlins since 1st Oct 2006 due to the breach of our rights as stated in The Articles of Association and continued oppression."
32This declaration could not be made unless the shareholders and directors to whom it is directed are joined as party to the proceedings. Although the parties paid little attention to its specific content, it seems to me that this declaration overlaps with matters that have already been determined by the Court of Appeal, so far as it is founded in claims under the Company's articles of association and oppression and not restricted to events since the delivery of the Court of Appeal's judgment. My preliminary view is that I could not grant leave for an amendment in the form of this paragraph, although I will hear any party who wishes to make any further submission as to the specific content of the paragraph.
33The seventh paragraph of the relief sought in the proposed Amended Cross-Claim is as follows:
"6. An order that the shareholders and/or [the Directors] as directors pay the McLaughlins $950,000 for their property taken without their consent on 1 October 2006 within 14 days."
This order could also not be made unless the shareholders and directors to whom it is directed were joined as party to the proceedings. The parties also paid little attention to the specific content of this paragraph, but it seem to seek to reagitate a matter that was addressed in the damages calculations undertaken by Ward J at first instance and in the Court of Appeal. Specifically, it seems to me that order seeks to change the basis on which damages were previously calculated - which, as I noted above, assumed that Mr and Mrs McLaughlin would retain their share in the Company (and, implicitly, the unit that it represented or a replacement strata title unit) and made a deduction for its present value from the damages payable - with an order for payment of an amount attributable to its value to Mr and Mrs McLaughlin, on the contrary basis that it is no longer retained. The amount of $950,000 adopted in that order also seems to reflect an issue that was in contest before the Court of Appeal. My preliminary view is that I could not grant leave for an amendment in the form of this paragraph, although I will hear any party who wishes to make any further submission as to the specific content of the paragraph.
Claims under the share surrender agreements and articles of association in respect of monies owed by shareholders
34The fifth paragraph of the relief sought in the proposed Amended Cross-Claim is as follows:
"5. An order that [the Company] reconcile the accounts and judgments recorded against individual shareholders and/or [the Directors] as directors for their proportion of monies owed."
Although this paragraph seeks an order against the Company, I understand it to be a step in seeking to establish a basis for recovery of an amount levied against shareholders, under the share surrender agreements based on such a reconciliation. That order may arguably be unnecessary, so far as the administrators have already performed such a reconciliation and levied shareholders under those agreements, but that question need not be determined at this point.
35Paragraphs 7-11 of the relief sought in the proposed Amended Cross-Claim are as follows:
"7. The damages and costs be awarded by The Appeals Bench of The NSW Supreme [Court] be paid proportionately within 14 days by the members/shareholders of [the Company] and/or [the Directors] as directors.
8. A Declaration that shareholders/members and/or [the Directors] as directors are liable to pay the McLaughlins' costs for legal work of [counsel and solicitors] in the litigation with [the Company].
9. An order that the shareholders/members and/or [the Directors] as directors pay these legal costs proportionately within 14 days.
10. An order that shareholders/members and/or [the Directors] as directors pay the costs of Farnsworth Shepard and all creditors of [the Company] within 14 days.
11. A Declaration that [the Directors] as directors of [the Company] are in breach of contract (articles of association and share surrender agreement) and are personally liable."
36I understand these paragraphs to be directed to the obligations of the Company's shareholders or former shareholders in respect of damages and costs in the proceedings under the share surrender agreements to which I have referred above and under the Company's articles of association. Mr and Mrs McLaughlin in turn propose to plead material facts supporting this relief, including shareholders' entry into the share surrender agreements that are alleged to have accepted liability for the Company's debts and the observations of Ward J in her judgment delivered on 18 February 2010 to which I have also referred above. They also plead the judgment delivered by the Court of Appeal and the order for payment of damages in favour of them and plead that the Company has continued to breach their rights by, inter alia, failing to enforce the judgment and order in their favour. It seems to me that these propositions are seriously arguable, in the light of the facts that I set out above, and neither the liquidator nor Turner Freeman contended to the contrary.
37The liquidator criticises the form of the pleading generally. Turner Freeman also contends that the proposed Amended Cross-Claim is embarrassing, implicitly, within the meaning of r 14.28 of the Uniform Civil Procedure Rules and decisions such as Shelton v National Roads & Motorists Assn Ltd [2004] FCA 1393; (2004) 51 ACSR 278 at [18] and McGuirk v University of New South Wales [2009] NSWSC 1424 at [30], [33]. However, it does not seem to me that either the relief sought in paragraphs 7-11 of the proposed Amended Cross-Claim or the associated pleading of material facts gives rise to any real difficulty in this regard. The propositions that (1) the shareholders agreed to pay a levy necessary to meet the judgment and costs ordered against the Company under the share surrender agreements; (2) the Court proceeded on that basis in declining to restrain entry into the share surrender agreements; (3) the Company (by its administrators) has raised that levy; and (4) shareholders failed to pay it, are not complex and the pleading adequately identifies them. It does not seem to me that any shareholders who are joined as party to the proceedings would have any real difficulty in understanding the case they have to meet.
38The liquidator also opposes the grant of leave to amend the Cross-Claim on the basis that, inter alia, the proposed Amended Cross-Claim seeks relief against persons who are not presently party to the action. That observation is correct in respect of each of these paragraphs and, plainly, the Court could not grant leave to file the Amended Cross-Claim without the Directors or shareholders against whom relief is sought in these paragraphs being joined as party to the proceedings. Mr McLaughlin responds to that difficulty by seeking, in effect, an order that the liquidator join those persons as party to the proceedings. I do not consider that I could make such an order, where the liquidator presently brings no claim against those persons. However, that difficulty could readily be addressed by Mr and Mrs McLaughlin joining those persons as defendants to their proposed Amended Cross-Claim, albeit they would then bear any costs risk of doing so.
39A further issue arose in the course of submissions, so far as the rights under the share surrender agreements pleaded by Mr and Mrs McLaughlin are those of the Company rather than of Mr and Mrs McLaughlin personally and any claim brought by Mr and Mrs McLaughlin in respect of them would be in the nature of a derivative action. Mr and Mrs McLaughlin did not initially recognise the need to seek for the Court's leave to bring such a claim in the Company's name, but that is not a matter for any criticism of them where they do not now have legal representation. If the liquidator will not take steps to seek to enforce any rights of the Company under the share surrender agreements or its articles of association against its shareholders, then a possibility arises that the Court should grant leave to Mr and Mrs McLaughlin to do so, in a derivative claim brought in the Company's name, on joining those shareholders as additional defendants to their Cross-Claim. The liquidators indicated that, to the extent that such leave was sought, they would wish the opportunity to make further submissions in that regard. They will have the opportunity to make such submissions on 2 July 2014 when the matter is next listed before me. I therefore say nothing further as to this issue at this point.
40I note that, when parts of an amended pleading are objectionable, a Court may strike out that pleading or not grant leave to file it in its entirety, and on occasion allow the opportunity to the party to bring in a further amended document. Where Mr and Mrs McLaughlin are not legally represented, and in the particular factual circumstances, it seems to me that the objectives of s 56 of the Civil Procedure Act will be better served in this case by permitting those parts of the proposed Amended Cross-Claim that are properly brought in their present form, rather than rejecting the entirety of the Cross-Claim and requiring Mr and Mrs McLaughlin to reformulate it. Subject to the question whether leave to bring a derivative action should be granted and the question whether these matters are properly raised in these proceedings, which I will now address, I would grant leave to Mr and Mrs McLaughlin to amend the First Cross-Claim to include the relief sought in paragraphs 7-11 of the proposed Amended Cross-Claim and the associated pleadings of material facts.
41For completeness, I should note that Turner Freeman also opposed the grant of leave to bring the proposed Amended Cross-Claim, to the extent that it sought to withdraw (or at least did not maintain) the admissions made in their favour in the existing Cross-Claim as to the mortgage granted in favour of Turner Freeman. It does not seem to me that that issue now arises, so far as Mr and Mrs McLaughlin do not seek to withdraw the existing Cross-Claim but bring the Amended Cross-Claim in the alternative to it.
The objections to these matters being raised in this proceeding
42If the Court were satisfied that it should grant leave, in its inherent jurisdiction, to Mr and Mrs McLaughlin to bring these claims in the Company's name against its shareholders, then the question would arise whether those claims should be permitted to be brought in this proceeding.
43The liquidator submits that the directions which he seeks, the First Cross-Claim that was previously filed by Mr and Mrs McLaughlin when they were legally represented and the Second Cross-Claim filed by Turner Freeman turn on issues that need to be resolved, namely, whether the Company holds the Property in trust for Mr and Mrs McLaughlin, and whether Turner Freeman have security over the property by reason of the mortgage granted in their favour. The liquidator contends that these issues are in relatively narrow compass, whereas the range of claims sought to be pursued by Mr and Mrs McLaughlin involve a wider range of issues - albeit they will be narrowed to the extent that I would not grant leave for several of the claims as noted above - as well as requiring the joinder of additional parties to the proceedings. The liquidator also contends that there is not a sufficient overlap between the liquidator's application for directions, the First Cross-Claim and Turner Freeman's Cross-Claim and the matters sought to be raised by Mr and Mrs McLaughlin in the proposed Amended Cross-Claim, to warrant the grant of the leave sought. He contends that the claims that Mr and Mrs McLaughlin seek to bring in the proposed Amended Cross-Claim are factually distinct from the claims in respect of ownership of the Property.
44I have referred above to the extent of connection required to bring a cross-claim against third parties in proceedings. It seems to me that there is in fact a substantial overlap between the factual issues raised by the liquidator's application for directions and the First Cross-Claim on the one hand and the amendments raised by paragraphs 7-11 of the proposed Amended Cross-Claim and the associated pleadings of material facts on the other hand. I have referred above to the form of the declarations sought in the First Cross-Claim, and it pleads facts including that the Company has transferred strata title units to each shareholder except Mr and Mrs McLaughlin for shares held by shareholders in the Company - implicitly, pursuant to the share surrender agreements to which I referred above - and that the administrators and liquidators have failed to transfer unit 6, which is the strata title unit corresponding to the unit previously occupied by Mr and Mrs McLaughlin, to them. I noted above that the liquidator also seeks a direction as to whether, inter alia, he would be justified in transferring the Property to Mr and Mrs McLaughlin on the basis that it is held by the Company for them on a constructive or resulting trust, and that the First Cross-Claim pleads the fact that strata units have been transferred to other shareholders but Mr and Mrs McLaughlin (implicitly, under the share surrender agreements) and that the Property is held on trust by the Company for Mr and Mrs McLaughlin.
45In order to determine whether such a direction (or a corresponding declaration) should be made on the liquidator's application, the Court will need to determine whether the relevant facts do or do not give rise to a trust, including a constructive or resulting trust, in favour of Mr and Mrs McLaughlin and will therefore need to consider the various bases on which such a trust might arise. Possible bases for such a trust might include, for example, a claim that the Company had agreed to transfer the Property to Mr and Mrs McLaughlin - consistent with the share surrender agreements with other shareholders - and that its agreement to do so was specifically enforceable so as to give rise to a trust over the Property in their favour (see, for example, Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639 at 654-5 and the other cases cited in R Meagher, D Heydon & M Leeming, Meagher Gummow & Lehanes' Equity, Doctrines & Remedies, (4th ed 2002, LexisNexis Butterworths) at [7.150]); or that the Company had represented to Mr and Mrs McLaughlin that they could take the benefit of the transfer of the Property to them, they had acted to their detriment on that representation and that a constructive trust is the proper remedy to avoid that detriment (see, for example, Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 at 610; Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394). The determination of claims on these bases is likely to depend on the dealings between the Company, its Directors, Mr and Mrs McLaughlin and other shareholders in respect of, inter alia, the share surrender agreements, and these matters are also raised by the proposed amendments to the cross-claim. The recognition of that matter has the further consequence that there would be a risk of inconsistent factual findings as to those dealings were they to be determined in separate proceedings involving at least some of the same parties, particularly the Company and Mr and Mrs McLaughlin.
46The liquidator and Turner Freeman also point to prejudice on the basis that, if Mr and Mrs McLaughlin were permitted to file the proposed Amended Cross-Claim in its present form, the proceedings would essentially recommence as against several or many additional parties who were joined in them, resulting (they contend) in substantial costs being thrown away and substantial further costs being incurred, and with the result that proceedings which could now be heard in the near future would likely not be heard until the end of 2014 or more likely mid-2015. Turner Freeman also point to the amount that is due to them by way of solicitors' fees, and contend that further delay would involve significant prejudice to it. It seems to me that the liquidator and Turner Freeman are correct that the amendments sought to be made will delay a hearing, which could otherwise be allocated in the near future in respect of the matters presently in issue. It is also regrettable that Mr and Mrs McLaughlin, who were previously legally represented, did not raise these wider issues previously, which may well have avoided such delay.
47However, the Court has the capacity to mitigate the delay that rightly concerns the liquidators and Turner Freeman by providing active case management and taking steps to ensure that the parties focus on the real issues in dispute in the proceedings. If Mr and Mrs McLaughlin are granted leave to bring proceedings on the Company's behalf, which involve the joinder of other shareholders, it would also be open to the Court to order that a claim against a single shareholder proceed in the first instance as a form of "test case". While the determination of that claim would not bind other shareholders, it may well assist all parties in obtaining a better understanding of their rights and obligations and possibly then resolving issues between them in a consensual manner. I note that the use of mechanisms of this kind are well-established in this and other courts in the management of proceedings involving common issues and multiple parties, and I will hear the parties as to that possibility. It may well also be possible to manage a hearing so that Turner Freeman and the liquidator need not be present for argument as to matters that may not concern them.
48I recognise that the matters to which the liquidator and Turner Freeman draw attention have real weight. However, s 56 of the Civil Procedure Act is directed to the just, as well as the quick and cheap, resolution of the real issues in dispute in the proceedings. Section 64 of the Civil Procedure Act in turn recognises the desirability of determining all relevant issues in one proceeding and avoiding multiplicity of proceedings. I have pointed above that a determination whether the Company has acted in a manner that would give rise to a constructive trust over the Property in favour of Mr and Mrs McLaughlin and a claim by the Company (or Mr and Mrs McLaughlin) under the share surrender agreements may depend on the same dealings between the parties. The issue that Mr and Mrs McLaughlin seek to raise, that the Company has not met its obligations to them by reason that shareholders have not met their obligations under the share surrender agreements, is of real practical importance for them and it seems to me that there would be real prejudice, and indeed injustice, to them if they were not permitted an adequate opportunity to agitate that issue.
49I accept that, as the liquidator and Turner Freeman point out, Mr and Mrs McLaughlin would not, strictly, be deprived of the opportunity to agitate that issue by being required to bring separate proceedings concerning those matters. However, this would then give rise to the risk of inconsistent findings to which I referred above. It also seems to me that it would place a substantial practical burden on Mr and Mrs McLaughlin, as self-represented litigants who are resident interstate, to require them not only to participate in these proceedings (which would then not resolve all relevant issues) and also to maintain a separate set of proceedings to seek to obtain the practical benefit of the existing judgments in their favour. I have not neglected, in reaching this finding, the fact that Mrs McLaughlin, too readily in my view, accepted that the separation of the proceedings would not cause prejudice in the course of submissions before me.
50Balancing these competing considerations, and the desirability of avoiding multiplicity of proceedings and potentially inconsistent findings on the one hand, and minimising delay and wasted costs on the other, I have concluded that, if Mr and Mrs McLaughlin are prepared to join one or more shareholders as party to the Cross-Claim - which, it must be recognised, will involve a significant potential costs risk on their part, if they are ultimately unsuccessful - and if, after the liquidator has an opportunity to make submissions, the Court is satisfied that they should have leave to bring a derivative claim, then I should grant leave to them to amend the First Cross-Claim by adding the claims for relief set out in paragraphs 5 and 7-11 above and the associated pleadings of material fact, to the extent they are not already contained in the First Cross-Claim. To the extent that an Amended Cross-Claim is permitted, it will be necessary for Mr and Mrs McLaughlin to consolidate the First Cross-Claim and those parts of the Amended Cross-Claim that are permitted into a single pleading.
51Any such amendment would, of course, be on the usual basis that Mr and Mrs McLaughlin must pay any costs thrown away by reason of that amendment. In reaching this result, I have not neglected Turner Freeman's submission that any order for costs made against Mr and Mrs McLaughlin, as a result of the grant of leave, may remain unpaid, in circumstances that that firm has brought bankruptcy proceedings against them arising from the costs of the proceedings against the Company. There is also force in this submission, although it seems to me to highlight the real prejudice that Mr and Mrs McLaughlin have suffered as a result of the events that I have set out above, which have deprived them (and Turner Freeman) of the practical benefit of the costs orders in their favour. It does not seem to me to outweigh the other considerations to which I have referred above.
Remaining issues
52There are a number of issues that remain to be determined, following the delivery of this judgment. First, it will now be appropriate to hear the liquidator as to whether leave should be granted to Mr and Mrs McLaughlin to pursue derivative proceedings to bring the narrower cross-claim for which I would grant leave (subject to the matters noted above) in this proceedings.
53Second, the manner in which Mr and Mrs McLaughlin formulated their proposed Amended Cross-Claim, and their submissions, seemed to me to raise a complaint in respect of the previous conduct of the liquidator, for the purposes of s 536 of the Corporations Act, at least so far as he had not pursued claims against the Company's shareholders arising under the Company's articles of association and/or the share surrender agreement. That complaint was raised in the course of proceedings, in the manner contemplated by the Court of Appeal in Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99, where Hodgson JA and Austin J (at [97], Spigelman CJ disagreeing at [93]) held that it is sufficient to satisfy s 536(1)(b) that "there be criticism expressed to the court, in any context, with respect to the conduct of a liquidator connected to performance of the liquidator's duties". Mr Golledge pointed out, and I accept, that it would be necessary to provide procedural fairness to the liquidator if that complaint were to be pursued by Mr and Mrs McLaughlin. It seems to me preferable that that issue be deferred until the determination of these proceedings, at which point Mr and Mrs McLaughlin can make clear whether that complaint is pursued and take proper steps to articulate its basis to allow the liquidator an opportunity to address it.
54Third, in the course of submissions, I raised with Dr Peden, who appeared for Turner Freeman, the possibility that that firm's pursuit of bankruptcy proceedings against Mr and Mrs McLaughlin would constrain their ability to pursue the First Cross-Claim and any amendment of it in these proceedings or pursue any derivative action for which leave is granted in the Court's inherent jurisdiction. It seems to me that that result would be potentially perverse, so far as the pursuit of that Cross-Claim and any derivative action might well be to the advantage of Turner Freeman, and would exacerbate the prejudice that Mr and Mrs McLaughlin have already suffered as a result of the events that I have set out above. I direct that Turner Freeman provide a copy of this judgment to the Federal Circuit Court of Australia, and any other Court that may be hearing any aspect of its bankruptcy proceedings brought against Mr and Mrs McLaughlin, and specifically draw its attention to the judgment generally and this paragraph specifically. It will, of course, then be a matter for that Court to assess the relevance of these matters in the bankruptcy proceedings.
55I make the direction set out above in respect of Turner Freeman. I will otherwise hear the parties as to any orders that need to be made to give effect to this judgment, and as to issues as to the future conduct of the proceedings, when the matter is next listed on 2 July 2014.