Abuse of process?
7The applicants do not contend that the proceedings have not been instituted bona fide for the relief claimed in them, or that they are doomed to fail; they accept that there are serious questions to be tried. Nor do they suggest that the adjudication of proofs of debt is a legal precondition to proceedings under s 588M. Rather, they contend that it is an abuse of process for the liquidator to maintain proceedings involving serious allegations of insolvent trading without taking any or sufficient steps to assess and determine what debts were incurred and to what extent they remain unpaid, and simply to "plagiarise" the schedule prepared by the deed administrators for a different purpose and in a different context. They submit that before commencing proceedings for compensation pursuant to s 588M for contravention of s 588G(2), the liquidator must satisfy himself with respect to each alleged debt (1) that it is a 'debt" within the meaning of s 588G incurred on a particular day (and not, for example a claim for unliquidated damages), and (2) that it, or some specific amount of it, remains unpaid; and that in the particular circumstances of this case that can only be achieved by calling for and adjudicating proofs of debt from all putative creditors. The particular circumstances invoked include: the disputes already mentioned as to the existence and quantum of certain of the debts, and whether they were "incurred" within the meaning of s 588G; that the liquidator has simply reproduced the administrator's schedule, including all proofs received by the administrators, not even omitting those which they rejected; that a large number of the alleged debts are for trifling or modest amounts; that PLC having submitted a proof as a priority creditor for $1.3 million, if the true unsecured debts are $1.5 million and the liquidator recovers compensation for that amount, no purpose will be served by the proceedings save to generate remuneration and costs, with any surplus being returned to PLC on its priority claim, and ordinary unsecured creditors likely to receive nothing; that the "real" claim could be for as little as $677,000; and that PLC is prepared to abandon or forgive its (admitted) debt of $26,230,549, which is by far the largest debt, in which case it is said that s 588M would not apply to that debt (for which Williams v Scholz [2007] QSC 266, [113]-[116] is invoked).
8The applicants invoked what was said to be "the universal obligation on all litigants to have, prior to instituting proceedings, a proper basis for each allegation", for which they relied on (NSW) Legal Profession Act 2004, s 345 and s 347.
9In my view, the applicants' submission is misconceived. There is no principle that before instituting proceedings a liquidator (or any other plaintiff) must be "satisfied" of the material facts that constitute its cause of action, and that absent such satisfaction the proceedings are an abuse of process. So long as proceedings are instituted bona fide for the relief claimed in them, and they are not doomed to fail, they are not an abuse of process.
10The applicants' submission implies that before instituting proceedings, a liquidator must conduct some kind of preliminary assessment and evaluation of the case in order to be satisfied of the constituent elements of the cause of action. There is no such requirement of any plaintiff. A party is not required to conduct in its own mind a "mini-trial" to satisfy itself of the existence of the material facts that constitute its cause of action before instituting proceedings. In Allstate Life Insurance Co v Australian and New Zealand Banking Group Ltd (1995) 57 FCR 360, Hill J considered an application to stay or dismiss proceedings on the ground that they were an abuse of process, inter alia on the basis that the pleading, which alleged fraud, had been settled by counsel without having any reasonable basis for making that allegation. As to this, his Honour said (at 371-2):
Whether reasonable basis in fact for alleging fraud
The next matter raised was the question of whether there was a reasonable basis in fact known to Mr Hayes at the time the pleadings were drafted to support the allegations of fraud made.
There is an ethical rule of the New South Wales Bar, replicated in substance in the rules of other bars throughout the country, that a barrister should not draw or settle any court document alleging fraud unless the barrister believes on reasonable grounds that the factual material already available to him or her provides a proper basis for the allegation (see r36 of the New South Wales Barristers' Rules 1994). That such a rule existed was accepted by Mr Hayes. A reasonable basis of fact would comprehend, in addition to written material, instructions and matters of inference, as well as oral statements. Mr Hayes, who drafted the first holding writ filed (the Mitsubishi holding writ) denied that he had breached the ethical rule. He said, and in so far as his subjective state of mind is relevant I accept his evidence, that he believed there was such a reasonable basis. Ordinarily, that would have been the end of the matter.
Instead the present case took the extraordinary turn of cross-examination of Mr Hayes as to his thought processes by reference to the material available to him. ...
At the initial stages of pleading a claim there will always be evidence which points in one way and the other. An allegation of fraud is indeed a serious matter and should be the subject of anxious concern. I am sure that in Mr Hayes' case it was. But the pleader is not obliged to conduct in his or her mind a mini-trial to reach a conclusion that the allegation must, or indeed would on the balance of probabilities, succeed. It is sufficient if the material known, which can include not only documentary material but also oral statements of witnesses and matters of instructions, provides a reasonable basis for the allegation if nothing else were to be proved. The mere fact that a possible defence is open does not make it improper to allege fraud unless, on all the materials available, that defence is such that it must necessarily succeed.
In the above comments I should not be taken as accepting the proposition that had Mr Hayes objectively breached the ethical rule, that fact alone would constitute the pleading as drafted an abuse of process justifying the writ being struck out. Unless the writ was shown to have been issued for an ulterior purpose (and there was no suggestion here that that was the case) it is hard to see how an abuse of process is involved. A litigant in person, for example, would not be bound by the ethical rules of the Bar. If this be so how could a writ framed by such a litigant be struck out as an abuse of process on the grounds that the ethical rule was not complied with? Where the litigant happens to be represented, breach of the ethical rule would, in an appropriate case, give rise to disciplinary proceedings against the barrister concerned, but should hardly be visited upon the client.
11It is noteworthy that this was said in the context of an allegation of fraud, where the obligation of counsel settling a pleading has always been at its highest. Until relatively recently, it would not have been suggested that similar responsibilities attended the settlement of a pleading alleging negligence. But what emerges from his Honour's judgment is that, even in the context of a lawyer pleading an allegation of fraud, the rule that counsel must be satisfied that there is a reasonable basis for the allegations is a professional ethical rule, breach of which may sound in disciplinary sanctions but does not vitiate the proceedings. The rule does not apply to the parties, as distinct from their lawyers. And the ethical rule does not require a pleader to conduct in his or her mind a mini-trial to reach a conclusion that the allegation would succeed.
12The ethical rule is now reflected in Legal Profession Act, s 345 and s 347, which relevantly provide that a law practice must not provide legal services on a claim for damages unless the responsible legal practitioner reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim has reasonable prospects of success; that the provision of legal services by a law practice without reasonable prospects of success does not constitute an offence but is capable of being unsatisfactory professional conduct or professional misconduct; and that a law practice cannot file court documentation on a claim for damages unless the responsible legal practitioner certifies that there are reasonable grounds for believing on the basis of provable facts and a reasonably arguable view of the law that the claim has reasonable prospects of success. While this expands the obligation from cases in which fraud is alleged to all claims for damages, it remains a rule governing legal professional practice, the sanction for which is disciplinary. Contrary to the applicants' submission, it does not enunciate a universal obligation on all litigants (as opposed to lawyers) to have, prior to instituting proceedings, a proper basis for each allegation.
13A liquidator is in this respect in no different position from any other litigant. The submission that before commencing proceedings of this kind the liquidator must be satisfied of the matters referred to was supported by reference to statements of the Court of Appeal in Hall v Poolman [2009] NSWCA 64; 75 NSWLR 99, to the effect that when contemplating the commencement of legal proceedings "... the liquidator is obliged to make the relevant decisions with the skill and care appropriate to his office" (at [144]), and that legal proceedings "... should only be commenced after careful thought" (at [145]). However, neither of those passages is a statement that the liquidator must be satisfied of the material facts in a cause of action before commencing proceedings, let alone that in the absence of such satisfaction the proceedings are an abuse of process. In any event, their context was consideration of a liquidator's professional responsibility, not the validity of proceedings. The applicants' submission conflates what may be proper or reasonable conduct on the part of a liquidator, with what may constitute an abuse of process.
14The applicants complain that the liquidator proposes to use this litigation to determine what debts were incurred, when, and to what extent they remain unpaid, "without any prior and impartial assessment of those matters by the liquidator". But proceedings under s 588M necessarily involve litigation and determination of whether the alleged debts were incurred, when, and in what amount, and what loss or damage the creditor has suffered. Those are material facts in every s 588M case. They are matters that the liquidator must prove in the proceedings. The fact that the liquidator had adjudicated proofs of debt would not relieve him of the obligation of proving those matters in the proceedings. Moreover if the liquidator did so, they would not cease to be issues in the proceedings: it would remain open to the defendants to dispute that the alleged debts were incurred.
15Liquidators are given powers not available to ordinary litigants, including to conduct examinations and to adjudicate proofs of debt. But this does not mean that they must exercise those powers before commencing proceedings: indeed, the Court is not infrequently approached by those whom a liquidator would seek to examine in aid of litigation with applications to stay the examination as an abuse of process on the basis that the liquidator is oppressively or unfairly taking advantage of powers not available to ordinary litigants. Some of the issues raised by the applicants identify potential difficulties with significant aspects of the plaintiff's case - for example, whether the Perpetual debt is a debt incurred for the purposes of s 588G, and if so when it was incurred. These will be significant issues with which the plaintiff will have to deal at trial. The liquidator accepted that some aspects of the claim required further investigation and refinement. But even if the applicants wholly succeed on those issues, they will not extinguish the plaintiff's claim. Moreover, the applicants do not suggest that they render the plaintiff's case hopeless. The circumstance that there are serious issues about aspects of the plaintiff's case does not mean that the liquidator must conduct some prior inquiry to resolve those issues, in his own mind or at all. There is no abuse of process in bringing a case under s 588M which alleges that numerous particularised debts have been incurred, some of which are disputed, without first adjudicating proofs of debt.
16The applicants' contend that even if successful, the proceedings may produce no worthwhile benefit for ordinary unsecured creditors. This depends in part on the proposition that the overwhelming share of any recovery would be returned to PLC, as the major creditor, which assumes that the claim that its debt should be postponed under s 588Y would be unsuccessful. But even if the claim were for "as little as" $677,000, and even if a substantial proportion of that were consumed by costs and expenses, that could not conceivably be so trifling as to be an abuse of process. While, in Hall v Poolman, the Court of Appeal agreed that liquidators should not pursue litigation simply in order to generate fees without any view to the interests of creditors or the public interest, the Court disagreed with the proposition that liquidators were never entitled to bring proceedings where the only prospect of recovery was reimbursement of their own fees and expenses (at [157]). Moreover, that was said in the context of discussion of the professional responsibility of liquidators, and it does not follow that proceedings brought by liquidators inconsistently with that approach would be an abuse of process (though they may expose the liquidator to civil or disciplinary liability). In any event, the applicants have not begun to establish that the present proceedings are being pursued "simply in order to generate fees without any view to the interests of creditors or the public interest". At the highest, they have established a risk that the costs of the proceedings will be disproportionate to the benefits. The existence of such a risk, even if a very substantial one, does not render proceedings an abuse of process.
17It may be accepted that the categories of abuse of process are not closed [Batistatos v Roads and Traffic Authority of New South [2006] HCA 27; (2006) 227 ALR 425, [9]]. However, the court should be cautious about recognising a novel basis on which proceedings can be impugned in limine, where the defendant is unable or unwilling to allege that the proceedings are not instituted bona fide for the relief claimed in them, or are doomed to fail. To do so would invite defendants to make applications for stays at an early stage, which would have the practical effect of requiring a plaintiff to adduce evidence to demonstrate that it was satisfied (and presumably satisfied on reasonable grounds) of the existence of the material facts, leading to the type of cross-examination that Hill J described as extraordinary. The just, quick and economic conduct of litigation is likely to be inhibited rather than facilitated by adopting this novel concept. Proceedings are often instituted on the basis of what a plaintiff believes it will be able to prove after discovery and cross-examination, not on what it is "satisfied of" when proceedings are instituted. The improper institution of proceedings is sufficiently controlled by the well-established categories of abuse, namely that the proceedings are not brought bona fide for the relief claimed in them, or that they are doomed to fail. Unless they can be so characterised, the circumstance that the plaintiff has not "satisfied itself" - to whatever standard may be suggested - of the existence of the material facts does not render them an abuse of process.
18In my view, there is no abuse of process in the liquidator prosecuting these proceedings without first calling for and adjudicating proofs of debt. Accepting that there are serious issues as to quantum, they are legitimately issues for trial.
Separate determination of Perpetual debt?
19Alternatively, the applicants seek to have the question of the amount of the Perpetual debt, when it was incurred, and the amount of Perpetual's loss or damage for the purposes of s 588M(1)(b), be determined separately and before the other issues in the proceedings. It is said that the resolution of those questions involve legal issues - such as when the liability to pay outgoings arises, and the effect of the surrender of the lease - and that the Court should therefore separately determine that issue. It is also said that determination of the proposed separate question will be "highly relevant" to whether, as the plaintiff alleges, the company was insolvent from its incorporation. Finally, it is said that early determination of this question will facilitate an informed commercial assessment of the litigation not only by the applicants but also by Perpetual, who is funding the proceedings.
20Of course the mere fact that legal issues are involved is insufficient reason to try a preliminary question. The Perpetual debt is but one component, albeit an important one, of the plaintiff's claim for compensation. Its quantification will not determine the quantum of the claim; it will only determine the quantum of one integer of it. Moreover, it would not be possible to determine the relevant amount of loss and damage for the purposes of s 588M(1)(b) without also determining when it was that the company became insolvent. Even if the quantification of the Perpetual debt is also relevant to the issue of insolvency, it is not suggested that it will be determinative of insolvency.
21Resolution of the question either way will not be dispositive of the proceedings. Nor will it reduce the issues: it will merely separate out for preliminary determination the selected issues. In my view, the proposed question is not an appropriate one for separate determination.