- Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd

The proper construction of r 2.7 of the Supreme Court (Corporations) Rules

The Applicants seek orders under r 12.11(1) of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") and s 63(3)(a) of the Civil Procedure Act 2005 (NSW) setting aside service of the Originating Process by reason of an alleged failure by TCL to serve the Originating Process "as soon as practicable after filing". The Applicants submit that that is required by r 2.7(1) of the Supreme Court (Corporations) Rules 1999 (NSW) ("Corporations Rules"). The Applicants relied on a lengthy written outline of submissions, of some 23 pages in single spacing, in support of this application. That written outline of submissions did not seem to be wholly consistent with the somewhat narrower, and more balanced, position put by Mr Pesman and Mr Bender, who appeared for the Applicants at the hearing. I have had regard to the entirety of those submissions and Mr Pesman's oral submissions. However, I have not considered it necessary to address each individual proposition raised in those submissions in order to identify my reasons for dismissing the application.
The Applicants point out that the Corporations Rules took effect from 1 March 2000, as common procedural rules adopted by the Federal Court of Australia and the Superior Courts of the States and Territories that apply to proceedings under the Corporations Act. They also draw attention to r 1.3 of the Corporations Rules which relevantly provides that the Corporations Rules apply to a proceeding in the Court under the Corporations Act and other rules of Court apply, to the extent that they are relevant and not inconsistent with the Rules, to a proceeding in the Court under the Corporations Act. The Applicants submit, and I accept, that the Corporations Rules apply to these proceedings where TLC alleges contraventions of ss 180 and 181 of the Corporations Act, and that the proceedings are proceedings under the Corporations Act although they also advance claims that are based on the general law: Litmus Australia Pty Ltd v Canty [2006] NSWSC 196 at [43].
Rule 2.7 of the Corporations Rules provides that: "[a]s soon as practicable after filing an Originating Process and, in any case, at least five days before the date fixed for hearing, the Plaintiff must serve a copy of the Originating Process and any supporting affidavit on: (a) Each defendant (if any) to the proceeding; and (b) If the corporation to which the proceeding relates is not a party to the proceeding - the corporation."
The Applicants submit that this rule imposes an express obligation on the plaintiff in a proceeding to which the Corporations Rules apply to serve the Originating Process on each defendant as soon as practicable after it is filed. That submission may broadly be accepted, with the qualification that the rule also imposes an additional or alternative obligation that requires service at least five days before the date fixed for the hearing. The latter obligation broadly corresponds to UCPR r 6.15(3) which requires a summons to be served not less than five days before its return date.
The Applicants also submit that neither the Federal Court Rules nor the Uniform Civil Procedure Rules: "contain the additional requirement imposed by r 2.7(1) of the Corporations Rules that the Originating Process be served as soon as practicable after it is filed. That absence highlights the decision of the drafters of the Corporations Rules to include an additional requirement that service be effected as soon as practicable after the Originating Process is filed and r 2.7(1) must be construed in that context." I do not accept that submission. It seems to me that the first limb of r 2.7(1) of the Corporations Rules simply makes explicit what would ordinarily be implicit, as a matter of the parties' obligation to promote the just, quick and cheap resolution of the real issues in dispute in proceedings, namely that proceedings should ordinarily be served as soon as practicable after they are commenced.
The Applicants also submit that, absent an extension of the time limit imposed under the first limb of r 2.7(1): "(a) The Defendant must be given the maximum practicable notice of the proceedings by service of the Originating Process as soon as practicable after filing, including the facts alleged in support of the relief claimed as set out in the supporting affidavit required by r 2.4(1); and (b) The proceeding must thereafter be case managed inter partes towards hearing rather than being stood over for a period of 6 or 12 months prior to service as might be permitted by other rules of Court that apply to other matters …"
I also do not accept that submission. First, it does not address the fact that the requirement of service "as soon as practicable" raises questions of what is practicable in the circumstances, which it seems to me are not to be determined only by the time which would be taken to physically serve the proceedings upon a defendant. Second, that submission does not recognise that Court rules should be interpreted to promote the just, as well as the quick, resolution of the matters in issue in the proceedings, in accordance with s 56 of the Civil Procedure Act. Third, the proposition that the proceedings "must" thereafter be case managed in a particular way does not sufficiently recognise the Court's discretion in the management of the proceedings or its obligations under s 56 of the Civil Procedure Act.
TCL responds that, properly construed, r 2.7 provides for two periods by which service may be effected, namely as soon as practicable and five days before the date fixed for hearing, and that compliance with either part of the rule would suffice. TCL also submits that the "date fixed for hearing" means a substantive hearing, and not a directions hearing in the Registrar's list and no date has been fixed for the hearing of the Originating Process. In oral submissions, Mr Dick, who appears with Mr Sulan for TCL, submitted that the reference to service "at least five days before the date fixed for hearing" in r 2.7 should be read together with the first limb of the rule so as to identify the "outer limits" of "as soon as practicable" (T37). That proposition appears to find support in an observation of the Court of Appeal of the Supreme Court of Victoria in Horne v Retirement Guide Management Pty Ltd [2017] VSCA 47 (at [109]) to similar effect. I now turn to address that decision.
The Applicants placed substantial reliance on the decision of the Court of Appeal of the Supreme Court of Victoria in Horne v Retirement Guide Management Pty Ltd above, which they submitted was "consistent" with the construction of r 2.7 of the Corporations Rules for which they contend. That decision is not, as Mr Pesman fairly conceded, authority for that construction, and is consistent with that construction only in the sense that the Victorian Court of Appeal did not need to determine whether to accept or reject that construction and did not do so. TCL responds that the decision of the Court of Appeal in Horne v Retirement Guide Management Pty Ltd above is not on point, and I broadly accept that submission for the reasons that I indicate below. TCL also points out that the Court of Appeal in Horne Retirement Guide Management Pty Ltd above did not have to consider the effect of r 5.12 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), which broadly corresponds to UCPR r 6.2(4)(a), because Counsel in that case had disavowed reliance on that rule, as the Court of Appeal noted (at [75]). TCL also points out that, in that case, the plaintiff's claim required an extension of time beyond the one year period which was permitted for service under r 5.12 of the Supreme Court (General Civil Procedure) Rules, whereas these proceedings were served (subject to the position of Mr Menudin which I have noted above) within the time specified in UCPR r 6.2(4)(a), which I will address below.
In Horne Retirement Guide Management Pty Ltd above, service was effected pursuant to an extension of time granted by an Associate Judge on an ex parte application made by the plaintiff and was only valid if that extension of time was not set aside. That extension was set aside at first instance and that decision was affirmed by the Court of Appeal. The Court of Appeal observed (at [108]-[110]) that the effect of the words "as soon as practicable" in r 2.7 of the Corporations Rules was to fix a time for effecting service, presumably at the earliest point at which service was practicable. The Court of Appeal also observed that the words "and, in any case" in that rule indicates that both elements of the rule do the same work and the second element takes precedence over the first, possibly with the result that service will be effective where it was served not less than five days before the first hearing in the matter, or the final hearing of the matter, depending upon the construction that is given to the second limb of that rule. The Court of Appeal also observed that: "If a party effects service well after it became practicable to do so, the party being served may attempt to set aside service by establishing that in the circumstances of the case, it had become practicable to serve well before service was effected." Mr Dick submitted that the Court of Appeal was in error in that reading of the rule (T38). I am not persuaded by that submission, having regard to the terms of r 2.7, although it does not follow that a Court would be obliged to set aside service by reason of non-compliance with the rule in a particular case. It is not necessary to reach a final view as to that question for the purposes of this application.
The Court of Appeal also held (at [115]) that there were several avenues available to a Court to extend the time for service specified in r 2.7, and that the Court: "may extend the second element of r 2.7 so that service may be effected less than five days before the date for hearing, but leave the first element of r 2.7 in place. Alternatively, the Court might grant an extension that disposes of both elements of r 2.7 and specifies a particular date by which service must be effected."
The Court of Appeal ultimately held that the extension of time, on which the plaintiffs needed to rely in that case, was vitiated by an error in the exercise of the discretion by the Associate Judge who had granted it. As I will note below, no extension of time is required in this case, at least for the purposes of UCPR r 6.2(4). That case also did not give rise to any issue of inconsistency between the position in respect of a cause of action under the general law and in respect of a statutory claim under the Corporations Act, a matter that I will address below, since service in that case was effected outside the time that would have been valid, absent the extension of time under the Supreme Court (General Civil Procedure) Rules as well as under the Corporations Rules.
The Applicants submitted that the Court of Appeal in Horne Retirement Guide Management Pty Ltd above construed r 2.7(1) of the Corporations Rules as "prevailing over" the one year period of validity permitted by r 5.12(1) of the Supreme Court (General Civil Procedure) Rules in commenting on the reasoning of the Associate Judge who had granted the extension (at [167]-[168]). I do not accept that submission. The Court of Appeal did no more than there recognise that r 2.7 imposes an obligation to serve an Originating Process as soon as practicable, and then found that the Associate Judge had erred in focussing only on the one year period of validity established by the Supreme Court (General Civil Procedure) Rules to the exclusion of the requirements under r 2.7 of the Corporations Rules. The Applicants also submitted that I should follow the decision in Horne v Retirement Guide Management Pty Ltd above, unless I am convinced that the interpretation adopted in that decision is plainly wrong. It does not seem to me that that question arises in this case, where the issues determined by that case are significantly different from those that arise in this application, and nothing in the determination of this application would involve an approach that is inconsistent with that taken by the Court of Appeal on the different facts in issue in that case.
The Applicants also referred to the decision in Re Convector Grain Pty Ltd (in liq) [2017] VSC 473 at [77]-[85], overturned by Robson J on appeal in Grain Pty Ltd (in liq) v Laureville Pty ltd (No 2) [2018] VSC 33. Those decisions do not advance the Applicants' position, where they establish, not surprisingly, that the Court has power to extend the time limit imposed by r 2.7(1) of the Corporations Rules and regularise service of a liquidator's application in an appropriate case, although that case involved a much shorter delay in service than this case.
It seems to me that, on the face of r 2.7 of the Corporations Rules, and consistent with the reading given to that rule in Horne v Retirement Guide Management Pty Ltd above (to the limited extent that decision is on point), that rule imposes an obligation to serve an Originating Process as soon as practicable, as well as to serve it five days before the date of the hearing. I would be inclined to the view that the latter obligation refers to the final hearing, but it is not necessary to express a final view as to that matter since nothing turns on it for present purposes. It seems to me that that rule is not in terms directed to the validity of service of the Originating Process, a matter that I will address further below. I will assume, without deciding, that the liquidator could have "practicably" served these proceedings at an earlier date, at least by accelerating his efforts to obtain funding of the proceedings, although I do not accept the Applicants' several criticisms of the liquidators' conduct which I address below. Even making that assumption, favourable to the Applicants, it seems to me that the relief they seek could not properly be granted for the reasons noted below.

Whether service of the Originating Process should be set aside or the proceedings dismissed

The Applicants accept that a contravention of r 2.7(1) of the Corporations Rules is an irregularity and does not, in itself, invalidate service of the Originating Process, having regard to s 63 of the Civil Procedure Act. They accept that the Court must engage in a balancing exercise in order to determine whether or not then to set aside service of the Originating Process under r 12.11(1) of the UCPR or s 63 of the Civil Procedure Act, and they accept that the Court may exercise the rectification power conferred by s 63 of the Civil Procedure Act where it can do so without injustice. In oral submissions, Mr Pesman submitted that compliance with r 2.7 of the Corporations Rules is mandatory and that failure to comply with that rule enlivens a discretion to set aside service under UCPR r 12.11 or s 63 of the Civil Procedure Act (T21).
The Applicants support the exercise of the discretion to dismiss the proceedings on the basis that: "The delay was caused by the liquidators' decision, without good reason, to delay service until a time that was convenient to [TCL] almost six months after service was required by r 2.7(1). [TCL] has offered no reason as to why that occurred beyond the invalid reason that it wished to procure funding. The prejudice is properly characterised as being self-inflicted. During this period, presumptive prejudice accrued to the [Applicants] as a consequence of the liquidators' decision. That is a sufficient justification for the prejudice to [TCL] arising from the loss of some or all of its causes of action to be discounted entirely."
Mr Dick responds that the Applicants do not assert that TCL's claims are not seriously arguable, and that the Applicants fairly acknowledged that the relief they seek would bring about a situation where those claims were statute-barred. Mr Dick also submits that the Court would not set aside service of an Originating Process which has been served within the express time period provided for in UCPR r 6.2(4), even if that application had been served in contravention of the timing requirement in r 2.7 of the Corporations Rules.
In determining whether service of the Originating Process should be set aside or the proceedings dismissed, I have had regard, first, to the Applicants' criticisms of the liquidators' conduct and the delay in service. Mr Goyal's evidence is that TCL had limited funds at the time the Originating Process was filed in May 2017 and did not then have funding in respect of the proceedings (Goyal 14.2.18 [16]). His evidence is also that, for reasons he sets out, he considered it prudent that TCL commence the proceedings on 8 May 2017 and not serve the Defendants until TCL had obtained funding to conduct the proceedings, and in particular an indemnity for adverse costs and security for costs, and obtained approval for entry into the funding agreement in accordance with ss 477(2B) and 506(1A) of the Corporations Act.
The Applicants submitted that the only reason proffered for the liquidators' delay in serving the Originating Process was a desire on their part to secure litigation funding, and that was an improper or at least an inappropriate basis on which to delay service of the proceedings. In oral submissions, and on the premise that r 2.7 of the Corporations Rules had not been complied with, Mr Pesman addressed the question of the adequacy of the explanation for that breach and submitted that the Court should infer that the decision not to serve the proceedings was made in knowledge of r 2.7 "and in defiance of it" (T30). I would not draw that inference, where Mr Goyal was not cross-examined and that proposition was not put to him to allow him an opportunity to respond to it.
TCL responds that, at least in an appropriate case, a need for litigation funding may provide a proper basis for a delay of service. As TCL points out, that proposition appears to have been accepted by Tobias JA (with whom Ipp JA agreed) in Tolcher v Gordon above where his Honour noted a liquidator's delay in serving proceedings, after funding was withdrawn shortly before the limitation period expired, and observed (at [126(b)]) that: "The liquidator made a conscious decision not to attempt service of the SLC before 1 August 2003 as he wished the litigation funding to be in place before that occurred. Although in a sense this was, as the primary judge found, a "commercial decision" by the liquidator, nonetheless in my opinion it was appropriate, prudent and responsible and not a decision for which the liquidator can be justifiably criticised - at least without the benefit of hindsight."
In Weston v Publishing and Broadcasting Ltd (2012) 88 ACSR 80 at [187], Sackville AJA similarly doubted any proposition that a desire to secure litigation funding "can never justify delay in serving initiating process", although the Court found that the delay in the particular case was not justified. A similar proposition appears to have been accepted by Ball J in Hastie Group Ltd (in liq) v Moore [2016] NSWSC 1682 where his Honour noted (at [58]) that it would have been imprudent for the liquidators in that case to serve proceedings before they had a reasonable degree of confidence that they would be able to meet their costs, including any costs orders made against the company in liquidation. As Mr Dick points out, cases in which reference has been made, without disapproval, to a delay in order to obtain litigation funding involve delays that were significantly longer than the delay that arose in this application.
The Applicants relied upon the fact that the liquidators in Horne v Retirement Guide Management Pty Ltd above had been seeking litigation funding, and that the Court of Appeal (at [176]) did not disturb Judd J's conclusion at first instance that: "seeking litigation funding did not amount to a good reason for extension in this case." His Honour was plainly not there articulating any general rule. As I noted above, the Court of Appeal's decision was there that the extension of time on which the plaintiffs needed to rely in that case, was vitiated by an error in the exercise of the discretion by the Associate Judge who had granted it, not by reason of any principle in respect of litigation funding.
It seems to me that Mr Goyal could properly be concerned that substantial proceedings should not be commenced, and the costs (including costs that would be unrecoverable on an assessment) of defending them not imposed upon the Applicants until TCL was in a position that it had the funding not merely to commence but to continue the proceedings to a determination on their merits. It seems to me that a liquidator may properly be, and very likely ought to be, concerned as to the impact of commencing substantial proceedings that he or she is not funded to continue to their conclusion. This conclusion is a factor tending against the exercise of the Court's discretion to grant the relief sought by the Applicants.
The Applicants also submitted that it would have been open to Mr Goyal to serve the Originating Process and to seek, by agreement or by application to the Court, a stay of the proceedings in respect of any subsequent application for security for costs. That submission impliedly recognises that, had TCL adopted a different procedural approach, the proceedings could properly have been commenced but not progressed during the relevant period, although the Applicants contend that the proceedings should now be dismissed because TCL did not adopt that different approach. With respect, that submission emphasises the absence of detriment suffered by the Applicants by the approach adopted by TCL, by pointing to the fact that the Applicants would be in substantially the same position as they now are had TCL taken that different approach. I have not neglected that that different approach would have drawn the detail of the allegations made to the Applicants' attention at a somewhat earlier point. However, that highlights the absence of persuasive evidence of any disadvantage suffered by the Applicants, in the particular case, from the delay in drawing the detail of those allegations to their attention. This factor also tends against the grant of the relief sought by the Applicants.
The Applicants also submitted that, during the period of the funders' due diligence from 4 July 2017 until 6 September 2017, the liquidators' delay amounted to an "impermissible arrogation from the Court to a third party [of] the right to decide the period by which the time for service is to be extended". That submission adopts the language of Ipp JA (with whom Tobias and McColl JJA agreed) in Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104 at [82]. However, it does not seem to me to be apt in the circumstances of this case. To the extent that any question of the extension of time under r 2.7 of the Corporations Rules arises, or whether the Court should make an order declaring the service of the proceedings invalid, or dismissing the proceedings, nothing done by the liquidators has adversely impacted the Court's exercise of that discretion, which is to be exercised in this application. This matter does not support the grant of the relief sought by the Applicants.
The question of any prejudice to the Applicants arising from the delay in service of the Originating Process after it was filed is also relevant to the exercise of the Court's discretion whether to grant the relief that they seek. In their written outline of submissions, the Applicants submit that: "Apart from the knowledge of Ms Tan that proceedings had been issued by [TCL] against [HCL] and [Mr Meers], there is no evidence that any of the [Applicants] had any knowledge of the proceedings prior to being served." It seems to me that that submission inverts the onus of proof. The Applicants seek to set aside the Originating Process and seek other relief and it is a matter for them to establish any proposition that they had no knowledge of the proceedings prior to service, if they seek to rely on it to support the relief they seek, not for TCL to disprove a matter that the Applicants have not established. Mr Pesman accepted, in oral submissions, that the evidence did not identify any particular prejudice to the Applicants but submitted that that delay generally involves prejudice, and the relevant events happened some seven years ago, so that there is presumptive prejudice (T33).
TCL submits, in its outline of submissions that: "… the Applicants have identified no material or specific prejudice. For example, they have not specified any witnesses or evidence that is no longer available to them. The issue of prejudice must also be considered by asking: what knowledge did the Applicants have of the proceeding and what level of preparation have they been able to do in the interim period between filing and service. On these two important questions the evidence is sparse. The Applicants have not been forthcoming as to their state of knowledge and the inference ought to be drawn that any evidence which they could call on these topics is unhelpful to their case."
In oral submissions, Mr Dick also points out that none of the individual Applicants, nor any officer of HCL or HRL, gave evidence as to his or her state of knowledge of the proceedings; as to what had been done in the period before filing and serving the proceedings (or, I interpolate, in the period between the appointment of administrators to TCL and the service of the proceedings); or of any identified prejudice arising from the delay between the filing and service of the proceedings. Where the Applicants other than HCL, HRL and Mr Menudin do not seek to give evidence (other than Ms Tan's evidence as to her knowledge, to which I have referred above) as to their state of knowledge of the proceedings, I infer that any evidence led by them would not have assisted them. I do not, of course, draw any inference that their not having led evidence of that matter establishes that they in fact had knowledge of the proceedings. The lack of evidence of any real prejudice to the Applicants arising from the delay in service weakens the case for an exercise of discretion to grant the relief they seek.
The Applicants also advanced detailed submissions as to the policy behind limitation statutes and referred to the concept of "presumptive prejudice" adopted in several of the cases dealing with those statutes. I have noted above that the individual Applicants did not lead evidence (other than Ms Tan's evidence) to establish their state of knowledge of the relevant proceedings or to identify any prejudice which would arise for them from the continuance of the proceedings; it seems to me that Ms Tan's evidence did little to advance the position so far as HRL or HCL were concerned and less to advance the position of the individual Applicants; and the proceedings appear to have been commenced, at least in respect of substantial parts of the relevant claims, within the six year period of limitation applicable to claims under s 1317K of the Corporations Act. It does not seem to me that this submission significantly advances the Applicants' position.
The Applicants also advanced detailed submissions as to the principles applicable to an extension of time under UCPR r 12.11 and its predecessors. I have had regard to those principles, so far as they are relevant to the question whether any extension of time should be granted under r 2.7 of the Corporations Rules, although such an extension is not necessary in this case, and no question of an extension of time for the period of service specified in UCPR r 6.2(4) arises in this application.
I have not accepted the premises of the Applicants' submission that service should be set aside and the proceedings dismissed, including that the liquidators did not have good reason to delay service and that a wish to have funding of the proceedings before pursuing them was "invalid" or improper or that significant weight should be given to "presumptive prejudice" arising from a relatively short delay, where proceedings were commenced within the limitation period specified in s 1317K of the Corporations Act, the individual Applicants have not led evidence of any substance of actual prejudice and the evidence of that matter led by HCL and HRL is not persuasive. It also seems to me that that submission does not adequately address the need for balancing between the interests of the Applicants on the one hand, and the interests of TCL and its creditors in obtaining a trial on the merits on the other.
It does not seem to me that a basis has been established for the Court to exercise its discretion to set aside service of the Originating Process under UCPR r 12.1(1) or s 63 of the Civil Procedure Act, and all of the relevant considerations support the contrary result. Assuming, without deciding, that non-compliance with r 2.7 of the Corporations Rules was established, and the extension of the time for service sought by TCL, I would not exercise the judicial discretion arising under UCPR r 12.11(1) or s 63 of the Civil Procedure Act so as to set aside service of the Originating Process upon the Applicants or dismiss the proceedings.

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