Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd [2010] FCA 1092 | Case summary

The Interlocutory Process filed 23 April 2009 be dismissed.
The thirteenth and fourteenth defendants pay the seventh defendant's costs of and incidental to the Interlocutory Process, including any reserved costs, such costs to be fixed and paid forthwith notwithstanding that the principal proceeding is not concluded.
There be leave to appeal (if leave be required) from the orders made by Gray J on 8 July 2010. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT 1 ZMB Australia Pty Ltd and Young Turks Pty Ltd applied for a declaration that one of them is the sole beneficial owner of the proceeds of the sale of land at Railway Parade, Upper Swan in Western Australia ("the Mews land"). The application came on for hearing before Gray J. He directed that a separate question be decided before trial, namely whether any rights which ZMB may have had in respect of the proceeds had been assigned to Touma Pty Ltd. Later he answered that question, holding that those rights had been assigned by a deed dated 25 September 2007: Australian Securities and Investments Commission v GDK Financial Services [2010] FCA 710. 2 The parties are now at issue regarding the consequences of that determination. Mr Warne, the respondent, seeks an order that ZMB and Young Turks' application be dismissed. ZMB and Young Turks oppose that order being made, at least pending the hearing of an appeal from the judge's determination. 3 A word or two must be said about the background to the case. A managed investment scheme, commonly referred to as the "Mews scheme" because it involved the establishment of what was to be called the Mews Retirement Village on the Mews land, is in the process of being wound up. The Mews land has been sold by the liquidators of the registered proprietor, Western Retirement Village Management Pty Ltd (WRVM), one of the promoters of the Mews scheme. The fund produced by the sale is being administered by the court. As part of that process orders have been made requiring any person who claims an interest in the fund to bring proceedings to substantiate their claim. ZMB and Young Turks are two such claimants. 4 To put ZMB and Young Turks' application into its proper context it is appropriate to explain how they came to be involved in the scheme. Young Turks and GDK Financial Solutions Pty Ltd entered into a joint venture to establish WRVM to purchase and develop the Mews land as trustee for Young Turks and GDK. WRVM and The Mews Village Nominees Pty Ltd (MVN) entered into a marketing, management and profit share agreement. WRVM sold the Mews land to MVN and lent it money to complete the purchase. WRVM (and hence Young Turks and GDK) was never paid the deposit, or the balance of the purchase price, by MVN. Thereafter, Young Turks and GDK assigned their right, title and interest in the Mews land to ZMB. Later ZMB also acquired the interest of two investors, Seachange Management Pty Ltd and Francis Street Pty Ltd, in the Mews scheme. 5 On 25 September 2007 ZMB and Touma executed a deed by which Touma agreed to purchase ZMB's entitlement in the Mews scheme. "ZMB's entitlement" was defined to "includ[e] any rights, title or interests acquired from the Investors [Seachange Management Pty Ltd and Francis Street Pty Ltd] … and any right to receive a benefit … upon the sale of any asset of the MEWS Scheme". 6 It was the existence of this deed which caused Gray J to state a separate question. At the hearing of that question ZMB argued that the deed only assigned the interests it had acquired from Seachange Management and Francis Street. Gray J rejected this argument and found that ZMB had assigned all its beneficial interest in the venture to Touma. 7 The result of Gray J's ruling is that ZMB has no basis upon which to maintain its claim for the declaration and consequential relief. 8 Order 29 r 4 of the Federal Court Rules provides that where a decision on a question substantially disposes of the proceeding or renders unnecessary any trial, the court may, as the nature of the case requires, make any order that is appropriate, including an order dismissing the proceeding or pronouncing judgment in favour of one of the parties: see also Percival v Dunne (1885) 29 Ch D 128. 9 As ZMB's claim cannot be sustained, its claim should be dismissed. 10 Young Turks is in a similar position. On 1 October 2003 Young Turks and ZMB entered into a deed. The recitals to the deed record that Young Turks and GDK are equal venturers in a joint venture known as the Western Retirement Village Pty Ltd Joint Venture, which was to be built on the Mews land. The recitals also record that Young Turks wishes to transfer its interest in the joint venture to ZMB. To give effect to this object, cl 2 provides that: "[Young Turks] transfers to [ZMB] and [ZMB] acquires from [Young Turks] [Young Turk's] half interest in the Joint Venture (together with all benefits, rights and entitlements accruing to or attaching to [Young Turk's] interest in the Joint Venture and the [Mews land]) for [$10.00] and otherwise on the terms and conditions of this Agreement". 11 The effect of the transfer was to divest Young Turks of its interest in the Mews land in favour of ZMB. And, based on the judge's ruling, ZMB divested itself of that interest in favour of Touma. So, just as ZMB cannot maintain the action, neither can Young Turks. It follows that Young Turks' claim should also be dismissed. 12 Mr Warne seeks an order that Young Turks and ZMB pay indemnity costs of and incidental to the interlocutory process. As Gray J has dealt with the costs of the hearing of the separate question, ordering that they be paid to Mr Warne on the usual basis, I treat Mr Warne's application as an attempt to relitigate that order. There was no objection taken to that course. 13 Mr Warne founds his claim for indemnity costs on two bases: (1) that ZMB and Young Turks' claims were "untenable and misconceived"; and (2) that ZMB and Young Turks failed to accept three offers of compromise made during the course of the proceeding. 14 With respect to the first contention, I do not agree that, at least so far as ZMB is concerned, its claim was "untenable and misconceived". It is true that the judge found that ZMB had transferred its rights to Touma in accordance with the deed of 25 September 2007. But nothing in the reasons suggests the claim was hopeless. 15 On this aspect, the judge dealt in some detail with the history and circumstances that led to the execution of the deed with Touma. That history shows that, initially, Rental Fleets Australia Pty Ltd, a company controlled by a Mr Salvo, was negotiating to purchase the interest in the scheme that ZMB had acquired from the two investors, Seachange and Francis Street. 16 In due course Rental Fleets decided not to go ahead with the acquisition and introduced Touma as a possible purchaser. Thereafter negotiations continued between ZMB and Touma until the deed was executed. The judge found that Touma was not fixed with the knowledge Rental Fleets had in relation to the nature of the transaction. He found that the knowledge of Mr Salvo was not passed on to Touma. 17 It was not, however, beyond possibility that the facts may have turned out differently. Nor is it correct to describe as "untenable and misconceived" the proposition that when Touma took up the negotiations with ZMB it should have had attributed to it Rental Fleets' (objectively ascertained) knowledge of the transaction and its surrounding circumstances. 18 The judge said that absent some relationship of principal and agent between the two organisations, Touma could not be fixed with that knowledge. There are other views, which are not "untenable or misconceived", even if they were ultimately shown to be incorrect. For example, given that Touma was introduced by Rental Fleets, it was open for ZMB to assume that Touma had been advised by Rental Fleets about the nature of the transaction. Further, the correspondence between ZMB's and Touma's lawyers provides some basis for thinking that Touma was aware that it was only acquiring the interest in the Mews scheme that ZMB had acquired from Seachange and Francis Street. For example, there is one email from ZMB's lawyers which states: "We understand that your client's interest was in fact acquired from third parties. It would greatly assist if you could provide us with the documentation that led to your client acquiring the said interest". ZMB's lawyers responded: "We will forward you via email the documents under which the interests of Francis Street and Seachange Management were acquired" and that "the sale of these interest [sic] are at a significant discount to what ZMB has only recently paid as per the Purchase Deeds". 19 Moving to the second contention relating to the three offers of compromise, it is to be observed that each was, in effect, an offer that the interlocutory process be dismissed and either that each party bear their own costs or a small proportion of Mr Warne's costs be paid. There are several reasons why those offers should not affect the costs question. The first and most obvious is that we are here dealing with a fund being administered by the court. It is a fund that must be distributed between the persons who are actually entitled to it. It is not for parties to compromise claims with the possible consequence that a person not entitled to share in the fund will participate in its distribution. 20 It is true that when Mr Warne was appointed to represent the investors in the Mews scheme, I ordered that Mr Warne have the power to settle proceedings subject to court approval. On reflection, this part of the order was made in error. The Butterworths Practice & Procedure: Federal Court [38.835.10] states that a person who is a representative party is in charge of litigation up until judgment and may compromise, discontinue or submit to judgment as he or she pleases. The White Book (at least prior to 2000) deals with the permissibility of a representative plaintiff compromising a proceeding. It states that a representative plaintiff may compromise a proceeding on behalf of all he/she represents. Nothing is said about the position of a representative defendant. 21 I have now looked at some of the old cases. They suggest that a representative plaintiff has little or no power to compromise a claim. In Handford v Storie (1825) 2 Sim & St 196; (1825) 57 ER 320, 321 it was stated that: "A plaintiff who sues on behalf of himself and all other persons of the same class, as he acts upon his own mere motion and at his own expense, retains the absolute dominion of the suit until the decree, and may dismiss the bill at his pleasure". I read this decision as permitting the plaintiff to withdraw his action but not to compromise it in a way that binds the represented class. In Re Calgary and Medicine Hat Land Company Ltd [1908] 2 Ch 652, 662, Farwell LJ stated that: "[A] plaintiff is entitled to enforce the rights which all enjoy in common for the common benefit of all, but not to give up or alter any such rights, at any rate without the leave of the Court". This confers only a limited power to settle an action and then only in a limited type of case. 22 Rees v Richmond (1890) 62 LTNS 427 makes it tolerably clear that a representative defendant only has power to submit to a claim and no power to consent or compromise a claim brought against the parties he represents. 23 Based on these authorities, what is said in the Butterworths Service is misleading. 24 So far I have proceeded on the assumption that what was contained in the three letters is an offer capable of being taken into account for costs purposes. But there are several cases which hold that an offer that a party withdraw, or withdraw and submit to a costs order, is not an offer that involves a real and genuine element of compromise and hence its rejection should not be considered unreasonable for costs purposes: see eg Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (No 4) [2009] FCA 803, [12]-[14]; Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) 201 ALR 618, [62]. 25 All in all, Mr Warne should be paid his costs, but only on the ordinary basis. I note, lest it be thought that I have overlooked the point, that it was not submitted that ZMB and Young Turks' costs should be borne by the fund. 26 Finally, I should mention that ZMB has also brought an application for leave to appeal the judge's ruling. A judge's answer to a question stated under O 29 is interlocutory (see Dunstan v Simmie & Co Pty Ltd [1978] VR 669) and leave to appeal is required: Federal Court of Australia Act 1976 (Cth), s 24(1A). In contrast, the order that will dismiss ZMB and Young Turks' application, notwithstanding the application is described as an "interlocutory application", results in a final disposition of their claim from which no leave to appeal is required. But, to make sure that the proposed appeal can go ahead, I will, nonetheless, grant leave if leave be required. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd

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