- Bailey v Palombo

Supreme Court of NSW|2021-08-09|Before: Black J

Solicitors: Ai Strategic Lawyers (Plaintiff) Contracts Specialist (First Defendant) Corrs Chambers Westgarth (Second and Third Defendants) File Number(s): 2021/50975

Judgment - ex tempore (Revised 10 August 2021)

By Amended Originating Process filed on 15 March 2021, the Plaintiffs, Wind Turbine Services Australia Pty Ltd ("WTS") and Cosmic Wind Services Pty Ltd ("Cosmic") applied for orders, under s 455D or 447A of the Corporations Act 2001 (Cth) that a Deed of Company Arrangement ("DOCA") made between SBL Solutions Pty Ltd ("SBL"), Messrs Pirina and Naidenov ("Deed Administrators") and SBL Solutions Services Pty Ltd ("SSL") be terminated. Alternatively, they seek an order under s 75-41 of the Insolvency Practice Schedule (Corporations) ("IPSC") setting aside a resolution of creditors of SBL passed at a meeting on 11 January 2021 ("11 January resolution") that SBL vary the DOCA and an order that SBL be wound up. That application was heard on 29 July 2021. I reserved my judgment at the conclusion of that hearing and will return to the circumstances of that hearing below.
After I had reserved judgment, and after an exchange of correspondence to which I will refer below, the Plaintiffs, by Interlocutory Process filed on 3 August 2021, sought orders that they be given leave to reopen their case to tender two letters dated 30 July 2021 annexed to an affidavit of their solicitor, Mr Niles. Those letters are dated 30 July 2021, the day after the hearing before me, and refer to a change in the Plaintiffs' position that occurred after the hearing. I will return to the significance of that matter below.

Affidavit evidence and chronology

I will first refer to the affidavit evidence on which the Plaintiffs rely, before turning to the development of the proceedings by way of background. By his affidavit dated 3 August 2021, Mr Niles, who is the Plaintiffs' solicitor, refers to the circumstances in which a further report dated 28 July 2021 of Mr Melluish was served on 29 July 2021 in the proceedings, and to the content of that report, so far as it indicated that, if the Court wound up SBL and allowed the Deed Administrators' costs of the proceedings and the Plaintiffs' costs sought to be recovered in the proceedings, then there would be insufficient funds for a liquidator appointed to SBL to pursue any recovery claims. Mr Niles there indicated that the Plaintiffs' case had been prepared on the assumption that there would be more than adequate funding for a liquidator from the assets of SBL, although I will refer to issues below which must cause concern as to the basis of such an assumption.
Mr Niles also refers to having sought instructions on 29 July 2021, during the course of the hearing, but being unable to speak to the Plaintiffs' respective directors until after the conclusion of the hearing and having been provided with the letters which are annexed to the affidavit. By the first of those letters, dated 30 July 2021, Wind Turbine Services Australia and Cosmic Wind Services Pty Ltd, the Plaintiffs, together indicate that they will not claim more than $100,000 in costs from the assets of SBL and will defer their claim for costs until the liquidators' recoveries exceed $450,000. By the second letter, they undertake to fund a particular liquidator if he is appointed to an initial maximum of $100,000, of which they will each contribute $50,000.
By a second affidavit dated 6 August 2021, Mr Niles refers to Counsel's explanation of the reasons that no objection was taken to Mr Melluish's further report dated 28 July 2021 at the hearing on 29 July 2021. It seems to me that that issue is of little significance, because all that Mr Melluish's further report dated 28 July 2021 did was to give mathematical precision, as of 28 July 2021, to matters which were readily apparent from earlier correspondence between the parties and two earlier reports of Mr Melluish. Little would have turned on any objection to that further report, because the matters established by Mr Melluish's further report were readily apparent by inference from his earlier reports.
By affidavits dated 4 August 2021, Ms Lenk and Mr Hatton each explain why previous offers were not made to fund investigations by any liquidator appointed to SBL, on the basis of a belief that money paid into the deed fund could be used by a liquidator to recover money for the benefit of creditors of SBL and that additional funding would not be required from the Plaintiffs; Ms Lenk also refers to other matters with which she was dealing on the day of the hearing, so she was not able to answer her phone when her solicitor sought instructions during the day of the hearing; and also to her having become aware after the hearing had completed that there was a possibility that a liquidator appointed to SBL may not have sufficient funds available to investigate and recover assets for the benefit of creditors. There is no suggestion that I should not take Ms Lenk's evidence and Mr Hatton's evidence at face value. However, I will point below to the matters which had arisen, in the period prior to the hearing, and during the hearing, which had focussed significant attention on the question of any funding that would be available to a liquidator to conduct such investigations.
I now return to the chronology of events concerning the proceedings. The Plaintiffs have here made, and pursued, allegations in respect of the conduct of the Deed Administrators, who have repeatedly raised concerns about that matter in correspondence from their solicitors, tendered in the substantive proceedings, which drew attention to the fact that those allegations were forcing the Deed Administrators to take an active role in the proceedings, in which they might otherwise have taken a more limited role or submitted to the Court's orders, and to incur costs in leading evidence which they would otherwise not have led. By an email dated 30 March 2021, the Deed Administrators' solicitors referred to the costs associated with significant and time-consuming steps in respect of the preparation of evidence, resulting from that choice by the Plaintiffs. That matter was again addressed in a letter dated 1 April 2021 from the Deed Administrators' solicitors, where they pointed to the possibility, which the Plaintiffs did not take up, that the Plaintiffs could amend their points of claim to withdraw the allegations against the Deed Administrators personally, so that they would not need to take an active role in the proceedings, and again by a further letter dated 14 April 2021 which again referred to the significant costs which were being incurred by the Deed Administrators' defence of the allegations against them. I draw attention to these matters because they indicate that, long before the First Defendant served Mr Melluish's expert reports, it was apparent that the way in which the proceedings had been put by the Plaintiffs was likely to lead to costs being incurred by the Deed Administrators in their defence.
In Mr Melluish's first report dated 2 May 2021, he also pointed to two issues which are of some significance. The first was that Hermes Capital, a secured creditor, would potentially claim the amount of the deed fund on a liquidation, in which case there would be no deed fund available to fund investigation costs by the liquidator. The risk that a liquidator would be unfunded was plainly identified from that point, rather than form his further report dated 28 July, nearly two months later. The second was that priority claims and costs arising from the proceedings, obviously referring to the Plaintiffs' costs and the Deed Administrators' costs, would adversely affect the return in a liquidation. Mr Melluish addressed that issue expressly, and again pointed to the risks that the costs of the proceedings would erode the funds available in a liquidation (CB 868) and he there calculated, in table 6 and subsequent tables, the reduction in the return on a liquidation which would reflect the costs incurred in the proceedings. In his concluding paragraphs, he again noted the further costs which may arise as priority costs in the liquidation as a result of the proceedings, so that liquidation dividends would be lower than the estimated dividends under a deed of company arrangement, and again addressed the risk arising from a claim by Hermes Capital to the deed fund.
I emphasise those matters because it is apparent from that report, made in early May 2021, that Mr Melluish had identified all that subsequently occurred, in respect of the erosion of the funds available in a liquidation, as a result of the costs of the proceedings. All that he had not done then, and subsequently did, was to quantify the amount of that subsequent erosion after it had occurred. There seems to me to be no doubt that, by the time that report was served, the Plaintiffs were squarely on notice of the fact that the costs of the proceedings were likely to have a significant impact on the funds available in a liquidation, by eroding the funds held in the deed administration that would be transferred to a liquidator (unless Hermes capital claimed them) if they succeeded.
By 25 June 2021, the Deed Administrators had advised creditors, and the Plaintiffs fairly accept that they had received the advice, that: "Due to the current Proceedings and the associated legal costs and time costs incurred by my office, it is likely that a return to creditors will be greatly diminished from previous estimates and the estimated return is undetermined at the date of this correspondence." Again, that identified in qualitative terms the outcome to which Mr Melluish had already referred, namely an erosion of the funds held in the deed administration by the costs of the proceedings, although it did not yet quantify it.
On 26 July 2021, in response to a notice to produce issued in the proceedings, the Deed Administrators produced a production bundle, which appears to be of substantial size although it is not in evidence and, on the same date, the solicitor for the First Defendant fairly sent the other parties' solicitors the documents produced by the Deed Administrators pursuant to the notice to produce, and indicated that they had requested Mr Melluish to update his calculations having regard to those documents. An attached letter referred to the amount of time, costs and disbursements that had actually been incurred by the Deed Administrators, together with assumed future time, costs and disbursements.
By a further email dated 26 July 2021, the First Defendant's solicitors served an updated report of Dr Melluish which, significantly, deducted the Plaintiffs' legal costs, estimated at $100,000, in the event that they were successful and deducted the Deed Administrators' legal costs, in an amount described as reflecting the increase in the Deed Administrators' estimated legal costs from $130,000 to $160,000, in order to determine the amount of the DOCA return. Mr Horowitz, who appears for the First Defendant, points out that it was implicit in that calculation that the amount of funds then available in the deed administration was minimal. That inference would readily have been drawn, even without doing the mathematics, by simply recognising the Deed Administrators' earlier advice to that effect and the estimated legal costs in the amount there noted.
Subsequently, by a letter dated 28 July 2021, the day before the hearing, the Deed Administrators provided a further update as to cash held, costs as at 27 July and estimated costs, which was addressed to the other parties' solicitors, including the Plaintiffs' solicitors, and which again disclosed the extent to which the cash held was eroded by those costs without any need for a further report of Mr Melluish to establish that matter. The further report of Mr Melluish served on 28 July 2021, the day before the hearing, undertook the mathematical calculations which demonstrated the extent of that erosion, but disclosed no information, in my view, that was not already apparent from the documents that preceded it.
In the course of the hearing on 29 July 2021, there was focus, throughout the hearing, on the issue of how any investigations and proceedings undertaken by the liquidators which the Plaintiffs sought to have appointed would be funded, and I raised that question in submissions (T29) and Mr Rodionoff (who appears for the Plaintiffs) indicated he would return to it. I noted, in the course of submissions (T69) that the costs of the application sought by the Plaintiffs would have the result that the outcome of the application was potentially worse for creditors than a DOCA, but also noted, reflecting the evidence to which I have referred above, that that position was implicit in the position from the start of the proceedings. In an exchange (T72), which appears to have prompted the application to reopen, I noted that one of the tables of Mr Melluish's last report was of limited relevance, because it did not allow for the costs of the winding up sought by the Plaintiffs and that the result of the relief that the Plaintiffs sought would need to be determined by reference to those costs. At that point, Mr Rodionoff noted the possibility that he would seek instructions to make an offer in respect of the costs claimed by the Plaintiffs in the proceedings, but no such offer was made during the balance of the proceedings. I bear in mind there the evidence which has been led as to the Plaintiffs' unavailability to give instructions at that time.
Subsequently, on 2 August 2021, my Associate was sent copies of the letters on which the Plaintiffs now rely, on the basis that the Court had given leave to tender those letters. My Associate, at my request, pointed out that the Court had not done so and that any application for leave to reopen would need to be made by Interlocutory Process, as has now occurred.

The applicable legal principles

Mr Rodionoff draws attention to the principles applicable to a reopening, as summarised in Urban Transport Authority of New South Wales v Nweiser (1992) 28 NSWLR 471 at 475-476. Clarke JA there observed that, where, a short time after a case was closed, Counsel sought leave to reopen because Counsel realised he had made a mistake, it is difficult to discern how the interests of justice would be furthered by disallowing an application to reopen to call evidence that was relevant to and may have had a significant impact on, the issues in the case. His Honour also there referred to the difference between tactical decisions and inadvertence and emphasised, as I obviously bear in mind, the fact that the rules are directed to the furtherance of the interests of justice. I also bear in mind that the Court must act in accordance with ss 56-58 of the Civil Procedure Act 2005 (NSW) in dealing with a reopening application of this character.
Mr Rodionoff also refers to Bailey v Palombo [2020] NSWSC 1209, where the Court dealt with the scope of reopening under rr 2.1 and 29.5 of the Uniform Civil Procedure Rules 2005 (NSW) and observed (at [28]) that any decision to grant leave to reopen is one that involves the exercise of discretion, and the question whether the interests of justice are better served by allowing or rejecting the application. The Court also there referred to relevant matters, including prejudice to the other party; the reasons why the evidence was not led in the first place; whether there had been a deliberate or tactical decision made not to call the evidence during the hearing; any delay in making the application; and the importance, relevance and probative value of the proposed new evidence to the issues in the case. I will return to the significance of those matters in this application below.
I should note, however, that there is a significant aspect of this application, which I raised with Mr Rodionoff in submissions, that did not arise in those cases. This is not a case where a plaintiff seeks to reopen to lead evidence of a state of facts which existed, at the time of the hearing, which Counsel neglected, either for strategic purposes or by error, to then bring to the Court's attention. As at the date of the hearing, the Plaintiffs' position, which they maintained throughout the hearing, was that they sought the costs of the application and did not make an offer as to costs of funding of the liquidator that they sought to have appointed. That position did not alter, notwithstanding that that matter was raised several times in the course of submissions as to its consequences. The evidence that is now sought to be led is of a different character, namely a change in the Plaintiffs' position, that has occurred only after judgment has been reserved, which may potentially lead to a result that is more favourable to them than the position which existed and which they maintained during and until the time the hearing was concluded.
It seems to me that the Court should not neglect the fact that, ordinarily, cases are decided on the facts that exist when they are argued, although on occasion leave to reopen will be granted where a subsequent event, outside the parties' control, would affect the Court's decision. It would, it seems to me, be a significant extension of that position, for the worse, if any party could conduct a hearing on one basis and then, if it emerged that a different basis would have been more favourable, change the facts in its favour by a unilateral decision to reverse a position that had been adopted during the hearing, and adopt a different position, and then ask the Court to determine the matter on the basis of that different position. That proposition does not turn on any finding as to whether it was reasonable or unreasonable for that party to wish to take that course, but instead on the proposition that it would erode the orderly determination of proceedings if the basis on which the hearing takes place is to be treated as contingent, and the position that the parties adopt in it as contingent, and open to modification after the hearing has concluded, if a party then sees a strategic advantage in adopting a different position. No doubt, the Plaintiffs may wish to change their position as to funding a liquidator and as to the costs of the proceedings; perhaps, the First Defendant now also wishes to change its position as to other matters; in other proceedings, parties who have stridently adopted one position, during the course of the hearing, may also wish to adopt different positions which, with the benefit of hindsight, appear preferable.
In this respect, it seems to me that there is relevance in a different line of authority, to which I drew Counsel's attention, including the decisions in Home Management Maintenance Pty Ltd v Doyle (1992) 107 FLR 225; Hindmarsh Medical Clinic v Hindmarsh Family Practice Pty Ltd (1997) 38 IPR 616 ("Hindmarsh") and Spotlight Pty Ltd v NCON Australia [2011] VSCA 267, where the Courts have considered whether leave to reopen to lead further evidence should be given after judgment is reserved or where judges have expressed preliminary views. In Hindmarsh, the applicant applied for leave to re-open its case solely to adduce evidence of a particular matter shortly before judgment, and Mansfield J rejected that application, observing that: "It is plain that it was within my discretion to grant it: Betts v Whittingslowe (No 1) [1944] SASR 163, although it would generally be unwise to do so simply to allow the fortification of evidence by further evidence which might readily have been adduced at trial. See also Home Management Maintenance Pty Ltd v Doyle (1992) 107 FLR 225."
Mr Rodionoff rightly submits that, here, I had not indicated a preliminary view, by way of some form of tentative or summary judgment. At the same time, I had, in submissions, raised matters that were troubling me to allow Mr Rodionoff the opportunity to make submissions about them, and that appears to have prompted the Plaintiffs' change of direction after all the evidence had been led and the closing submissions were substantially complete, so as to seek to put their case on a very different basis to that which had been put and addressed at the hearing.
I should add one matter, for completeness, to the reasons that I gave orally in determining this application. Counsel did not address or rely on Re Citadel Financial Corp Pty Ltd (subject to deed of company arrangement) (2020) 146 ACSR 220; [2020] NSWSC 886 in this application. In that case, I granted leave to lead further evidence where the question was whether a third party, the Deputy Commissioner of Taxation, rather than the plaintiff would provide an indemnity for a liquidator's costs. The position here differs significantly from that case, which was not conducted up to the end of closing submissions on the basis that such funding would not be provided and since the DCT's financial capacity to provide such funding if it offered to do so was clear in that case.
I return now to the factors to which the case law has identified as relevant to leave to reopen and I bear in mind Counsels' helpful submissions in that regard. It seems to me that here there would be a prejudice, at least to the First Defendant, of permitting reopening by the Plaintiffs. As Mr Horowitz (who appears for the First Defendant) points out, the First Defendant would be left to address the different position now taken by the Plaintiffs, in circumstances where Mr Melluish had addressed the position they took at the point of the hearing in each of his three reports, and I note that the Plaintiffs do not offer to compensate the First Defendant for the costs thrown away in addressing a position from which they now seek to depart.
So far as the reasons why the evidence was not led in the first place, it is plain enough that the evidence was not previously led because the Plaintiffs' position was then as it was, rather than as they now wish it to be. That did not involve any judgment, whether strategic or by inadvertence, by Mr Rodionoff, who conducted the case having regard to the Plaintiffs' then position, as he must, rather than to the new position which has only developed after judgment was reserved. I bear in mind Mr Rodionoff's submission that, had Mr Melluish's last report been served earlier, then the Plaintiffs might have sought to change their position earlier, but I also bear in mind the many indications to which I have referred above, in the correspondence and evidence led prior to Mr Melluish's final report, that the funds in the deed administration were being eroded by the proceedings and the absence of a change in the Plaintiffs' position in response to those indications. I accept there has been no significant delay in making the application, after judgment was reserved, and it was made promptly once the Plaintiffs' intention to change their position arose.
It seems to me that, with a substantial qualification, the proposed new evidence has importance, relevance and probative value, at least in the sense that the absence of funding of the liquidator is a matter which is significantly adverse to the application which the Plaintiffs bring. However, that leads me to the final difficulty with the Plaintiffs' application. That difficulty is that, although the Plaintiffs each offer to pay $50,000 by way of the funding of the liquidator, they provide no information as to their financial condition, their assets, their liabilities or their cash flow, so as to allow the Court to assess their capacity to make those payments. With no disrespect to the Plaintiffs, the Court cannot reach any view whether they are or will be capable of performing that offer, now, or in three months' time, or in six months' time when that payment may be due, and the Court will have no ability to enforce such an offer, if in three or six months' time the Plaintiffs do not have capacity to perform it. No doubt the Plaintiffs could have, but did not, lead evidence of their ability to perform the offers they make. They could have, but did not, offer a bank guarantee to secure those offers or at least evidence of moneys held in a bank account which could be applied to perform them, subject to their other financial needs. It seems to me that reopening at this point has the further difficulty that the Court could give limited weight to a proposition that two parties, as to which it has no financial information, each offered to pay $50,000 to fund the costs of the liquidator, because the only conclusion that could reasonably be drawn is that that offer might or might not be performed, depending upon the financial capacity of the Plaintiffs, when the time for performance came.
For all these reasons, I decline leave to reopen. The Plaintiffs must pay the Defendants' costs of this application. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 August 2021

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