BOASE -v- AXIS INTERNATIONAL MANAGEMENT PTY LTD [No 2] [2012] WASC 334 (14 September 2012)

4 Section 500(2) of the Corporations Act 2001 (Cth) provides that after the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court imposes.

5 Like provision in respect of companies being wound up in insolvency or by the court is made in s 471B. The same principles govern the grant of leave under these sections.

6 Part of the purpose of the requirement of leave is to avoid a company in liquidation being subject to a multiplicity of time consuming and expensive actions: Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314, 315 317; Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550, 555; Viscariello v Bernsteen Pty Ltd (in liq) [2004] SASC 266 [21].

7 The question whether a claimant should be permitted to proceed by action, or be required to submit a proof of debt and, if unsatisfied appeal to a judge, is essentially one of choosing between alternative forms of procedure: Re Gordon Grant; Vagrand Pty Ltd v Fielding; Viscariello.

8 The discretion to grant or refuse leave is broad. It is not possible or appropriate to attempt to state exhaustively the relevant considerations. Among the relevant considerations are the amount, seriousness and nature of the claim; the degree of complexity and legal factual issues, and the stage the proceedings have reached: Re Gordon Grant (317); Viscariello [21]; Lawless v Mackendrick [No 2] [2008] WASC 15 [35]; Duke v Rain Bow Pty Ltd [2011] VSC 599 [19].

9 It has often been said that there must be no prejudice to the creditors, or to the orderly winding up of the company, before the action is allowed to proceed: Re Gordon Grant and Grant Pty Ltd (in liq) (1982) 6 ACLR 727, 730; Re Sydney Formworks Pty Ltd (in liq) [1965] NSWR 646, 649 650; Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374, 376; Duke v Rain Bow Pty Ltd [20]. In Lawless v Mackendrick [No 2], Master Newnes described whether there was prejudice to the creditors or to the orderly winding up of the company as a factor to be taken into account.

10 In Haviland v Joslow (No 4) Pty Ltd [1979] 2 NSWLR 318, 319 Needham J stated that the court should not grant leave to proceed or to commence proceedings against a company in liquidation if it appears there is no possibility that the company will be able to meet any part of damages awarded against it. That was said to be based on the principle that the court should not give its imprimatur to fruitless proceedings which would involve a waste of time and money. That statement of principle has been cited in a number of cases since. See, for example, Maher v Taylor [1984] 1 NSWLR 231, 233; ASIC v Managed Investments Ltd (No 2) [2012] QSC 72 (pages 2 3). As those cases make clear, it is necessary to give attention to the character of the relief sought by the claimant against the company in liquidation. In Viscariello [21], Besanko J (with whom Doyle CJ and White J agreed) said that the fact that the company would be unable to satisfy the judgment was a factor against the grant of leave, because the court would not give its imprimatur to fruitless proceedings, referring to Haviland v Joslow.

11 In Re AJ Benjamin (376), Street J stated that there would be a good reason to refuse leave when there is no prospect of surplus assets in the company and no question of insurance. That statement was cited with approval in Maher v Taylor (234).

12 The position would be different if there is an insurer standing behind the company in liquidation that will pay the amount of any judgment awarded. In those circumstances, the grant of leave will generally not prejudice creditors: Lawless v Mackendrick [No 2] [37], and cases there cited.

13 The position would also be different in respect of a claimant who had an arguable proprietary claim. That is not the case here.

14 A claimant seeking leave need only to demonstrate a serious question to be tried: Vagrand Pty Ltd v Fielding (556).

15 Where the costs of defending the action to trial would substantially deplete the limited assets available for creditors, that is a major factor against the grant of leave; Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123, 128; Katingal Pty Ltd v Amor [1999] FCA 317; (1999) 162 ALR 287 [4].

16 It is convenient to mention some of the history of the action, before outlining the claims which the plaintiffs seek to make against Sagecorp.

17 For the purposes of these applications it is not necessary to comprehensively outline the long history of this action. I will refer to those parts of the history which seem to me to have some relevance to the present applications.

19 Liquidators were appointed to Sagecorp in December 2008.

20 In 2009, the action was entered in the CMC List. Amendments were made to the statement of claim. Some defendants objected to the statement of claim. Further amendments were made to the statement of claim.

21 On 31 July 2009, the plaintiffs applied for leave to join QBE Insurance (Australia) Ltd, said to be the insurer of Sagecorp, as a defendant. On 10 August 2009, at the plaintiffs' request, the application was adjourned sine die.

22 On 29 September 2009, the then fourth to sixth defendants, directors of Sagecorp (who are now the proposed fourth to sixth defendants), filed an application to strike out paragraphs of the statement of claim. That application was determined in favour of those defendants, with written reasons: Boase v Axis International Management Pty Ltd [2009] WASC 331. Leave to replead was granted.

23 The plaintiffs did not invoke the leave to replead the case against the fourth to sixth defendants.

24 On 4 March 2010, with the plaintiffs' consent, orders were made that the proceedings against the fourth, fifth and sixth defendant be dismissed (ts 135).

25 On 13 October 2009, the plaintiffs filed an application for leave to proceed against Sagecorp, which was by then in liquidation.

26 On 14 January 2010, Kenneth Martin J dismissed the application to lift the stay of proceedings against Sagecorp. His Honour delivered oral reasons for that decision. In essence, the ground of the decision was that the financial position of Sagecorp meant that there was no utility in pursuing the proceedings against Sagecorp. His Honour made clear that it would be open to the plaintiffs to bring a further application for leave, based upon different material, if they so chose.

27 In July 2010, orders were made for the matter to be referred to mediation.

28 In late 2010 mediation occurred. The matter was not resolved.

29 In March 2011, the plaintiffs applied for an order that Sagecorp permit inspection of certain books and records. Orders were made on that topic on 23 March 2011.

30 These applications were foreshadowed in May 2012 and made in June 2012.

The plaintiffs' proposed claim against Sagecorp

31 The plaintiffs' proposed claims are set out in their minute of proposed further amended statement of claim dated 25 June 2012. Relevantly, the pleading includes the following:

(a) Sagecorp held an Australian financial services licence [4];

(b) the third defendant, Mr Ward, was an authorised representative of Sagecorp and the holder of a proper authority [5];

(c) a claim is made against the third defendant, Mr Ward. It is not necessary to outline their claim in any detail. In essence, the plaintiffs say that Mr Ward made false and misleading statements to Mr Boase, in reliance on which the plaintiffs invested approximately $365,000 for the purchase of shares in Firepower Holdings Group Ltd (FHG);

(d) the plaintiffs plead a claim against the seventh defendant, a firm of solicitors into whose trust account they say they paid the investment funds. Again, it is not necessary to detail the claim against the seventh defendant. In broad summary, the plaintiffs claim that in transferring the plaintiffs' monies, the seventh defendant acted contrary to the plaintiffs' authority, in breach of trust, breach of fiduciary duty, negligently, or otherwise wrongfully;

(e) the plaintiffs claim that Sagecorp owed a duty of care to the plaintiffs, and that Sagecorp breached that duty [45] [50]. In essence, Sagecorp's alleged breach is in allowing Mr Ward to continue as an authorised representative in circumstances where Sagecorp knew or should have known that he was selling shares in FHG, when that was not on Sagecorp's approved list. More detailed particulars of negligence are set out under [47] in the proposed statement of claim;

(f) as a result, the plaintiffs have suffered loss and damage in the form of their investment, and ongoing management administration fees, all of which total about $386,000;

(g) the directors of Sagecorp decided to liquidate Sagecorp and start another company with the same representative and the same business as Sagecorp, namely a company I will refer to as Peak [49]; and

(h) it is pleaded that 'it is an inescapable conclusion, that in an attempt to avoid the fruit of its own lack of proper corporate governance of the third defendant and its own corporate responsibilities [Sagecorp] decides to escape and hide in liquidation' [56].

32 The plaintiffs have filed three sets of written submissions in support of this application. Each set of submissions is supported by an affidavit which includes substantial annexures. I have, of course, considered all the material which the plaintiffs have put before me. Given its volume, and given that the relevance of some parts of the material to the determination of the present application is not apparent to me, I do not propose to outline all of the material that has been provided by the plaintiffs.

33 For ease of exposition, it is convenient to outline the essential reasons why I consider that leave should not be granted, before turning to submissions made by the plaintiffs and my response to those submissions. Taken together, the next two sections of these reasons explain why I have decided that leave to proceed against Sagecorp should not be granted.

34 As I have explained, the plaintiffs' claim against Sagecorp is for damages, not for any other form of relief.

35 The evidence is that there is no prospect of Sagecorp paying any funds to any creditor. That does not appear to be in dispute. From a very early stage in the liquidation, the liquidator's fees exceeded the assets of the company. The material before the court reveals that, consequently, the liquidators of Sagecorp have not taken the step of calling for and dealing with proofs of debt.

36 On the face of it, there would seem to be nothing to be achieved by the action proceeding against Sagecorp. A judgment for damages against Sagecorp will inevitably be worthless. The plaintiffs have not pointed to any nonfinancial benefit of a judgment against Sagecorp and, in circumstances where the claim is one for damages, none is apparent.

37 It appears to be common ground that by the time of the liquidator's report to creditors of 23 February 2011, a number of people had made claims, of a general character similar to the plaintiffs, totalling something over $4 million. The plaintiffs submit that it is likely or plausible that significantly more claims of a similar kind might be made.

38 The liquidator has proposed that the company be wound up and deregistered. The evidence of the progress of such a proposal, in recent times, is scant. There is no evidence that any other claimant resists the orderly winding up and deregistration of Sagecorp. However, given how little evidence there is on this topic, that is not a matter to which I give any weight.

39 There is evidence that Sagecorp was insured. However, there is no evidence that the insurer will or is likely to stand in Sagecorp's shoes to meet any judgment, or to defend the action. The evidence is to the contrary. The liquidator's report to creditors states that the insurer has denied liability, that the liquidators have no funds to challenge the insurer's position, and that the preliminary advice given to the liquidators is that a challenge is unlikely to succeed.

40 In the circumstances I have outlined, like Kenneth Martin J when the previous application was made, I am not persuaded that there is any sufficient utility in the grant of leave to proceed against Sagecorp. To my mind, the principles outlined in [10] [11] are engaged by the circumstances of this case.

41 As I have said, I do not propose to outline everything raised by the plaintiffs in their submissions and supporting material. Rather, I will mention those matters which appear to me to be more relevant to this application.

42 The plaintiffs' submissions of 6 June 2012 appear to proceed on the basis that the question is whether Sagecorp is a necessary or proper party in the sense required for joinder in O 18 r 4 or O 18 r 6. For present purposes, that is not the question. There is no doubt that, for the purposes of O 18 r 4, the claim against Sagecorp was properly joined to the claims against some of the other defendants. However, that is by no means sufficient to warrant the grant of leave. To the contrary, an application for leave under s 500(2) engages different considerations.

43 The plaintiffs' submissions contain many assertions of complaints or claims against parties other than Sagecorp. For example, in the submissions of 6 June 2012 the plaintiffs complain of:

(a) the 'fraudulent liquidation' by the proposed fourth, fifth, sixth and eighth defendants of Sagecorp and the formation of Peak;

(b) ongoing commissions going to Peak when they should have gone to Sagecorp; and

(c) the payment of a dividend to the proposed fourth and fifth defendants by Sagecorp.

44 Further, the plaintiffs' submissions of 12 July 2012 refer to matters or transactions that might be voidable by the company. It appears from the plaintiffs' submissions that the plaintiffs (mistakenly) consider that these matters found claims by the plaintiffs against the company. I will say more about this when I consider the plaintiffs' application to add defendants.

45 In determining whether leave should be given to proceed against Sagecorp, attention must be directed to claims made or proposed to be made by the plaintiffs against Sagecorp, not claims by the plaintiffs against other parties, and not to potential claims by Sagecorp against others. In particular, it is to the claims by the plaintiffs against Sagecorp pleaded in the proposed statement of claim that attention is to be directed.

46 The plaintiffs' submissions of 12 July 2012 emphasise (as is the case) that Sagecorp was not in liquidation when the plaintiffs commenced the action. They also submit, in effect, that:

(a) the proposed new defendants' conduct in 'fraudulently' liquidating Sagecorp is what gives rise to the need for leave;

(b) the object of that fraudulent conduct was to defeat claims by investors in FHG; and

(c) to refuse leave would be to enable the attainment of the object of that fraudulent conduct.

47 Those submissions involve an assumption or invite a finding that the directors of Sagecorp acted as alleged by the plaintiffs. No such assumption or finding can be made on this application. An application for leave to proceed is not an occasion for an investigation of the purpose of the directors in resolving to winding up the company.

48 The plaintiffs submit that a failure to grant leave to proceed against Sagecorp will have a number of adverse consequences which will be unfair to the plaintiffs. The plaintiffs submit:

(a) if Sagecorp is deregistered, this would 'shut the door' on access to any documents from the liquidator (submissions 12 July 2012 [14]); and

(b) the documents already discovered by Sagecorp will be lost to the action since they cannot be used in the action except against Sagecorp (submissions 12 July 2012 [16], [26]).

49 These perceived adverse consequences will not result from the refusal of leave. If leave is refused, and if the company is deregistered, the documents will remain available to be produced under subpoena. The liquidator is obliged to retain the books and records of the company for five years following deregistration: Corporations Act s 542(2). Documents discovered by Sagecorp are not restricted to being used in the action against Sagecorp. Rather, documents discovered by Sagecorp are able to be used by the plaintiffs in this action generally (thus against other defendants).

50 The plaintiffs' submissions also assert that many questions arise which would be unanswered if leave to proceed against Sagecorp is not granted. The plaintiffs' submissions refer to s 511(3) of the Corporations Act. This action is not an application under s 511(3), and is not an occasion for such an application. The question on this application requires attention to the claims sought to be made by the plaintiffs against Sagecorp, as reflected in the proposed pleading.

51 In their responsive submissions of 13 August 2012, the plaintiffs submit that 'anything less than a trial will leave many serious questions of corporate governance left hanging...' [12], and that 'without a trial the truth will be lost' [13]. The refusal of leave to proceed against Sagecorp does not mean that there will be no trial. The action proceeds, but not against Sagecorp.

52 The plaintiffs also submit that the liquidator has not shown that lifting the stay of proceedings will cause prejudice to the liquidator or Sagecorp's creditors. In my view, it is not for the liquidator to establish prejudice on an application of this kind. Of course, the evidence led, and not led, on behalf of the company is a relevant consideration.

53 In my view, for the reasons I have given, leave to proceed against Sagecorp should be refused.

54 That brings me to the plaintiffs' application to amend the writ to add the proposed fourth fifth, sixth and eighth defendants, and to amend the statement of claim.

Amendments to writ and statement of claim; general principles

55 Leave to add a new party should not be granted if no arguable claim against the proposed new party is identified. Leave to amend the statement of claim in a form that is defective, and liable to be struck out, should not be granted. See Civil Procedure Western Australia [21.5.4].

56 I refer to the principles stated in Boase v Axis International Management Pty Ltd [3] [6] and BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [No 2] [2008] WASC 117 [15] regarding the caution with which a power to strike out or dismiss a claim summarily is to be exercised. The same caution applies to the power to refuse to permit amendment to add a claim.

57 It is to be taken into account that the plaintiffs are litigants in person. See, for example, Civil Procedure Western Australia [20.19.1A]. On an application for summary disposal involving a litigant in person, the court should be astute to ensure that, in a poorly expressed or unstructured document setting out the claim, there is no viable cause of action which, with appropriate amendment, could be put into proper form: Wentworth v Rogers (No 5) (1986) 6 NSWLR 534, 536, 543; Tobin v Dodd [2004] WASCA 288 [15]. The same seems to me to apply here. A court should be careful to see that the rights of an unrepresented litigant have not been 'obfuscated by their own advocacy': Neil v Nott [1994] HCA 23; (1994) 121 ALR 148, 150; Glew v Frank Jasper Pty Ltd [2010] WASCA 87 [10].

The proposed claims against the fourth to sixth and eighth defendants

58 The proposed fourth, fifth and sixth defendants were previously defendants in this action as the directors of Sagecorp. The plaintiffs, by their application, seek to join these proposed defendants as directors of Sagecorp and as directors or employees of the proposed eighth defendant.

59 The indorsement of claim on the proposed amended writ dated 6 June 2012 sets out 12 paragraphs reflecting the various claims made by the plaintiffs. The only paragraph that concerns the proposed fourth, fifth, sixth and eighth defendants is par 6. That paragraph states that those defendants were

parties to and intentional participants in the fraudulent liquidation of [Sagecorp] and the formation and registration with the ASIC of [Peak], to continue the business of [Sagecorp]. Peak was set up to avoid potential liabilities incurred from anticipated claims from the plaintiffs over their investment losses through the first, second and third defendants in Firepower...

60 I have already outlined the essential structure of the proposed statement of claim.

61 The parts of the statement of claim bearing on the proposed fourth to sixth and eighth defendants may be summarised as follows:

(a) at all relevant times these proposed defendants and Sagecorp had authorised Mr Ward to operate as an authorised dealer and allowed him to continue promoting and selling FHG shares [44];

(b) there is a claim against Sagecorp that it failed in various respects in its obligations take steps to prevent Mr Ward from selling FHG shares [45] [50];

(c) it is said that the proposed fourth, fifth and sixth defendants, as directors of Sagecorp 'made a decision to liquidate [Sagecorp] and start another company with the same representatives and the same business as Sagecorp', namely Peak [49];

(d) Sagecorp's conduct complained of in par 45 50 was all 'approved and supported' by the proposed fourth, fifth and sixth defendants [51];

(e) as a result of Sagecorp's, Mr Ward's, and the proposed fourth, fifth, sixth and eighth defendants' 'misleading and deceptive conduct, negligence, breach of conduct [sic], unconscionable conduct and breach of statutory duties, [the plaintiffs] have suffered loss and damage' [52];

(f) these proposed defendants failed to revoke Mr Ward's letter of authority when they had full knowledge of his selling of an unapproved product, namely FHG [54];

(g) these proposed defendants knew of the dangers of an investment in FHG when the plaintiffs did not, and failing to dismiss Mr Ward or Axis, or advise the plaintiffs what the risks were breached a duty of care and was misleading [59];

(h) otherwise [53] [61] contain a number of assertions which may be more in the nature of evidence or submissions than anything else. In any event, I am unable to fit these assertions into any recognisable legal framework or any particular possible cause of action against any of the proposed defendants in favour of the plaintiffs; and

(i) paragraphs 62 68 appear to be directed towards connecting Sagecorp with the proposed eighth defendant. They fall well short of providing any arguable claim that the proposed eighth defendant is liable for the wrongful acts or omissions of Sagecorp, or Sagecorp's directors, if that is what is intended.

Should leave be granted to add the new defendants and amend the pleading?

62 For the reasons that follow, I would not grant leave to the plaintiffs to amend the writ to add the proposed new defendants, or to amend the statement of claim in the form proposed in the latest minute.

63 As I have said, the only claim against these proposed defendants in the writ is in par 6 of the indorsement on the writ which I have set out above.

64 In my opinion, the statement of claim does not plead any facts capable of sustaining a claim by the plaintiffs for a loss suffered by them in consequence of the conduct complained of in par 6 of the indorsement. The references made in [49] and [56] of the statement of claim (referred to above), fall well short of revealing any basis for an arguable claim of recoverable loss by the plaintiffs in respect of the proposed fourth to sixth defendants' alleged conduct in putting Sagecorp into liquidation.

65 Further, and in any event, on the face of it, the complaint that the directors of Sagecorp diverted contracts or opportunities from Sagecorp to Peak, and wrongfully caused Sagecorp to go into liquidation in order to avoid its liabilities, is conduct which could be complained about, if at all, by the liquidator. It might found an application by the liquidator to set aside certain transactions. I am unable to discern any arguable basis for a claim for damages by a creditor or contingent creditor of the company in this respect.

66 Further, the plaintiffs' claim in this respect relate to events which occurred, entirely, subsequent to the issue of the writ. A cause of action which has arisen since the proceedings commenced must be the subject of separate proceedings. It cannot be added by way of amendment: Baldry v Jackson [1976] 2 NSWLR 415; Wigan v Edwards (1973) 47 ALJR 586, 596.

67 Further, I consider that the new statement of claim does not disclose any reasonable cause of action against any of the proposed defendants.

68 In my opinion, [45] [52] of the proposed statement of claim do not disclose any cause of action against the proposed fourth to sixth and eighth defendants.

69 Paragraph 47 sets out what the plaintiffs say were Sagecorp's breaches of its duties owed to the plaintiffs. Paragraph 51 says, in effect, in a rolled up way, that this was all 'approved and supported' by the proposed fourth to sixth defendants. No facts are pleaded to support this. Nor is it explained in the pleading or in the plaintiffs' submissions how approval or support by one of these defendants would result in that defendant being legally liable to the plaintiffs for Sagecorp's acts or omissions, whether as a director of Sagecorp or otherwise.

70 It is then said, in [52], that these (and other) defendants engaged in misleading and deceptive conduct, negligence, breach of conduct (presumably meaning contract), unconscionable conduct and breach of statutory duties. I am unable to discern from the proposed statement of claim any facts capable of supporting any of these claims. Relevant conduct on the part of the proposed fourth to the sixth defendants which is said to be misleading is not identified. Nor are facts pleaded by which such conduct is said to have caused loss to the plaintiffs. Facts giving rise to a duty of care owed by these proposed defendants to the plaintiffs are not pleaded. Nor is any contract between the plaintiffs and any of these proposed defendants pleaded. There is no plea of any statutory duties owed by these proposed defendants to the plaintiffs.

71 There are no facts pleaded to give rise to any duty of care or duty of disclosure as might sustain what is asserted in [59].

72 Further and in any event, the claims sought to be made in these paragraphs are not referred to in any way in the plaintiffs' proposed writ.

73 For all these reasons I would not grant the leave sought by the plaintiffs.

74 In these circumstances, it is not necessary to decide whether some or all of the claims against the proposed fourth to sixth defendants are barred by an estoppel arising from the dismissal, on 4 March 2010, of the action against the fourth, fifth and sixth defendants.

75 For these reasons, I would dismiss the plaintiffs' applications. On the face of it, costs should follow the event in accordance with the general rule. I will hear from the parties on the question of costs.