Bofinger v Kingsway [2011] NSWSC 64 | Case summary

Grounds for Review 11In Tomko v Palasty (No 2) [2007] NSWCA 369 the Court of Appeal recently dealt with the nature of review with which I am concerned. Basten JA after an extensive review of the authorities concluded at paragraph 52 in these terms: "52 It follows that the proper approach to an application in relation to a decision of the Registrar is as follows: (1) the application should be treated as a 'review', pursuant to section 121 (3) of the Supreme Court Act and UCPR r 49.19; (2) a review, unlike an appeal, does not require demonstration of error, nor is it restricted to a reconsideration of the material before the primary decision maker; (3) authorities with respect to the conduct of appeals against the exercise of discretionary powers, such as House v The King , do not in terms apply to a review; (4) nevertheless, similar policy considerations may arise in relation to a review, including: (a) a Court may be less inclined to intervene in relation to a decision concerned with the management of an ongoing proceeding, as opposed to one which terminates the proceeding or prevents its commencement; (b) different factors may need to be addressed in relation to breach of time limits in relation to the commencement of proceedings, as compared with breach of time limits for steps to be taken in the course of proceedings properly commenced, and (c) a Court may be more inclined to intervene on a review based on fresh evidence, changed circumstances; or whether error is demonstrated in the decision under review." 12The other members of the Court were Hodgson JA and Ipp JA. Ipp JA agreed with what was said by Basten JA subject to the adoption of the additional remarks of Hodgson JA. Those additional remarks appear in paragraphs 6 to 10 of the decision, and are as follows: "6. I agree that a review of a decision of a Registrar is not an appeal, subject to section 75A of the Supreme Court Act ; and that in such a review a Court must exercise its own discretion. 7. In my opinion, this discretion extends to a discretion as to whether, and if so how to intervene; and in my opinion, there is an onus on a person seeking to have a Court set aside or vary a Registrars decision to make out a case that the Court, in the interests of justice, should exercise its discretion to do so. 8. In the case of a decision on practice or procedure, this will normally require at least demonstration of an error of law, or a House v The King error, or a material change of circumstances, or evidence satisfying the strict requirements for fresh evidence. Even then, a Court may not think that the interests of Justice require intervention. This could be so, for example, if the error of law is a deficiency of reasons and the result is on its face not an unreasonable one; 9. In the case of a decision which finally determines a party's rights, or which (albeit one of practice or procedure) has a decisive impact on those rights, a Court may be more willing to intervene. It may permit further evidence to be led which does not satisfy the strict requirements for fresh evidence, if it is satisfied that the interest of Justice require this. It may decide to substitute its own discretionary decision for that of the Registrar, even though no House v The King error is shown, again if it is satisfied that the interests of Justice require this. To that extent, the review may be considered a de novo hearing. 10. In my opinion, this approach is consistent with the position that such reviews are not appeals and involves the exercise of discretion by the reviewing body; and with the policy considerations referred to by Jordan CJ in In Re the Will of Gilbert (1946) 46 SR (NSW) 318 at 323. It is also consistent with the general principle concerning interlocutory applications: they do not finally decide matters, and successive applications can be brought for the same orders; but generally, a later application for orders that have previously been refused will be summarily dismissed unless a change of circumstances is shown or there is evidence satisfying the strict requirements for fresh evidence." 13Hodgson JA recently reaffirmed these views in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11. His Honour said at paragraph 16 to 19 the following; " As I have said, the matter comes before me on an application to review the Registrar's decision. 17. As regards the nature of such a review and the grounds on which such decisions can be reviewed, I adhere to what I said in Tomko v Palasty (No 2) [2007] NSWCA 369 at paragraphs [4] to [10]. 18. Thus in my view a review of a decision of a Registrar is not an appeal, and in such a review a Court must exercise its own discretion. This discretion extends to a discretion as to whether and if so how to intervene, and there is an onus on a person seeking to have a Court set aside or vary a Registrars decision to make out a case that the Court in the interest of Justice should exercise its discretion to do so. 19. In a case of a decision on practice or procedure, this will normally require at least a demonstration of error of law or an error of the kind referred to in House v The King [1936] HCA 40; 55CLR 499, or a material change of circumstances or evidence satisfying the requirements of fresh evidence." 14Plainly, this is a matter which is concerned with practice and procedure and the limitation referred to by Hodgson JA will apply. 15The reference to House v The King [1936] 55 CLR 499 is a reference to what was said at page 504 of that case in these terms: "But the judgement complained of, namely, sentence to a term of imprisonment, depends upon the exercise of a judicial discretion by the Court imposing it. The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges comprising the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the Court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." 16The Registrar was asked for leave to file the amended statement of claim, which she granted. It was suggested that the Registrar had either failed to give reasons or that such reasons as she gave were not sufficient and demonstrated an error of law. 17The Registrar did not publish separate reasons. However, at the conclusion of addresses the following exchange occurred between her and Mr Foreman, counsel for the first and eighth defendants. "REGISTRAR: But it has to be so obviously futile that it would be struck out. FOREMAN: Yes, it does. REGISTRAR: And you have spent all morning trying to convince me that it's futile? FOREMAN: Yes. REGISTRAR: So I find it hard to accept that it's so obviously futile when it's taken all morning to try and convince me and I haven't been convinced. FOREMAN: Registrar, if you haven't been convinced, then it's probably not much point in continuing but can I just say this, that the length of time is due to the inadequacies of my advocacy not because of the complexity of the point. The short point is-- REGISTRAR: I don't think that's the case at all. FOREMAN: The short point is simply this, that if we are dealing with an objective standard, which is what my friend's posited, it cannot be objectively dishonest and unreasonable to do that which four judges of this Court have said was an appropriate thing to do. REGISTRAR: There may be some merit in what you're saying but my concern is that at this early stage that it is a complex issue and I'm very loath to, in effect, strike out that part of the statement of claim at this early stage of proceedings because I think it is complex. And I think that it's not up to me at this early stage of proceedings to make a determination. It's a matter for a judge at some later stage. So I think it is probably a little bit premature to strike it out at this stage. FOREMAN: In those circumstances, if that's the Court's reasoning, then there's probably not-- REGISTRAR: Not much more-- FOREMAN: --in continuing. REGISTRAR: Right. I will allow the statement of claim. You are going to have to amend it, to call it a second further amended statement of claim because that's what it should be under the rules." 18The Registrar makes it clear that she declined to strike out the second further amended statement of claim because it involved a complex matter that needed to be dealt with by a judge at some later stage. 19Although the Registrar was not dealing with a claim to dismiss the proceedings she was dealing with the question of whether or not the amendment should be allowed. It was suggested to her that the amendment was futile, as it could not succeed. 20There is always a need for exceptional caution when exercising the power to either summarily dismiss proceedings or strike out parts of a statement of claim, whether or not it is inherent or under statutory rules. Similar principles apply to whether an amendment should be disallowed, as it is futile. Dixon J (as he then was) sums up a number of authorities in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 where he says at p. 91: "A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury. The fact that a transaction is intricate may not disentitle the court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process or is vexatious. But once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process." 21In General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130 after referring to this quote, Barwick J said: "Although I can agree with Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futile proceedings, in my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed." 22Earlier at p129 His honour had said: "It is sufficient for me to say that these cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of a cause of action - if that be the ground on which the court is invited, as in this case, to exercise its powers of summary dismissal - is clearly demonstrated. The test to be applied has been variously expressed; "so obviously untenable that it cannot possibly succeed"; "manifestly groundless"; "so manifestly faulty that it does not admit of argument"; "discloses a case which the Court is satisfied cannot succeed"; "under no possibility can there be a good cause of action"; "be manifest that to allow them" (the pleadings) "to stand would involve useless expense". 23Before the Registrar, Mr Foreman made reference to Minister for Crown Lands v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201 at 203, in which Kirby P, Meagher & Handley JJA stated : "It is a serious matter to allege fraud against a party in pleadings to which attach the privileges incidental to court proceedings. Reports of such allegations may be recounted in the community and through the public media. They may do great harm to a party before a word of evidence has been offered and submitted to the searching scrutiny of cross-examination or to rebuttal." He submitted that that it was particularly important to scrutinise allegations of fraud to ensure they are not futile and he argued that the claim could not possibly be established, that it had no prospects of success and that it should not have been permitted to proceed by giving leave to file the amended statement of claim. 24This argument was based on the premise that despite the High Court's decision that there was a constructive trust and that money ought not to have been paid to the second mortgagee, Justice Young and the Court of Appeal found differently, holding that Kingsway's refusal to accept the plaintiff's claims was correct as a matter of law. According to Mr Foreman, that difference in opinion demonstrates a distinction between pursuing a legally erroneous course and engaging in fraud and dishonesty. He put the proposition that the mere refusal to accept a claim, cannot of itself amount to fraud and dishonesty, in circumstances where it was reasonable not to accept a claim. Reasonableness could be measured, according to Mr Foreman, on the basis of the decisions of Justice Young and the Court of Appeal, which found in favour of Kingsway. 25Mr Foreman submitted that the High Court only found that there was a trust, however, the question in the proceedings before the Registrar was whether it was dishonest to refuse to accept a claim. These questions of fraud and dishonesty were not before Justice Young or the Court of Appeal or the High Court. It was submitted that the High Court was not actually referring to fraud and dishonesty at all; instead the High Court was giving a clue as to the line of principles that could be applicable. 26On hearing these submissions, the Registrar stated: "REGISTRAR: And all this comes down to the definition of what fraudulent is in these particular circumstances whether it's the moral turpitude, as you have been suggesting, or if it's not acting as ordinarily would be expected, I think is what the plaintiffs have suggested. FOREMAN: If that's an issue we can take that because the High Court - as I said I've identified on the last occasion - has made it abundantly clear that the relevant test for fraud and dishonesty is that approved by Justice Gibbs in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 , which is morally reprehensible, and they state in terms that Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378; [1995] 3 All ER 97; [1995] 3 WLR 64 , on which my friends rely, is not the law in the country. So we can deal with that in due course." 27Mr McVay, for the plaintiffs, disputed Mr Foreman's interpretation of these decisions and submitted that because the High Court had found that the defendants were trustees, the question of their conduct had been reopened. It was argued that Mr Foreman's application was premature and more in the nature of a strike out application. 28In this matter, as there was argument on the law as to the appropriate test, I think it would have been appropriate for the Registrar to deal with the question and not to reserve it for a judge to deal with later. In the circumstances I will review the Registrar's decision. 29The last formulation of the matter by the High Court makes it plain that one still has to have a "dishonest and fraudulent design". 30In Farah Constructions v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 at 164 said the following at paragraphs 179 - 184: " [179] What then of the phrase "dishonest and fraudulent design"? Since the widening of the second limb of Barnes v Addy beyond breaches of express trust, attempts commonly are made in corporate insolvencies to render liable on this footing directors, advisers and bankers of the insolvent company. This makes a proper understanding of the second limb important, lest its application prove unjust. As Lord Selborne LC said in Barnes v Addy ( at 251) : 'There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.' The relevant passages in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 establish for Australia that "dishonest and fraudulent designs" can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent. [180] The reformulation proposed by the respondent, with its abandonment of the "dishonest and fraudulent design" integer and its stiffening of the notice requirements in a way adverse to plaintiffs, should not be adopted. No sufficient difficulty in the current rules has been demonstrated to justify the taking of any such step. In any event, Mrs Elias and her daughters would not be liable even under the reformulated test. They did not participate "in a significant way" in Farah's breach and they had no "actual knowledge of the essential facts which constituted the breach". [181] Say-Dee relied upon the statement by Gibbs J in Consul ( at 397) : '[A] person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation. His Honour also said that the words "dishonest and fraudulent" included "a breach of trust or of fiduciary duty"( at 398) . However, Gibbs J did not categorise all breaches of trust or fiduciary duty as "dishonest and fraudulent" because he said that the expression was to be understood by reference to equitable principles" ( at 398) .' [182] Say-Dee relied on the former passage and on passages in the judgment of Stephen J (at 408 and 412) to support the submission that in Australian law the "dishonest and fraudulent design" requirement had been superseded and that it was sufficient to plead and prove any knowing participation in a breach of trust or fiduciary duty, save for "a de minimis breach". However, Say-Dee accepted that this qualification had not been stated in Consul. [183] In its final form, the submission put by Say-Dee was that a defendant who had not received a direct financial benefit "but has participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the breach should be liable to the beneficiary of the duty/trust for the consequence of the breach". This submission should be rejected. [184] Breaches of trust and breaches of fiduciary duty vary greatly in their seriousness. Some breaches are well intentioned, some are trivial. In Maguire v Makaronis , this Court observed ( (1997) 188 CLR 449 at 473-474) (footnotes omitted). See also Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at 498 [33] and the Australian legislation: Trustee Act 1898 (Tas), s 50; Trustee Act 1925 (NSW), s 85; Trustee Act 1936 (SA), s 56; Trustee Act 1958 (Vic), s 67; Trustees Act 1962 (WA), s 75; Trusts Act 1973 (Q), s 76; Trustee Act 1925 (ACT), s 85; Trustee Act (NT), s 49 A : 'The stringency apparent in some of the nineteenth century breach of trust cases displayed what Lord Lindley MR called 'a very hard state of the law, and one which shocked one's sense of humanity and of fairness'. The result was what his Lordship called the deliberate relaxation of the law by s 3 of the Judicial Trustees Act 1896 (UK). This conferred a power of curial relief in respect of breach of trust where the trustee had acted 'honestly and reasonably' and 'ought fairly to be excused'. There is no such general power of dispensation in respect of loss caused by breach of duty owed by other fiduciaries.' However, some breaches of fiduciary duty by company officers, employees, auditors, experts, receivers, and receivers and managers and liquidators may be excused on similar grounds. ( Corporations Act 2001 (Cth), s 1318. These statements are not to be taken as casting doubt on the possible liability of company officers, advisers or bankers, where it is established that their knowledge of circumstances would indicate to an honest and reasonable person facts which constituted a breach of trust or a breach of fiduciary duty.) " 31The history of the way the High Court arrived at that is also dealt with in the Bell Group Limited (In liquidation) & Ors v Westpac Banking Corporation [2008] WASC 239 a decision of Owen J. At paragraphs 4725 to 4731 he discussed the nature of the phrase "dishonest and fraudulent design" in these terms: [4725] The members of the High Court who decided Farah Constructions appear not to share Lord Nicholls' incredulity at such an outcome. The High Court, at [179]-[185], went back to Lord Selborne's formulation of the principle in Barnes v Addy itself and to what was said in Consul Developments . Their Honours said that Say-Dee's submission involved an abandonment of 'the "dishonest and fraudulent design" integer' and a reformulation of the second limb so that liability would attach to a third party who had not received a direct financial benefit but who had 'participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the breach'. That submission was rejected and the conclusion announced in this way, at [179]: The relevant passages in Consul establish for Australia that 'dishonest and fraudulent designs' can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent. (emphasis added) [4726] Their Honours had little to say about the meaning of the phrase 'dishonest and fraudulent design', although they did comment, at [173], that a person can act dishonestly, Judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. Admittedly, that was in the context of a discussion concerning the requirement of 'knowledge' expressed in the second limb and was probably directed more at the state of mind of the third party than it was at the erring fiduciary. Nonetheless, as a matter of principle it is difficult to see why a similar approach should not be taken in relation to dishonesty on the part of the fiduciary. In other words, the test has objective elements so that, like the 'morally obtuse' third party, a fiduciary cannot escape liability by failing to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such a person: Farah Constructions [177]. [4727] In its common usage 'dishonest' is the antonym of 'honest'. And honesty means marked by uprightness or probity, being fundamentally sincere and truthful. As it is used in relation to accessory liability, I doubt it goes as far as dishonesty in, for example, a criminal law context or actual fraud in a common law sense. As the High Court pointed out in Farah Constructions , at [183], Gibbs J in Consul Developments did not categorise all breaches of fiduciary duty as 'dishonest and fraudulent' and said that this phrase is to be judged 'according to the plain principles of a court of equity'. It seems, therefore, that the impugned conduct must be attended by circumstances that would attract a degree of opprobrium raising it above the level of a simple breach of trust or breach of a fiduciary duty. This is consistent with the discussion in Farah Constructions on the facts of that case, especially at [181]-[186]. It is implicit in what is said at [184], for example, that a breach of fiduciary duty by a company officer that may be excused under Corporations Act 2001 (Cth) s 1318 would not be regarded as part of a 'dishonest and fraudulent design' and thus would not ground an accessory liability claim. [4728] In any event, if the mere fact of a breach were sufficient to ground liability, the cautionary note in Farah Constructions that 'any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent' would be robbed of meaning. So too would the strongly worded rejection of what the High Court described at [180] as an attempt to abandon 'the "dishonest and fraudulent design" integer'. Unless some real meaning is given to the phrase 'dishonest and fraudulent design', there would be no significant difference from the approach advocated in Royal Brunei . And the High Court also referred to an 'imputation of commercial dishonesty' (admittedly made against the third party rather than the errant fiduciary) which, their Honours noted, was a serious allegation that ought to have been pleaded and particularised and assessed in the way mentioned in Briginshaw v Briginshaw (1938) 60 CLR 336. [4729] Briginshaw , it will be remembered, is the case in which Dixon J (at 362) noted that the seriousness of an allegation or the gravity of the consequences flowing from a particular finding affect the answer to the question whether an issue has been proved to the reasonable satisfaction of a tribunal. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170, at 170-172, the High Court affirmed the Briginshaw principle but reminded tribunals that the standard of proof remains the same. [4730] Allegations of dishonesty and fraud are necessarily serious. This explains why the rules of pleading demand that such an assertion be pleaded distinctly and with particularity. It also explains the professional conduct requirement that lawyers responsible for a pleading that alleges fraud must have before them material that provides a reasonable basis for the allegation. The standard of proof for fraud in a civil trial is the balance of probabilities. But the seriousness of such an allegation can have an impact on the level of persuasion that must be reached before a finding will be made. By 'level of persuasion' I do not mean the standard of proof. I am referring to the process by which the trier of fact reaches a state of reasonable satisfaction in relation to the issue under consideration. [4731] The reference in Farah Constructions to Briginshaw is, itself, indicative of an issue to which there attaches a level of seriousness greater than the norm. Briginshaw concerned an allegation of adultery, which, in the 1930s, was regarded as a matter of 'grave moral delinquency'. In G v H (1994) 181 CLR 387 at 399, Deane, Dawson and Gaudron JJ used 'moral wrongdoing' as one of the touchstones attracting the principle for which Briginshaw stands. In relation to a breach of a fiduciary duty, where equity is called upon to attach the conscience of those concerned in the breach, the term 'moral wrongdoing' is apt. 32The first and eighth defendants sought to suggest that because of the decisions of Young J, who dealt with the facts in the matter and the Court of Appeal, which only dealt with matters of principle rather than factual matters such as waiver, there would be no basis for suggesting that in refusing to accept the plaintiffs' claims the defendants transgressed ordinary standards of honest behaviour. In my view that is not an appropriate test, but one has to look carefully at the actual allegations in paragraph 36. 33Looking at the allegations, one finds that the only allegation that is said to give rise to dishonest and fraudulent design is that the first defendant consciously ignored the plaintiffs' claims as guarantor. Assuming for arguments sake that the plaintiff's claims were valid, there is nothing further alleged other than ignoring a valid claim. 34To ignore the claim might be done in many different circumstances. First, it may be done in circumstances where the person ignoring the claim has had advice that the claim is good, appropriate and should be recognised. Second, if might be done in circumstances where the person making the payment has been importuned by the second mortgagee to do so on the basis of threatened claims of right. Third, it might be done in ignorance of whether or not the claim is a valid one, or it may even be where a payment was made without even considering whether or not the claim was a valid one. 35In the absence of any further definition of the circumstances in which it is said that the present claim was ignored, one cannot see from the simple formulation of the claim that the defendant's ignoring of the claim can be necessarily characterised as a dishonest and fraudulent design. 36Apart from discussing the history of the present formulation of the rule as now evidenced by the High Court's decision in Farah Constructions v Say-Dee , the plaintiffs referred to a number of other comments on the width of the word "fraud" in equity. 37However, in my view those comments are not relevant to resolve the present problem. 38In these circumstances paragraph 36 should be struck out. As there may be consequential effects on the pleadings, the parties can bring in short minutes for an appropriate order to put the pleadings in a proper state so that the matter can move forward. 39I direct the parties to bring in short minutes.

Amendments 21 March 2011 - Paragraphs renumbered after deletion of a paragraph. Amended paragraphs: 25-36 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: 22 March 2011

Bofinger v Kingsway

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