The plaintiffs, Mr Michael Carrafa and Mr Fabian Kane Micheletto, are the trustees in bankruptcy of the bankrupt estate of Mr Peter Ronald Evans. Their proceedings against the first to fourth defendants are listed for hearing for five days, commencing on Monday 18 May 2020. The plaintiffs seek the Court's leave to further amend their Second Further Amended Statement of Claim to join two additional defendants. The existing defendants oppose the grant of leave to amend the existing Statement of Claim if that will result in a vacation of the hearing date. The plaintiffs press for the amendment and offer to pay the costs thrown away of some of the defendants, if vacation of the hearing date were to become necessary.
The Court heard this application on 30 April 2020 and decided that day to allow the amendment to the pleadings and to vacate the hearing. One of the parties subsequently asked for reasons for that decision. These are those reasons. Before the issues concerning the amendment and the adjournment are analysed some background is required.
[2]
Mr Evans, his Mother's Property and his Bankrupt Estate
Mr Evans is the only child of Ms Rosemary Evans, who died in July 2015. Ms Evans made a will in 2010, giving her entire estate to her son Mr Evans.
After Ms Evans died, an employee of a company in which Mr Evans had an interest, Mr Asfar, the first defendant, applied for and obtained a grant of probate in respect of a later will of Ms Evans, made in 2012.
Ms Evan's 2012 will looks quite unusual. On the face of it Ms Evans gave the entirety of her estate not to her only son Mr Evans but to Mr Asfar. The 2012 will only benefited Mr Evans if Mr Asfar predeceased him. The 2012 will was purportedly witnessed by Mr Asfar's parents. Mr Asfar has no connection with Ms Evans either by blood or socially.
The plaintiffs challenge the validity of the 2012 will in these proceedings on the basis that it is not Ms Evans' true will.
A few days after he obtained probate of Ms Evan's will, Mr Asfar caused her property in Hardy's Bay ("the Hardy's Bay property") to be transferred into his name as registered proprietor.
Mr Evans had been made bankrupt in March 2015, a few months before his mother died. Upon his bankruptcy, the Official Trustee was appointed as his trustee in bankruptcy, followed later by the appointment of the plaintiffs.
In December 2013, two of Mr Evan's creditors, Cleveland Investment Global Limited ("Cleveland") and Ficaro Pty Limited ("Ficaro") obtained judgments against him respectively in the sums of $259,167.23 and $110,067.23.
Mr Evans had an earlier business relationship with Ficaro. He had been one of its directors until December 2009. Mr Asfar had been an employee of Ficaro for a period. Mr Evans appears to have fallen out with the principals of Cleveland and Ficaro before severing his relationship with those companies.
Once Mr Asfar was in the position of registered proprietor of the Hardy's Bay property, the plaintiffs allege that some of Mr Evans' creditors, with the knowing acquiescence of the bankrupt himself, sought by a dishonest scheme to acquire the benefit of the Hardy's Bay property to the disadvantage of the general creditors of Mr Evans bankrupt estate.
Cleveland and Ficaro apparently contended that the 2012 will, when properly construed, created a bare trust in favour of their debtor, Mr Evans. And Cleveland and Ficaro further contended that Mr Asfar was the bare trustee of that trust. Although that claim on the face of the 2012 will looks difficult to understand. To enforce the trust,Cleveland and Ficaro instructed Swaab Attorneys to seek freezing orders against Mr Asfar to prevent him dealing with the assets of Ms Evans' estate, including the Hardy's Bay property. The principal solicitor acting in the matter on behalf of Swaab Attorneys was a partner of that firm, Mr Mark Baddams.
The claim by Cleveland and Ficaro for a freezing order revealed that arguably the principals behind those two companies were a Mr John Fletcher and his son, Mr Simon Fletcher, who are the proposed additional defendants.
The plaintiffs contend that when Cleveland and Ficaro sought the freezing orders against Mr Asfar they assumed a fiduciary duty to the plaintiffs as trustees of Mr Evans' bankrupt estate for the benefit of all the creditors of the estate. The plaintiffs contend that submissions were put to, and accepted by, the Court on behalf of Cleveland and Ficaro that freezing orders would be made for the benefit of all creditors of Mr Evans in respect of all of the assets in Ms Evans' estate, not just assets to the value of Cleveland and Ficaro's judgment.
That submission seems to be borne out by the terms of the judgment of Kunc J on the freezing order application in which his Honour said that, "the assets of the estate should ultimately in their entirety be in the possession of Mr Evans' trustee in bankruptcy as an independent third party entitled to them by operation of the bankruptcy law": Cleveland Investments Global Pty Ltd v Ficaro Pty Ltd [2016] NSWSC 473 ("Cleveland v Ficaro") at [19].
Cleveland and Ficaro secured the freezing order. But after doing so they reached an arrangement with Mr Asfar which is at the heart of the plaintiffs' presently pleaded complaint in these proceedings. The settlement was recorded in a deed in which Mr Asfar paid Cleveland $400,000, in exchange for allowing a caveat that had been lodged by the Official Trustee over the Hardy's Bay property to lapse and the freezing orders to be discharged. That allowed Cleveland, potentially the only unsecured creditor, to receive full payment of its debt ahead of all the other unsecured creditors in Mr Evans' bankruptcy.
The Official Trustee's caveat over the property lapsed and the freezing orders were discharged. The plaintiffs alleged that the deal was secured in a clandestine manner, without telling the Official Trustee, the plaintiffs or any other creditor of Mr Evans. The plaintiffs seek to set aside the settlement deed as contrary to public policy and as a fraud upon third parties, the creditors of Mr Evans. It is to be wondered how the Official Trustee's caveat over the property could lapse without notice being given to the Official Trustee. But the Official Trustee was indeed apparently unaware of this settlement negotiated between Cleveland, Ficaro and Mr Asfar.
It should be noted that Ficaro, Cleveland and Swaab Attorneys deny that the deal was secured in a clandestine manner. And they deny that it was a breach of fiduciary duty or in any way improper or contrary to public policy. Mr Baddams says that he was merely acting in the role of solicitor, and did not participate in any dishonest scheme alleged against Cleveland and Ficaro. Such questions will be determined at trial.
The $400,000 that Mr Asfar paid to Cleveland under the deal was raised through a mortgage that Mr Asfar had secured over the Hardy's Bay property once the title came into his hands. At the time of settlement under the deed Mr Asfar also drew down a further $129,270 for himself. The Hardy's Bay property was eventually sold. But the balance of the sale proceeds were captured by further Court orders and are now held in the Court, being a sum of $345,000.
The plaintiffs seek to recover the $400,000 received by Cleveland under the settlement and the loss of the value of the Hardy's Bay property by way of equitable compensation from the present defendants, Mr Asfar, Cleveland, Ficaro and Mr Baddams of Swaab Attorneys.
In the proceedings, the plaintiffs seek revocation of the 2012 will and a grant of probate of the 2010 will. The plaintiffs claim equitable compensation from Cleveland, Ficaro and Mr Baddams on the basis of their alleged breach of fiduciary duty (Cleveland and Ficaro) owed to the plaintiffs, or knowing involvement in a dishonest scheme to breach Cleveland's and Ficaro's fiduciary duties (Mr Baddams): Barnes v Addy (1874) LR 9 Ch App 244; (1874) 43 LJ Ch 513; (1874) 30 LT 4; (1874) 22 WR 505 at 251. The plaintiffs allege that the result of this scheme was to deprive the creditors of Mr Evans' bankrupt estate of the market value of the Hardy's Bay property.
[3]
Recent Procedural Events, Ficaro Deals with its Property
These proceedings were commenced in November 2017. At the time, the plaintiffs undertook a property search and discovered that Ficaro owned a valuable property in Darling Point in Sydney ("the Darling Point property"). On 15 April 2019, the solicitors on behalf of the plaintiffs, conducted another property search and found out that Ficaro's Darling Point property had been transferred on 21 May 2018 for $2.7 million.
The following day, the solicitors for the plaintiffs wrote to Ficaro's then solicitors seeking information concerning the sale. They also sought an undertaking that Ficaro would not dissipate its assets. Ficaro responded via their solicitors, Cornwalls, complaining of difficulty in obtaining instructions but giving no undertaking. The plaintiffs filed a motion returnable on 8 July 2019 seeking a freezing order and seeking disclosure by Ficaro of its assets and dealings with the proceeds of sale of the Darling Point property.
Ficaro indicated it would oppose the motion, which was set down for hearing on 7 August 2019. The day before the hearing of the motion, the solicitor for Ficaro swore an affidavit on information and belief about Ficaro's financial position, disclosing that $1.3 million of the proceeds had been paid to a Hong Kong company and that Ficaro was insolvent in excess of $1 million. Ficaro engaged Landers and Rogers as its new solicitors on or around 20 August 2019.
But the affidavit was served under without prejudice correspondence and the motion was adjourned to 21 August 2019. On the adjourned date, Cleveland and Ficaro indicated to the Court that an affidavit sworn by a director of the companies would be filed to confirm the matters in the solicitor's affidavit. In substance, the plaintiffs were invited to wait until that was done. The matter was also adjourned on 21 August 2019 because Lander and Rogers said they needed more time to take instructions. The matter was adjourned to 29 August 2019.
But before that adjourned date, some of the information about the Hong Kong company, that had allegedly received the proceeds of sale, Asian Cleveland Limited, appeared to the solicitors for the plaintiffs to be incorrect.
By 29 August 2019 an affidavit had still not been provided by any director of Ficaro and on 29 August 2019, the plaintiffs' motion was set down for hearing on 9 November 2019.
Early in October, the solicitor for the plaintiffs enquired when a director's affidavit would be available. An affidavit sworn on 30 October 2019 by Mr Simon Fletcher, as a director of Ficaro, was finally served on the solicitors for the plaintiffs. That affidavit confirmed that $1,318,107.00 had been paid to Asian Cleveland Limited, a company said to be registered in Jersey not in Hong Kong, $574,000 had been transferred to Cleveland and $329,000 to Mr John Fletcher from the proceeds of sale of the Darling Point property. The annexed financial statements of Ficaro showed it to be insolvent to the extent of approximately $1.3 million.
As a result of receiving this information, and after a change in counsel, the plaintiffs sent to the defendants' solicitors a proposed Third Further Amended Statement of Claim, which proposed the joinder of Mr Simon Fletcher as the fifth defendant, and Mr John Fletcher as the sixth defendant in the proceedings. The proposed Third Further Amended Statement of Claim claims equitable compensation against Mr Simon Fletcher and Mr John Fletcher on the basis that they too are persons knowingly involved in the dishonest scheme to assist the breach by Ficaro and Cleveland of their fiduciary duties to the plaintiffs.
The plaintiffs' solicitors sought the consent to the joinder of the additional defendants from the solicitor for Cleveland and Ficarro, Lander and Rogers. This was a logical request because on the evidence there seemed to be no real issue that Mr Simon Fletcher and Mr John Fletcher had some strong association with Cleveland and Ficaro, and the correspondence indicated that at least one of the Fletchers was giving instructions to Mr Kerr.
But the path to joinder of Mr Simon Fletcher and Mr John Fletcher was not straight forward. No consent was given to the joinder of the additional defendants or the amendment of the Second Further Amended Statement of Claim. So the plaintiffs filed a motion to amend on 11 February 2020 which was returnable before the Registrar in Equity on 3 March 2020. On that day, Cleveland and Ficaro submitted that it was necessary for the plaintiffs to serve the motion for leave to amend on the Fletchers as originating process. The same day, the solicitors for the plaintiffs wrote to Lander and Rodgers enquiring if they had instructions to accept service. But Lander and Rodgers did not hold those instructions and indicated that obtaining instructions might take some time. The plaintiffs then filed a motion for substituted service on 17 March 2020.
Between 17 March 2020 and when the matter first came before the Court for pre-trial directions on 23 April 2020, the substituted service application was unresolved. Lander and Rodgers had written to the plaintiffs' solicitors on 30 March 2020 advising where Mr John Fletcher may be able to be served in Beijing in the People's Republic of China, where he was said to be resident. But this correspondence reiterated that Lander and Rodgers "do not act for either Simon or John Fletcher" and "had not been instructed to accept service on their behalf".
By 17 April 2020, the plaintiffs' solicitors twice attempted to serve the motion at the Beijing address, but without success.
Attempts were also made to serve Mr Simon Fletcher at an address in Horsfield Bay in NSW. Real property search records indicate that he owns this property together with a Ms Vredeveld. But upon attempts to serve him being made on 9 April 2020, the process server was told by a woman at the address that Mr Simon Fletcher was "currently overseas and I do not know when he will be returning due to the coronavirus". The woman refused to provide any contact details for Mr Simon Fletcher.
This was the history up to the pre-trial directions hearing on 23 April 2020. On that occasion, the Court made further directions for the filing of written submissions and evidence with the view to determining on 30 April 2020 the issues of substituted service, amendment to the pleadings, and the possible adjournment of the hearing.
[4]
Substituted Service, Amendment of the Pleadings and Adjournment of the Hearing
By the time of the adjourned hearing on 30 April 2020, the substituted service issue had resolved in relation to Mr Simon Fletcher. Although Mr Doran of counsel had been instructed on 23 April and told the Court that Mr Simon Fletcher was in Horsfield Bay and not overseas, further attempts to serve him after 23 April 2020 were initially unsuccessful. But the processor managed to serve him in person on 28 April 2020.
Mr Simon Fletcher also served an affidavit which was tendered by the plaintiffs on 30 April 2020. At the time the affidavit was sworn, he had not been served but he swore to a version of facts concerning service that did not involve the woman at the Horsfield Bay premises, who it turns out is his wife, giving any misleading information about his whereabouts. He said that he had been living at the Horsfield Bay address continuously since December 2009.
As Mr Simon Fletcher had been served, and thus was aware of the hearing, there was no reason not to proceed on the motion for amendment against him. And the evidence of contact between Mr John Fletcher, Lander and Rodgers and Mr Simon Fletcher was sufficiently strong that the Court made an order for substituted service such that Mr John Fletcher would be taken to have been served by the past provision of the motion and other documents to Lander and Rodgers and Mr Simon Fletcher.
That left the remaining issues of the amendment of the pleadings and the adjournment of the hearing, matters in which the issues overlap.
It was accepted on all sides that if the Court granted leave for the filing of the Third Further Amended Statement of Claim that the hearing would have to be adjourned. There was plainly insufficient time for Mr Simon Fletcher and Mr John Fletcher to be able to prepare and respond for a hearing which would commence on 18 May 2020. It was also appropriate to consider the amendment application and adjournment application together.
A number of points were taken about the form of the amendment, but in the Court's view, the pleading against Mr Simon Fletcher and Mr John Fletcher could readily be understood, reflecting a form of action known to law and was no obstacle to the making of the orders for the amendment. The more contentious question was whether an amendment should be allowed, which would result in the vacation of the hearing.
The principles that applied to the joinder of parties and the granting of adjournments to long-fixed hearings are well known: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; (2009) 258 ALR 14; (2009) 83 ALJR 951; [2009] HCA 27 at [24] ("Aon"); Cement Australia Pty Ltd v Australian Competition and Consumer Commission (ACCC) (2010) 187 FCR 261; (2010) 273 ALR 147; [2010] FCAFC 101 at [52].
Both Mr Baddams, the fourth defendant represented by Mr Pike SC and Mr Jedrejczyk, and Cleveland and Ficaro, the third and fourth defendants represented by Mr Cheshire SC, opposed both the amendment of the pleading and the adjournment of the proceedings. Except in minor respects, it is not necessary to consider separately the arguments fielded by each group of defendants as they largely, although not entirely, overlap.
There was one important difference in their contest between each group of defendants. The plaintiffs accepted that if there was an adjournment of the proceedings, they would have to pay the costs thrown away by reason of the amendment of the pleadings. The plaintiffs also accepted that the costs of Swaab Attorneys, thrown away by any adjournment, would need to be paid as a condition of the amendment. But the plaintiffs submitted that the equivalent costs of the second and third defendants should be reserved.
The defendants submitted that the plaintiffs were guilty of unexplained delay and that the adjournment should be refused. The case against the plaintiffs was that it had taken them from April 2019, when they were first alerted to the possibility of Ficaro selling its real estate, until April 2020 before the application for adjournment was finally brought to a head before a Court. This was said to be an extensive delay to not be explained as is required by Aon.
But this argument is not persuasive. First, looking at the delay between April and October 2019, much of that period is explained by representations on behalf of Cleveland and Ficaro to the plaintiffs that they only had limited information about what had happened to Ficaro's property which had to be confirmed by a director. Ficaro seemed to be making an open-ended offer to cooperate but delayed in cooperating. It is a rather hollow submission for Cleveland and Ficaro to say now that the plaintiffs should not have taken them at their word that they would confirm the facts of what had happened to the proceeds of sale which were indicated in the August correspondence. Had the plaintiffs sought to bring a motion earlier, Cleveland and Ficaro may have been able to argue upon the hearing of such a motion that the plaintiffs should be deprived of their costs of the motion because they had not waited for the foreshadowed confirmation of the facts by a director of Ficaro.
Nor do the plaintiffs deserve much criticism for delay during the later period between October 2019 and April 2020. At about the time at which confirmation was received as to what had happened to the proceeds of the sale of the Darling Point property, the plaintiffs changed counsel and set about re-pleading their case. It can be inferred from any review of the amended pleading that gaining a proper understanding of the case and re-pleading it properly is something that would have taken quite a number of weeks. It does not entirely surprise the Court that this was not able to be done between early November 2019 and the end of the 2019 Court term in mid-December 2019.
But the new pleading was served before the beginning of law term in 2020, in the last week of the law vacation, having been worked on during the vacation period. At the time it was served, if there had been cooperation on the other side, there would have been the months of February, March, April and the first almost three weeks of May 2020 for the Fletchers to become involved and get ready for a hearing. If they had accepted service at that time, they would have had quite sufficient time to get ready for the hearing date that was fixed.
It is their right, if they wish, to dispute service and require the plaintiffs to serve them as new parties personally. But it is fairly plain from the pattern of instruction in this case that the Fletchers are strongly influential in the conduct of the affairs of Cleveland and Ficaro (although their precise relationships are disputed), and that substituted service of them on the solicitors acting for Cleveland and Ficaro was always a likely outcome.
But that easy course was not consented to, so the plaintiffs had to go about this the long way, and apply by way of motion for substituted service. It was at this point that the plaintiffs made a procedural mistake by seeking to do that without asking the Registrar in Equity to re-list the matter before the trial judge so it could all be managed towards a final hearing. The most efficient procedure is to ask the Registrar to refer an issue such as the joinder of new parties to the trial judge when the matter has been listed for some time. That did not occur and the months of February and March were largely lost, wasted with the taking of formal legal points which slowed down the timing of service on the fifth and sixth defendants.
None of the points taken against the plaintiffs ever came close to denying the obvious reality that substituted service on the solicitors acting for Cleveland and Ficaro was, on the available evidence, the most appropriate way for these proceedings to be brought to the attention of the proposed new defendants. Whilst it can be accepted that the relationship between the Fletchers and Cleveland and Ficaro is not clearly established, Lander and Rogers on the evidence clearly appear to have been able to communicate with the Fletchers. The formalistic rather than cooperative approach taken by Cleveland and Ficaro on the issue of substituted service was always likely to delay the joinder of the proposed defendants, leading almost inevitably to an adjournment of the hearing. Analysed objectively, it was in Cleveland and Ficaro's interests, if they were truly separate from the Fletchers, to do whatever they could to promote the joinder of the Fletchers as rapidly as possible to try and save a hearing date. They could have done this, for example, by positively offering to pass on to the Fletchers any process or information given to Lander and Rogers pursuant to an order for substituted service. They could have done this in early February and the substituted service order could have been made then.
Cleveland and Ficaro now have little authority to criticise the plaintiffs for delay. Had they cooperated, they could have been ready for these proceedings but their choice not to cooperate has partly contributed to the present situation. Cleveland and Ficaro can take the formal legal points that they did. But they cannot also submit persuasively that the delay resulted from the taking of those points was the fault of the plaintiffs.
And that is also the answer to the defendants' subsidiary point that the delay is unexplained in Aon terms. But in the Court's view, the delay is not unexplained. In 2019, it is accounted for by the plaintiffs waiting for the confirmation that Cleveland and Ficaro promised. In 2020, it is explained by the formal uncooperative position taken by the Fletchers with part of the delay being accounted for in an error to not refer the matter to the trial judge. None of this weighs very heavily against the plaintiffs.
The fourth defendant, Mr Baddams, was in a different position. He was not actively assisting Cleveland and Ficaro in opposing any of the plaintiffs' requests for information or applications in 2019 or 2020. And he was able to properly submit that he always wanted to have his professional reputation vindicated sooner rather than later and he would be prejudiced by that test being deferred rather than dealt with during the trial period.
Mr Baddams' point that he is not the author of the delay is correct and it is for that reason, as distinct from the position of Cleveland and Ficaro, that the Court will make an order for costs thrown away in his favour arising out of any adjournment which is granted.
But the argument that delay in itself potentially occasions damage to his professional reputation is not persuasive. If the case is forced on now, the plaintiffs may be required to bring separate proceedings against the fifth and sixth defendants. That second set of proceedings may well indirectly vex Mr Baddams, who may be required to be a witness for one or other party in the subsequent set of proceeding. Issues concerning his conduct, and indirectly his reputation, are possibly more likely to be re-agitated in later litigation over a longer period, if the present hearing is not adjourned, than if it is.
There were a number of other subsidiary arguments advanced on both sides. One of those issues was the defendants' submission that in the event that an adjournment were to be granted that it should be on terms that the plaintiffs not be allowed to file further evidence without leave. But the Court regards that as too restrictive, when what issues might arise from the joinder of new defendants and the defences they may raise are still so uncertain and when the hearing date is being vacated anyway. This judgment otherwise sets out the main reasons behind the Court's orders.
Sufficient notice has been given to Mr Simon Fletcher and Mr John Fletcher of their proposed joinder. They will be joined as defendants in the proceedings and further service upon them will be dispensed with by the Court. And the Court will vacate the hearing listed to commence on 18 May 2020.
On the question of costs, the plaintiffs submit that the costs of Cleveland and Ficaro thrown away by the adjournment of the hearing should await the final outcome of the proceedings and will in substance be each party's costs in the cause, if the costs are reserved. These reasons have shown that Cleveland and Ficaro are sufficiently responsible for the present situation that they should not get the benefit of a costs order, particularly where they have taken a tactical course open to them which involves choosing not to "assist the Court to further the overriding purpose" of the Civil Procedure Act 2005, "to facilitate the just, quick and quick" disposal of the proceedings: Civil Procedure Act, ss 56(1) and (3). Instead, the costs of the adjournment will be reserved as between the plaintiffs and the second and third defendants.
[5]
Conclusion and Orders
For these reasons, the Court makes the following orders and directions.
Accordingly, the Court makes the following orders and directions:
1. Order that the documents which are identified in paragraph 4 of each of the affidavits of Mr Martin Campbell of 29 April 2020, set out in Schedule A to these orders, shall pursuant to Uniform Civil Procedure Rules 2005, r 10.14(3) be taken to have been served on the proposed sixth defendant, Mr John Fletcher on 29 April 2020.
2. Grant leave to the plaintiffs to amend their Statement of Claim, to file the Third Further Amended Statement of Claim, which has been initialled by the Court, dated today and placed with the Court papers.
3. Mr Simon Richard Sword Fletcher is joined as the fifth defendant in these proceedings.
4. Mr John Fletcher is joined as the sixth defendant in these proceedings.
5. The Court notes that sufficient notice of the Third Further Amended Statement of Claim has been given to the fifth and sixth defendants and no further orders for the service of that pleading upon them is required.
6. Vacate the hearing of this matter which is listed to commence before me on 18 to 22 May 2020.
7. Note that the hearing is vacated by the Court in part because it is not possible for the fifth and sixth defendants to be in a position to meet the case against them at the hearing dates commencing 18 May 2020.
[6]
Amendments
20 May 2020 - Coversheet: Mr R. Jedrejczyk added as junior counsel for the fourth defendant.
[22], [23], [28], [29] and [47] now reflect Polczynski Robinson as the solicitors for the plaintiffs.
[23] "Cornwall" replaces "Lander & Rogers". For the avoidance of any doubt, at the end of [24], the reasons now indicate that Lander & Rogers were retained on or around 20 August 2019.
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Decision last updated: 20 May 2020