Fexuto v Lombe and Yates [2006] NSWSC 981 | Case summary

5623/05 FEXUTO PTY LTD v DAVID JOHN FRANK LOMBE AND PETER GEORGE YATES IN THEIR CAPACITIES AS ADMINISTRATORS OF BOSNJAK HOLDINGS PTY LTD & ORS JUDGMENT - Ex Tempore 1 HIS HONOUR: There are two Notices of Motion before me and also an informal application. One of the Notices of Motion is a motion by the plaintiff seeking leave to amend the Statement of Claim in the proceedings. Another Notice of Motion, also by the plaintiff, seeks a direction that there may be a separate issue tried in the proceedings, which are due to be heard next month over five days. The informal application is one for leave to file a Reply which is one day out of time. 2 The litigation arises from the affairs of the group of companies of which Bosnjak Holdings Pty Ltd - which I will refer to as "BHPL" - was a principal member. The plaintiff in the proceedings is Fexuto Pty Ltd. It holds two-sevenths of the issued capital of BHPL. Fexuto is a company which is associated with Mr Bob Bosnjak. 3 At present there are 18 defendants in the proceedings. The first defendants are the Deed Administrators of BHPL. The third defendant is BHPL itself. 4 The second defendant is National Bus Company Pty Ltd, referred to as "NBC". NBC is a wholly owned subsidiary of National Express Group Plc, NEG, which is an English listed company. NEG is the eighteenth defendant. Another company in that group, National Express Group (Buses) Australia Pty Ltd is another wholly owned subsidiary of NEG. It is not a defendant, but between them NEG and National Express Group (Buses) Australia Pty Ltd hold four-sevenths of the issued share capital of BHPL. NBC is a company which is associated with Mr Jim Bosnjak. 5 The remaining one-seventh of the capital in BHPL is held by Bosnjak Group Pty Ltd, which is not a party to the present proceedings. 6 The proceedings as they are presently constituted arise from the fact that BHPL entered into a written loan agreement with NBC on 4 April 2000. Over the period from 5 May 2000 until 25 February 2003 Fexuto alleges that there were a total of 21 transfers of funds from NBC to a BHPL subsidiary. Those transfers totalled a little over $68,000,000. In connection with each of the transfers of funds a person who was a Director of both BHPL and NBC is alleged to have signed a promissory note on behalf of BHPL. 7 One allegation which Fexuto makes in the present proceedings is that the loan agreement did not attach to those transfers of money and in consequence BHPL was not bound to repay them, because certain pre-conditions which are set out in the loan agreement were not satisfied. 8 BHPL paid something over $9 million in interest concerning these 21 promissory notes, plus another two promissory notes that had been signed earlier, but which are apparently not contentious. Some interest was, according to NBC, in arrears when the administrators were appointed. 9 BHPL went into administration in January of 2005. Also in January 2005 11 companies, which are wholly owned subsidiaries of BHPL also went into administration. Those wholly owned subsidiaries are parties to the proceedings, as the fourth to fourteenth defendants. 10 One claim which Fexuto makes in the proceedings is that the Administrators wrongly admitted a claim by NBC for principal and interest which was owing in connection with the twenty-one disputed promissory notes. Fexuto asserts that if the proof of debt was wrongly admitted it would receive a much larger distribution as a shareholder. 11 Another claim in the proceedings as they presently stand arises from the fact that in December of 1999 BHPL and those 11 subsidiaries entered a deed referred to as a Deed of Cross Guarantee. Fexuto alleges that under that deed each party guaranteed debts of the other which were owed to an external creditor - that is to a creditor who was not a member of the group. Fexuto also alleges that the guarantee didn't become operative until the principal debtor commenced to be wound up. Fexuto alleges that as at January 2005, when Administrators were appointed to them, the 11 subsidiaries were in truth solvent, and that they would not become insolvent unless by operation of the Deed of Cross Guarantee they became liable to pay either the principal or the interest which NBC claim in connection with the 21 disputed promissory notes, or liable to pay both principal and interest. The proceedings as they are presently constituted say that there was no indebtedness under the Deed of Cross Guarantee for two reasons - first, NBC was not really owed the money, and second, the occasion for the guarantee to attach had not arisen, because none of the companies in the group had begun to be wound up. 12 There are three other defendants I have not mentioned. The fifteenth defendant is a company which was acquired by BHPL at some stage before it went into administration. Fexuto alleges that it became bound by the Deed of Cross Guarantee, and the same conclusions concerning the Deed of Cross Guarantee apply to it as to the other 11 subsidiaries. 13 The sixteenth and seventeenth defendants are in a somewhat different position. They are companies in the same group which are not themselves subject to a Deed of Company Arrangement, but whose assets have been made available for a fund constituted by the deeds under which the other companies are being administered. 14 No specific allegations are made against them in the pleadings as they presently stand, and no specific relief is sought against them, but they are joined as parties who would be affected by whether the Deed of Company Arrangement was set aside. 15 After the companies in the group went into administration there were two different proposals for a Deed of Company Arrangement put forward. One of them was put forward by NBC, another was put forward by Fexuto. Fexuto says that the NBC proposal had a pre-condition in it that any claims that BHPL or any of the by then twelve BHPL subsidiaries had against any NBC related company or any of their present or former officers be released. 16 In the proceedings as they presently stand Fexuto attacks the administrators' recommendation that the type of deed put forward by NBC should be entered. Fexuto says that the creditors were misled by three different misrepresentations of the administrators. These misrepresentations were that BHPL was liable to NBC for principal and interest connected with the promissory notes, that the subsidiaries were also liable for the principal and interest, and that the subsidiaries were insolvent. 17 The type of Deed of Company Arrangement put forward by NBC came to be the preferred one. Around 26 August 2005 BHPL and the twelve subsidiaries entered Deeds of Company Arrangement, and also entered a Deed Poll in favour of NEG, NBC and their various related companies and present and former directors and officers releasing each of those people from claims. 18 The relief which is sought in the proceedings, as they presently stand, is a reversing of the decision of the administrators concerning the proof of debt relating to the promissory notes, orders terminating the Deeds of Company Arrangement of BHPL and the twelve subsidiaries, and also an order setting aside the Deed Poll that granted a release to the NBC entities. 19 Various defences are raised to these claims including that the borrowing of the various loans was in fact authorised, that if it was not originally authorised then it was later ratified, that the officers who requested the loans be made had ostensible authority to make that request, that in any event BHPL ought repay the money on the basis of a restitutionary claim, that there has been an acknowledgment of a debt, and also that delay is a discretionary reason for deciding not to set aside the Deeds of Company Arrangement. 20 I have earlier mentioned the eighteenth defendant. It is joined to the proceedings because it has the benefit of the Deed Poll, and so is an entity which would be affected if the Deed Poll were to be set aside. 21 It is necessary to set out some of the matters relating to the course which the proceedings have taken up to now. 22 The proceedings were begun on 28 October 2005. The Originating Process which was filed at that time sought to appeal against a decision it was said the Administrator had made to admit a proof of debt in so far as it related to the twenty-one disputed promissory notes. An Interlocutory Process was filed at the same time seeking an injunction to restrain the administrators of BHPL from paying a distribution to NBC in accordance with its proof. It may be that this application was premature, in that it is not clear that the administrators had actually admitted the proof of debt at that stage, but it appears uncontroversial that on 1 November NBC lodged an amended proof of debt for $91.5 million, and that that proof of debt was admitted by the Administrators on 25 November 2005 for an amount which included principal and interest on the twenty-one disputed promissory notes. 23 On 14 December 2005 the Interlocutory Process settled, on the basis that the Administrators could make a distribution, provided that the amount which was distributed was kept in an account to which the Administrators were a signatory. In connection with that interlocutory injunction, the plaintiff gave the usual undertaking as to damages, but it also gave an undertaking to the Court and to the parties to prosecute the proceedings expeditiously. 24 In the course of December in 2005 the proceedings were amended. The amendment expanded the claims to those which I have earlier outlined in this judgment. Directions were given for the filing of evidence, including that a Reply was to be filed and served by 7 February 2006. 25 Just before Christmas in 2005 the Administrators made a part payment of $60 million to NBC in part payment of its proof. That money has been placed on a term deposit, and is still there. 26 In February of 2006 the matter was before the Chief Judge. His Honour noted that the plaintiff did not intend to serve any further affidavit evidence-in-chief, directed the defendant to serve affidavits by 7 March, and directed the plaintiff to serve affidavits in reply by 31 March. By that time, there were two motions seeking security for costs on foot. His Honour gave directions for preparation of those motions. 27 On 24 March 2006, by consent, orders were made for Fexuto to provide security for costs to the second, seventeenth and eighteenth defendants in the sum of $200,000 and also to provide security for costs to the Administrators in the sum of $175,000. 28 The matter came before me in the expedition list on 7 April. At that stage the plaintiffs were ordered to serve affidavits in reply by 5 May and the matter was provisionally set down for hearing before me on the 10th to 13th and 17th October 2006. It was only provisionally set down at that time, because the Reply, and any evidence in connection with the Reply had not at that stage been filed, and it was not possible to obtain any clear indication of what they might contain. 29 On 12 May the Chief Judge ordered the plaintiff to serve affidavit evidence in reply by 12 June. 30 The matter came back before me on 31 July. By that stage there was a dispute about production of documents which were said to be relevant to what, if anything, a Reply would contain. Directions were given for the first defendant to produce documents. The plaintiff was ordered to file evidence in reply by 21 August, failing which the plaintiff would not be permitted to rely on evidence filed in reply without the leave of the Court. 31 On 17 August 2006 the matter was before me again, when orders were made for access to documents which had been produced. 32 On 22 August two documents were filed. One of them was an affidavit by Mr Grieve, a solicitor for the plaintiff, which had an exhibit of nearly 350 pages. Another was a Reply. That Reply sets out, in summary form, some allegations about the way in which BHPL had been administered over a period of years. I will return to this Reply in a moment. 33 The amendment which Fexuto seeks to make to the Statement of Claim is one which involves joining some fourteen additional defendants. Each of those defendants is a natural person, each is said to be a current or former Director of BHPL and NBC, and four are alleged to be current or former Directors of NEG. 34 The proceedings have for some time alleged that NBC and NEG are shadow directors of BHPL. The proposed Amended Statement of Claim raises an oppression proceeding, against NEG and NBC. The oppression which is alleged is broadly that from mid-1999 there has been a concerted attempt to keep from Bob Bosnjak information about the transactions of the various companies in the Bosnjak group, notwithstanding that he was a Director of BHPL and that Fexuto was a significant shareholder in BHPL. As well, it alleges that those guilty of the oppression have refused to appoint any independent Directors notwithstanding that they have been in a situation of conflict. In very broad outline, it alleges that they have caused BHPL to go on a buying spree with money borrowed from NBC, that that buying spree has been engaged in against the wishes of Bob Bosnjak, that the borrowings were made notwithstanding that BHPL had surplus assets of the order of $20 million which could have been sold, and that the mounting interest burden on the borrowings drove BHPL into the insolvency which led to the administrators being appointed. Fexuto also alleges that the course of conduct which was embarked upon was one which any reasonable Director ought to have realised would destroy or seriously impair the value of Fexuto's equity in the company, and that it was embarked on solely in the interests of the world wide transport operations of NEG. The amendments allege that the effect was that the value of NEG's equity in BHPL was in effect converted into a debt, and that repayment of that debt destroyed or seriously impaired the equity of Fexuto. 35 All of these are, of course, at this stage just allegations, and they might turn out to be completely baseless when the facts are examined. 36 The same conduct that is alleged to have been oppressive to Fexuto, and also to Bosnjak Group Pty Ltd is also alleged to be a breach of duties which the various directors owed to BHPL. That leads, according to the proposed amendment, to a claim for leave for Fexuto to bring a statutory derivative action against the Directors on behalf of BHPL. So far as the allegation of oppression by NEG and NBC go, the amendment seeks an order for compulsory purchase of Fexuto's shares. 37 While the Deed Poll remains on foot, the Directors other than Jim Bosnjak and Carol Bosnjak have, on the face of the Deed, a release of the claims which BHPL seeks to bring against them or rather which Fexuto seeks to bring in BHPL's name against them. The Amended Statement of Claim seeks to allege that that apparent release is not totally effective, even while the Deed Poll remains on foot, on the basis that as a matter of law it is not possible to release the duty which a Director owes pursuant to section 180 of the Corporations Act, because section 180 is a civil penalty provision. The amendments to the Statement of Claim seek, also, to attack the entering into of the Deed Poll and to have it set aside. 38 Let me return to the Reply which was filed on 22 August. That Reply set out the history of the circumstances which are alleged, by the proposed new Statement of Claim to amount to oppression. It relies on those circumstances to assert that there are reasonable prospects that BHPL would succeed in a claim against the Directors, NEG and NBC, that each breached directors' duties owed to BHPL, that there are reasonable prospects that Fexuto and Bosnjak Group Pty Ltd would succeed in claims against NEG and NBC for oppression, and that those reasonable prospects ought to lead the Court in an exercise of discretion to terminate the various Deeds of Company Arrangement, and set aside the Deed Poll. It also alleges that those circumstances would lead, as a matter of discretion, to the refusal of NBC's claims of ratification, restitution and estoppel. I have some difficulty in following that last contention, but it is not necessary to decide anything about it now. 39 For quite some years Fexuto has had on foot some other oppression proceedings in relation to the affairs of the Bosnjak group of companies. Fexuto succeeded in making out a case of oppression before Young J, as his Honour then was. The orders for relief which his Honour made were varied by the Court of Appeal, but that variation still resulted in relief being given. In the working through of that relief proceedings were brought before Justice White. Those proceedings were resolved on 30 August 2006. The precise terms of the resolution are confidential, but there is evidence which has been read on an open basis that the effect of the making of the orders is that BHPL will come into some money, in consequence of which the Administrators will be in a position to make a distribution to the shareholders of BHPL. 40 The principles which are relevant to deciding whether to allow amendments include those set out in sections 56, 58 and 64 of the Civil Procedure Act 2005. "56(1) The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. (2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule. (3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court. (4) A solicitor or barrister must not, by his or her conduct, cause his or her client to be put in breach of the duty identified in subsection (3). (5) The court may take into account any failure to comply with subsection (3) or (4) in exercising a discretion with respect to costs." "58(1) In deciding: (a) whether to make any order or direction for the management of proceedings, including: (i) any order for the amendment of a document, and (ii) any order granting an adjournment or stay of proceedings, and (iii) any other order of a procedural nature, and (iv) any direction under Division 2, and (b) the terms in which any such order or direction is to be made, the court must seek to act in accordance with the dictates of justice. (2) For the purpose of determining what are the dictates of justice in a particular case, the court: (a) must have regard to the provisions of sections 56 and 57, and (b) may have regard to the following matters to the extent to which it considers them relevant: (i) the degree of difficulty or complexity to which the issues in the proceedings give rise, (ii) the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities, (iii) the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties, (iv) the degree to which the respective parties have fulfilled their duties under section 56 (3), (v) the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court, the practice of the court or any direction of a procedural nature given in the proceedings, (vi) the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction, (vii) such other matters as the court considers relevant in the circumstances of the case." "64(1) At any stage of proceedings, the court may order: (a) that any document in the proceedings be amended, or (b) that leave be granted to a party to amend any document in the proceedings. (2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings. (3) An order under this section may be made even if the amendment would have the effect of adding or substituting a cause of action that has arisen after the commencement of the proceedings but, in that case, the date of commencement of the proceedings, in relation to that cause of action, is, subject to section 65, taken to be the date on which the amendment is made. (4) If there has been a mistake in the name of a party, this section applies to the person intended to be made a party as if he or she were a party. (5) This section does not apply to the amendment of a judgment, order or certificate." 41 Pursuant to those sections, the Court has a broad discretion as to whether amendments should be allowed, and the power to give greater weight to questions of case management than was regarded as being appropriate before the introduction of the Civil Procedure Act 2005. 42 It is still a relevant question, in deciding whether to permit an amendment, what if any prejudice might be occasioned to parties by the making of the amendments. As well, of course, one considers what prejudice might be occasioned to a party by refusing an amendment. 43 The claims which Fexuto brought in the proceedings are ones which have been advanced little by little. The broad basis of the oppression claimed is one which was known to Fexuto, at least as early as February of 2005. There has been the failure to comply with directions which I have earlier mentioned, and there has been the undertaking to advance the proceedings with expedition which I have earlier mentioned. 44 One of the bases on which Fexuto seeks to have the Deed Poll set aside is section 447E Corporations Act. It provides, so far as relevant, that if the Court is satisfied that the administrators of a Deed of Company Arrangement have done an act that is or would be prejudicial to the interests of some or all of the company's members, the Court may make such order as it thinks just. Pursuant to section 447E(3), an order can only be made on the application of ASIC, or of a creditor or member of a company. 45 The plaintiff seeks to rely on section 447E as one basis on which to attack the entry of the Deed Poll. It may be that there is a problem with its standing concerning this, because the Deed Poll is one to which numerous companies in the Bosnjak Group were parties, and yet Fexuto is a member only of BHPL. So far as the evidence before me discloses, at any rate, it is not a creditor of any of the companies. 46 As a result of the settlement before Justice White, Fexuto will have distributed to it an amount which the Administrator estimates is somewhere in the range of $3.43 to $3.66 million. 47 If the oppression action is permitted to proceed it will inevitably make the action vastly more complicated than it is at present. 48 The estimate of hearing time lies somewhere in the range of four to eight weeks. As well, the evidentiary material which needs to be explored before the trial is much larger, as it ranges over conduct engaged in over a period of six years. 49 The administrators' solicitors, Minter Ellison, estimate that if the action expands in scope in this way, the additional legal costs which they will incur are in the range of $418,000 to $512,000. The NBC parties submit that Minter Ellison are underestimating the costs that are likely to occur, and that the legal costs which the administrators would incur are more likely to be in the range of $750,000 to $875,000. As well, administrators' fees would inevitably be incurred, on top of the legal costs. The administrators' fees would be incurred partly in the administrators attending to the litigation, and partly because the administrators are the custodians of the company's documents, and so would need to produce such documents as were needed to enable the action to advance. 50 The NBC parties estimate that their own costs of running the defence would be in the range of $970,000 to $1.135 million. 51 While these legal costs are very large, they are the sort of costs which could be covered by an order as to costs. I should make it clear that in referring to the figures which I have, there has been no examination of the correctness of the figures, and I accept them at face value and for the purpose of this application only. 52 There has already been an application for security for costs and if (as seems an open inference, given that Fexuto has already been ordered to provide security for costs once) it is in a position where it might be called on to provide security for costs again, that is something which can be dealt with by an appropriate application. 53 The extra legal costs of the administrators are the sort of thing which would not be covered by an order as to costs. However, if the company were in the hands of the directors, there would still be internal costs of the company which would be incurred in responding to requests for production of documents. 54 Further, it could not be the case that the mere fact that a company is in administration, and that the bringing of litigation against it would result in administrators incurring fees to deal with the litigation, means that litigation could not be brought against the company in administration. It is an inevitable attribute of the system that, if there is an application made to set aside a Deed of Company Arrangement or some transaction which the administrators have entered into, there will be fees incurred in dealing with it. 55 The NBC parties also submit that they will incur prejudice if the amount which the administrators have already distributed remains frozen. The administrators are proposing to make a further distribution next month, and White J has made an order which attaches to that further distribution the same regime for being frozen that applied to the earlier $60 million. At least at one time the $60 million was earning 5.75 per cent. 56 NBC says that if it were to receive the money which is now frozen, and the money which will shortly become frozen, it would use that money to pay NEG, and NEG in turn would use it to pay down existing debt which is currently incurring interest at about 7 per cent. The interest differential between the amount which is being earned by the frozen money, and the amount which NEG is paying out, seems to me it to be the sort of thing which could be covered by the undertaking as to damages: rule 25.8 Uniform Civil Procedure Rules 2005. 57 In all these circumstances, I am not persuaded that there is a financial reason for opposing the making of the amendment, which is sufficiently serious to justify its refusal. 58 The Reply which has been filed is one which shows, it seems to me, a very close connection between the issues which would be raised in the present proceedings if the case were to proceed on the present issues, and the issues which are involved in the proposed oppression application. 59 It is true that the legal conclusion which is sought to be drawn by the Reply from the conduct which is said to be oppressive, is not the same as the conclusion which the oppression proceedings seek to draw from that same conduct. Even so, it would be inevitable that there would be a significant overlap in the factual issues which were involved. 60 I recognise that, in some ways, the Reply raises an issue which is inconsistent with the present pleading. That is because the present pleading drives to a conclusion that the debt concerning the 21 disputed promissory notes is not really owing, while the Reply presumes it is owing. Even so, it seems to me, the Reply shows the connection between the issues. 61 The oppression case which is sought to be brought is one which, in effect, alleges that the entering into of the Deed of Company Arrangement and the Deed Poll are the culmination of a course of oppressive conduct. The question of whether those deeds should be set aside on the basis now pleaded deals with a closely related question to the question of whether the proposed amendment provides a ground for reaching a similar conclusion. 62 In all the circumstances, the preferable course is to permit the amendment to be made. 63 I have referred to the Reply, as though it was a document defining issues. When it was only a day late, I would not regard that as a reason for striking it out of the present proceedings. 64 Strictly, the Reply, though accepted by the Registry on 22 August 2006, ought not have been accepted because it was out of time. However, when it was only a day out of time the preferable course is to allow its filing to remain. 65 It may be that the allowing of the amendment to the Statement of Claim will necessitate some tidying up of the pleading of the Reply, but that is a matter which I will leave to the parties. 66 In the circumstances where I have decided to permit the amendment, the question of whether the hearing, which had been set for early October, ought to be conducted on the basis of there being only a separate issue decided, has ceased to be of practical importance. It is clear that if the amendment is allowed, an adjournment of the October hearing is inevitable. 67 The first order I make is, I grant leave to file in court a second amended Statement of Claim in the form of a document which I initial and date today's date. I vacate the hearing set for October 10 to 13 and 17 inclusive. 68 The NBC defendants seek an order that the plaintiff pay the costs thrown away in consequence of the amendment. Mr Ellicott QC opposes that on the ground it is most unlikely any costs will be actually wasted. 69 In my view it is still appropriate to make the order, and it is a matter for assessment as to whether any money actually gets paid pursuant to it. 70 I order the plaintiff to pay to the defendants the costs thrown away in consequence of the adjournment of the proceedings in October. 71 The costs of the Notice of Motion seeking leave to amend is one which, as Mr Wood submits, involves an application for an indulgence to amend out of time. Nonetheless, it is still part of the preparation of the ultimate case. I see no reason to make any order other than that the costs of each of today's Notices of Motion be costs in the cause. I so order. 72 I direct that the proceedings be stood into the Corporations List on Tuesday 3 October 2006 for further directions. In the event that consent orders of any kind can be made prior to that date, and it is desirable to make them, I also give the parties leave to approach me in chambers for the purpose of making any such consent orders. 73 Mr Wood asks that I make the order for costs thrown away to be payable forthwith. Until such time as the proceedings have been heard, it will not be possible to tell what costs have been thrown away, and what costs have not. As well, it is in my view often undesirable to make orders for costs to be payable forthwith when there is a prospect of interlocutory costs orders going either way before the proceedings are ready for final hearing. 74 In those circumstances I decline that application. **********

Fexuto v Lombe and Yates

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Judgment (9 paragraphs)

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