First Plaintiff v First Defendant

First Plaintiff v First Defendant - [2019] VSC 285 - VSC 2019 case summary — Zoe

[121]

(a) on the two prior occasions on which the Court's approval was sought in the First Funding Application and the Second Funding Application to enter into a funding agreement with the Melville interests, the Court refused to approve entry into the agreements on the basis that it was not in the interests of creditors and was incompatible with Mr Wallace-Smiths duty to act independently;[50]

(b) in the reasons for judgment of Robson J and Judd J the Court stressed the importance of Mr Wallace-Smith acting in the interests of all creditors rather than just a single creditor. Both Robson J and Judd J questioned whether the independence of Mr Wallace-Smith had been compromised by entry into the agreements.[51] Additionally, Judd J considered that the defendants had a real interest in the performance by Mr Wallace-Smith of his duties to AVSS and the unsecured creditors and to ensure that the Proceeding was not an abuse of process.[52] Judd J strongly criticised Mr Wallace-Smith for resorting to strategies that were directed at denying the defendants the opportunity to be heard or to challenge his decision to enter into the funding agreement with the Melville interests.[53] Further, the Court criticised Mr Wallace-Smith's reluctance to disclose information, even on a confidential basis, that would assist the Court in determining whether a funding agreement would be in the interests of creditors as a whole.[54] The Court also questioned the appropriateness of any fee paid to the Melville interests in return for funding as they were not arm's length funders;[55]

(c) the Court also expressed concerns about the judgment of Mr Wallace-Smith in commencing the Proceeding and seeking to enter into funding agreements with the Melville interests.[56] Judd J found that it was least arguable that Fingal bringing the Proceeding, through Mr Wallace-Smith, was an abuse of process;[57] and

(d) finally, Mr Wallace-Smith and his solicitor each have a personal interest in obtaining funding to prosecute the Proceeding from any source and on any terms in order to recover their unpaid fees of $770,000, for which there is no other source for payment.

[138]

(d) The Third Funding Agreement stands to benefit the Melville interests ahead of other creditors. Specifically, the Third Funding Agreement requires Mr Wallace-Smith to consent to an order being made under s 564 of the Act giving the Melville interests an advantage over other creditors when it comes to the distribution of property recovered in the Proceeding, regardless of whether this is in the interests of creditors.[63] This is in addition to the benefits the Melville interests may receive by: (i) having recovered nearly $2 million more than may be secured by the Fingal charge; (ii) recovering more than $3.5 million plus interest claimed still to be owing under the charge; and (iii) recovering the debt of Galvin Constructions with a face value of more than $1 million, which it acquired for only $20,000.

(e) The Third Funding Agreement requires unsecured creditors to bear the costs of the two unsuccessful attempts to fund Mr Wallace-Smith, which were disapproved of by the Court. Specifically, the Third Funding Agreement provides that payments of more than $500,000 said to have been made by the Melville interests to Mr Wallace-Smith to date (defined in the Third Funding Agreement as 'Funding Costs to Date'), including the costs of bringing the two unsuccessful funding approval applications, are to be repaid to Fingal in priority to unsecured creditors. This includes recovering adverse costs orders made against Mr Wallace-Smith on each occasion.[64] It cannot be in the interests of unsecured creditors for them to bear the full costs of both sides of unsuccessful applications that the Court has found were not made in their interests while the parties who stood to gain personally from the applications bear no costs.

(f) The Third Funding Agreement postpones recovery by unsecured creditors until after the repayment of approximately $1.7 million incurred to date to the Melville interests, Mr Wallace-Smith and his solicitors in circumstances where no substantive step has been taken in the Proceeding since it was commenced in 2013.[65] The sums said to be owing are:

[174]

(a) deny the defendants the right to have issues raised against them (issues which first arose in 2010) resolved in a just, efficient, timely and cost-effective manner and without undue delay;

(b) subject the defendants to years of further costs and stress of litigation, arising from events that have long since passed, in circumstances where the defendants have already endured the stress and costs of successfully defending the Fingal proceeding over the past six years. The defendants have simultaneously had to endure the stress and uncertainty arising from this collateral litigation since the Proceeding was instituted in 2013;

(c) prejudice the defendants' ability to defend the Proceeding, as the events in issue occurred in 2010, and going back several years before that, and the contemporaneous records have been held respectively by Mr Wallace-Smith and/or the Fingal receiver since their appointment in 2010 and 2011;

(d) deny the defendants the right to have the Proceeding conducted in a manner that would keep costs proportionate to the complexity of the issues or amount in dispute as Mr Wallace-Smith and his solicitor have already incurred, and may seek to recover, fees that are grossly disproportionate to the issues and amount in dispute, having regard to the stage of the Proceeding and steps taken to date;

(e) subject the defendants to collateral claims brought, through the liquidator, by the Melville interests, who stand to obtain a financial windfall for the funds that have been 'over-recovered' and to recover debts they have acquired for a small fraction of their face value if the claims are successful;

(f) deny the defendants the protection from oppression that would be available had Mr Wallace-Smith sought funding approval from the Court, as outlined on two previous occasions when their position was vindicated by Robson J and Judd J;

(g) deny the defendants the opportunity to be heard or to challenge the decision of Mr Wallace-Smith to enter into the Third Funding Agreement with the Melville interests. This is particularly relevant in the circumstances, as the Court has previously found that the defendants have a real interest in the performance by Mr Wallace-Smith of his duty to the company and unsecured creditors, and in ensuring that the Proceeding brought against them is not an abuse of process. The Court previously criticised the liquidator for resorting to strategies that were directed at denying the defendants that opportunity;[77] and

(h) subvert the Court's supervisory jurisdiction over the external administration of corporations,[78] including the Court's power to ensure that the conduct of liquidators is not oppressive, prejudicial or an abuse of process, and would deny the defendants the benefits of that protection.

[179]

(a) as to the validity of the Fingal charge, contrary to Mr Lhuede's affidavit sworn 27 April 2018 at [45], there was no declaration by the trial judge or by the Court of Appeal in the Fingal proceeding that Mr Leggo was estopped from disputing the validity of the Fingal charge. To the contrary, Mr Leggo was not a defendant to that proceeding and will dispute the validity of the charge;

(b) contrary to [45] of the Lhuede affidavit, the defendants dispute not only the validity of the Fingal charge but also the amount said to be secured by it;

(c) contrary to [46] of the Lhuede affidavit, the Court of Appeal did address this question and refused to declare that the Fingal charge secured moneys that had been advanced by unitholders and the Albury Lenders (which are the amounts Mr-Wallace Smith continues to assert are secured) and declared instead that the charge only secured amounts that had been advanced 'by Fingal' in its capacity 'as lender'. Contrary to [47] of the Lhuede affidavit, this could be as little as $141,500;

(d) contrary to the suggestion in [48] of the Lhuede affidavit, Mr Leggo did not concede that the payments referred to were costs within the meaning of clause 3.1 of the Deed of Settlement or that NDP was obliged to meet those costs. To the contrary, Mr Leggo contended that construction of the agreement was a question of law and that clause 3.1 of the Deed of Settlement was not an 'open cheque' to meet all costs of the development; and

(e) contrary to the statement in [48] of the Lhuede affidavit, Mr Leggo did not concede that he knew there would be insufficient funds to pay creditors in full in December 2009. To the contrary, Mr Leggo's evidence was that he received a document on 22 December 2009, more than seven months after the date of insolvency contended by Mr Wallace-Smith, that estimated there would be a loss at the end of the development in May 2010, which meant that unitholders, whose investments were to be repaid from any surplus, may not be repaid their investments plus interest in full. In respect of the creditors, Mr Leggo said 'I looked at this and thought ... there was still a healthy balance, a healthy buffer to ensure that the company would be able to meet all of its debts'.

[261]

(a) the events the subject of the plaintiffs' draft claim took place between nine and 17 years ago;

(b) the Melville interests have been looking to fund Mr Wallace-Smith to prosecute claims against the defendants since at least November 2012;

(c) the Proceeding was commenced by Mr Wallace-Smith in August 2013, with funding from the Melville interests;

(d) at the time the Proceeding was commenced, Mr Wallace-Smith did not have funds to institute or prosecute the Proceeding, save for the funds that had been obtained from the Melville interests;

(e) given the history of litigation and disputes between the Melville interests and Mr Leggo, in August 2013 Mr Wallace-Smith rightly sought Court approval to obtain funding under the First Funding Agreement from the Melville interests to prosecute the Proceeding;

(f) that approval was refused on appeal by Robson J;

(g) as a result, the Proceeding has been stayed since 19 June 2014;

(h) on 2 October 2014, Mr Wallace-Smith obtained creditor approval to obtain funding from the Melville interests under the First Funding Agreement;

(i) despite this, given the contentious source of funding, Mr Wallace-Smith again sought the Court's approval to enter into that funding agreement;

(j) again, approval was refused, on this occasion by Judd J;

(k) Mr Wallace-Smith remains unable to obtain funding from any person, save for the Melville interests, to prosecute the Proceeding;

(l) at some point before December 2016, Mr Wallace-Smith decided to accept funding from the Melville interests to prosecute the Proceeding without Court approval. Mr Wallace-Smith asserted confidentiality and privilege over the terms of that funding until shortly before the hearing of this application;

(m) a resolution of creditors was sought and obtained in December 2016, before the plaintiffs' application was filed on 1 March 2018. It appears that the debts of these creditors, save for one, have been purchased by the Melville interests for a very small fraction of their face value; and

(n) Mr Wallace-Smith now wishes to use funding from the Melville interests to prosecute the same claims that were exhibited to his affidavit filed in support of the originating process filed in August 2013.

At a glance

Court

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Judgment (369 paragraphs)

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Legislation Cited (3)

Cases Cited (8)