Francis (Trustee) v Oculus Accounting Pty Ltd

DERRINGTON J: 1 This was an oral application by the first respondent (Oculus) pursuant to r 1.34 of the Federal Court Rules 2011 (Cth) (the Rules) for a dispensation in respect of the requirement in r 4.01(2) in order to permit one of its directors, Mr David de Closey, to represent it in these proceedings. 2 For the reasons set out below, the application should be dismissed.

The proceedings 3 The general circumstances in which these proceedings have arisen can be briefly stated. 4 At the relevant times, Oculus conducted a business providing accounting and taxation advisory services. Whilst Oculus denies an allegation that part of its business was the provision of investment or financial advice, the claim against it by the applicants is based upon their allegation that it did so in relation to the making of investments in a particular company. 5 In broad terms, the applicants allege that: (a) Oculus was engaged to procure investors to subscribe for shares in the company, Guvera Limited (Guvera), a so-called "start-up" company then engaged in the business of providing internet music streaming; (b) in or about February 2014, Oculus or its agents advised the first named applicants in relation to their subscription for 40,000 shares in Guvera for the amount of $100,000; (c) an application to list Guvera on the Australian Securities Exchange was rejected and the company was subsequently placed into external administration in May 2017; (d) in the course of advising the first named applicants in relation to their investment in Guvera, Oculus breached various duties owed to the applicants, including duties of care and fiduciary duties, and also breached obligations arising under Schedule 2 of the Competition and Consumer Act 2020 (Cth); and (e) as a consequence, the applicants suffered loss or damage, which is recoverable from Oculus, as their Guvera shares are now worthless and unsaleable. 6 While significant aspects of those allegations are denied by Oculus in its defence, that summary briefly encapsulates the case, as it is presently pleaded, that Oculus will have to meet at trial. 7 The action is a representative proceeding, pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth), on behalf of the applicants and other persons with the same, similar or related claims against Oculus (Group Members). The precise number of Group Members is unknown, but orders were made earlier this year for the service of "opt out" notices on approximately 107 persons or entities. 8 The applicants quantify their loss as being the amount of $100,000 (the amount paid for the Guvera shares). It is reasonable to assume that the total claims against Oculus by Group Members may be many times that amount. 9 Pleadings have now closed and the parties have undertaken discovery. The next steps in the proceeding are likely to include the service of opt out notices (as earlier orders to do so were vacated) and the preparation of lay and expert evidence.

The present application 10 The need for the present application arose when Oculus' now former solicitors filed a Form 6 on 22 February 2021, advising that Oculus had terminated their retainer and had not appointed a new lawyer to represent it in these proceedings. 11 The Court subsequently learned of Mr de Closey's intention to represent Oculus in the proceeding. He was informed that, in order to do so, he would need to obtain a dispensation in respect of the requirement in r 4.01, and to that end would have to bring a formal application and put on evidence in support of it. 12 On 3 March 2021, an initial affidavit of the same date sworn by Mr de Closey was filed. The matters to which he deposed in that affidavit were brief and unsupported by any detail or documentary evidence. 13 On 8 March 2021, the applicants filed written submissions in opposition to the application, in broad terms submitting that Oculus had not established that there was a sufficient reason for granting the dispensation sought. In particular, they emphasised the insufficiency of the evidence put on by Mr de Closey. 14 At the case management hearing on 9 March 2021, the matter was adjourned for a month at the request of the parties to facilitate negotiations in relation to a potential resolution of the matter. At that time, it was raised that there were significant deficiencies in the material filed by Mr de Closey to date in support of the application, in particular a lack of evidence concerning the financial circumstances of Oculus and the persons standing behind the company. 15 On 7 April 2021, a second affidavit sworn by Mr de Closey on that date was filed. 16 The application was ultimately heard on 9 April 2021. The applicants maintained their opposition to application at the hearing, relying on their earlier filed written submissions.

Oculus 17 Mr de Closey deposed that Oculus is an accounting firm located in Tweed Heads in New South Wales. It employs 12 staff members, comprising two full-time and 10 part-time staff. 18 Mr de Closey and Ms Jennifer Dallinger are the only two directors of Oculus, and have been since November 2001. They are also the company's only two shareholders, each holding 300,000 fully paid, ordinary shares in the company. 19 In his earlier affidavit, Mr de Closey deposed that the proceeding had taken a "severe financial toll" on Oculus in terms of the legal fees incurred to date and had distracted from the servicing of its clients and the running of its business. He deposed that the financial resources of Oculus and of its directors had become so depleted that it could no longer afford legal representation, and that the directors were in ongoing discussions with an insolvency firm in relation to their options. He further deposed that there was a "very real prospect" that the directors would "resolve to place [Oculus] into liquidation in the near future". Those matters were unsupported by any detail in Mr de Closey's initial affidavit or by any documentary evidence exhibited to that affidavit. 20 There were several unaudited financial statements for Oculus annexed to Mr de Closey's second affidavit. These record that in the current financial year to date (2020/21) and the previous two financial years (2018/19 and 2019/20), Oculus has made trading losses of $69,923, $129,704 and $73,705 respectively. Notably, those losses take into account the amounts of $117,000 and $54,000 that were received by Oculus in the current and immediately previous financial years as part of the recently ended "Job Keeper" financial assistance scheme. 21 The financial statements also record that, in the current and immediately previous financial years, Oculus incurred legal fees in the amount of $143,915 and $104,663 respectively. In cross-examination, Mr de Closey referred to a total amount of $300,000, but the financial statements suggest that this is rounds up from the actual figure. He attributed those legal fees wholly to the costs of this proceeding. It can accepted, absent contrary evidence, that the amount of $248,578 has been incurred in legal fees. It is to be observed that that is an extraordinary figure considering the complexity of the proceedings and the stage to which it has advanced. 22 Mr de Closey deposes that Oculus has "little cash available to further fund legal counsel", referring to a $100,000 overdraft facility it has with the National Australia Bank of which $33,778 has apparently been drawn as at 31 March 2021. A balance sheet dated 31 March 2021 records that Oculus has current assets comprising amounts owed by trade debtors totalling $88,578 and that it has no cash at hand. 23 The financial statements also indicate that dividends have not been paid by Oculus in the financial years 2018/19, 2019/20 and 2020/21. However, those financial statements do record the payment of salaries (inclusive of superannuation) to Oculus' directors totalling $208,050, $295,229 and $149,029 in the current and two previous financial years respectively. It also appears from the balance sheets that Oculus also made loan repayments to Mr de Closey and Ms Dallinger during the current financial year totalling approximately $111,448. In cross-examination, Mr de Closey indicated that those amounts were paid in exchange for equivalent reductions in the directors' salaries for the relevant period. 24 In cross-examination, Mr Turnbull for the applicants took Mr de Closey to line items in the financial statements indicating that payments had been made to Oculus Services Pty Ltd. Mr de Closey described this company as a service entity which paid the rent, administrative staff and operating expenses of Oculus' accounting practice. He testified that it distributed around $10,000 (in total) to family trusts related to himself and Ms Dallinger in each of the previous two financial years.

Oculus' future prospects 25 Mr de Closey did not provide any updated evidence in his second affidavit concerning Oculus' discussions with an insolvency firm in relation to its options, nor concerning the prospect that the directors would put Oculus into liquidation in the near future. This was a significant omission given the lack of detail concerning those issues in his initial affidavit and the relevance of those matters to this application. 26 In cross-examination, Mr de Closey testified that there had been no further discussions since his initial affidavit. He also suggested that Oculus' financial losses would continue depending on legal costs and other factors, but inconsistently asserted that the losses would not continue. Despite that, he did not assert that Oculus would be placed into liquidation in the near future, only that the cost of legal counsel would put the company in a "precarious" position. 27 Mr de Closey could not identify any realistic estimate of Oculus' future legal costs in relation to this proceeding. He testified that his previous solicitors estimated the costs to proceed if some of the actions collectivised in this proceeding were tried individually would be $500,000. That is not a useful estimate for present purposes as it assumes that the matter would proceed as individual actions. If the question of liability were to be resolved as a preliminary issue, the cost of that would presumably also be less than the estimate given.

Mr de Closey 28 Mr de Closey did not depose in either affidavit to being authorised by Oculus to agitate this application and to represent it in the proceedings. It is self-evident that such authority is necessary. It was put to Mr de Closey at the hearing that he had not adduced evidence on this point, but he did not seek to provide that evidence from the bar table. 29 Mr de Closey was admitted as a Certified Practising Accountant of The Australian Society of Certified Practising Accountants (now CPA Australia) on 8 August 2000 and he holds a current Public Practice Licence from CPA Australia valid to 31 December 2021. He was also appointed a Justice of the Peace in the State of New South Wales in 1986 and still holds this appointment. 30 He has been a working director of Oculus for the last 20 years and before that managed a credit union branch for 14 years. He also deposed to having extensive dealings and knowledge in a variety of legal matters and the preparation of legal documents for credit union clients, and that he is quick to learn court processes and the filing of documents. 31 Relevantly, Mr de Closey also deposes that "[w]hen called upon to represent [Oculus] I do not believe issues of objectivity will arise, as have [sic] a detailed knowledge; of the class action, of the statement of claim and the events that led to the statement of claim."

The willingness and ability of Oculus' directors to fund the litigation 32 Mr de Closey deposed that he and Ms Dallinger, as the directors, were not willing to fund any further legal counsel as they believed that do so would put Oculus at further risk of financial loss and could jeopardise the continuing employment of Oculus' employees. However, the more relevant issue to be addressed was Oculus' ability to do so whilst remaining solvent, an issue on which the evidence was unclear. 33 Mr de Closey also testified that he and Ms Dallinger were unwilling to put in any of their own money to fund the litigation. As the cases discussed below make clear, the more relevant issue is their ability, rather than their willingness, to do so. As to that issue, Mr de Closey testified that he had no personal assets that could be used or liquidated to fund the litigation. He also confirmed that his wife owns the family home subject to a mortgage, and had no assets to put up to fund the litigation or at least was unwilling to do so. Mr de Closey frankly described this arrangement as an asset protection strategy deployed to insulate his family's assets from potential liability arising from his accounting practice. On Mr de Closey's view, there was nothing dishonourable in that. 34 Mr de Closey also testified that he was unaware of whether Ms Dallinger had a similar financial arrangement with her husband.

applicable principles 35 Rule 4.01(2) of the Rules provides that "[a] corporation must not proceed in the Court other than by a lawyer". It was not in dispute that this rule applies absent the dispensation sought. 36 The rationale for the imposition of like requirements in other courts and the need for a company to obtain leave to be represented other than by a lawyer has been examined at length previously: see e.g. Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 12) [2012] FCA 289 (Pharm-a-Care) at [9] - [14]; Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (1986) 8 NSWLR 104 (Bay Marine) at 105 - 106. The key reasons include: (1) The importance of ensuring that those who represent a corporation are authorised to do so and may thereby be subjected to orders of the court, in particular in relation to costs: Bay Marine at 105 - 106 (Kirby P) and at 110 (Samuels JA). (2) The aim of "ensuring that the officer seeking to represent the company truly represents the interests of the company and not his own": Re G J Mannix Ltd [1984] 1 NZLR 309 (Mannix) at 315. (3) The courts require properly qualified assistance in the pursuit of the administration of justice: Mannix at 314. A person is generally unsuitable to speak for a company unless he or she has been accorded recognition by admission to practise: Hubbard Association of Scientologists International v Anderson [1972] VR 340 at 343 - 344. 37 A discretionary power to permit an individual to represent a company is conferred by the rules of most superior and inferior courts. In this Court, r 1.34 confers a general discretion to dispense with compliance with any of the Rules. 38 Practically speaking, an application for a dispensation in respect of r 4.01(2) is usually agitated by the individual seeking to represent the corporation, though formally it is an application by the corporation. It must, at the very least, be shown that the individual seeking to represent the company is authorised to bring the application and to represent it in the proceedings. 39 The authorities identify that it is necessary to show that there is a "sufficient reason" why the company should be permitted to be represented other than by a lawyer in light of all "relevant considerations": Pharm-a-Care at [9] - [12]; Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68 at 73 - 75. The company seeking a dispensation carries the onus of establishing that there is such a reason. 40 In this Court, it is not necessary to meet a "threshold requirement of special or exceptional circumstances": Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241 (Termi-Mesh) at [12]; Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2002] FCA 1002 (Checked-Out) at [9]. But what is a "sufficient reason"? 41 In Damjanovic v Maley (2002) 55 NSWLR 149, Stein J (with whom Mason P and Sheller JA agreed) considered the principles that apply in relation to an application by an unqualified person for leave to represent another individual. His Honour identified the "guiding principle" for the exercise of the equivalent discretion as follows (at [83]): What runs through all of the authorities as the guiding principle in the exercise of the discretion is the public interest in the attainment of the ends of justice. The public has an interest in the effective, efficient and expeditious disposal of litigation in the courts. As a general rule this can best be achieved by parties employing qualified lawyers. 42 The same "guiding principle" applies in respect of the discretion presently being considered: it is necessary for the company to show that there is a sufficient reason why it is in the interests of justice that it be permitted to be represented other than by a lawyer, in light of all relevant considerations. 43 The Court's discretion pursuant to r 1.34 is unconfined: Flightdeck Geelong Pty Ltd v All Options Pty Ltd [2020] FCAFC 138 (Flightdeck Geelong) at [166]. The authorities identify a number of considerations that may be relevant: Basetec Services Pty Ltd v CPB Contractors Pty Ltd (formerly Leighton Contractors Pty Ltd) [2017] FCA 510 (Basetec) at [8]; Worldwide Enterprises Pty Ltd v Silberman [2009] VSC 165 at [20]; Deputy Commissioner of Taxation v Compumark Pty Ltd [2012] FCA 583 at [20]; Flightdeck Geelong at [116]. 44 In Basetec, White J set out a non-exhaustive list of considerations relevant to the exercise of the discretion to dispense with the requirement in r 4.01(2) (at [8]): (a) the financial capacity of the company and those standing behind it and whether a lack of financial capacity would inhibit a company from obtaining legal representation: Deputy Commissioner of Taxation v Compumark Pty Ltd [2012] FCA 583 at [19]-[20]; TermiMesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241 at [13]; Worldwide Enterprises Pty Ltd v Silberman [2009] VSC 165 at [20]; (b) the factual complexities of the case and the capacity of the proposed representative to conduct it effectively having regard to the skills, training, qualifications and experience of that representative: Damjanovic v Maley (2002) 55 NSWLR 149 at [77]; Compumark at [19], TermiMesh at [13]; (c) the overarching purpose of the civil practice and procedure provisions specified in s 37M of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) and the effect on the achievement of that purpose if the company proceeds with, or without, legal representation: Australian Competition and Consumer Commission v Adata (Vic) Pty Ltd (No 2) [2015] FCA 272; Compumark at [20]; Silberman at [20]; (d) the ability of the proposed representative to exercise the objectivity expected of a legal practitioner: Pacific Air Freighters (Qld) Pty Ltd v Toller [2000] FCA 0343; (2000) 171 ALR 519 at [11]; (e) whether a lack of available disciplinary measures in relation to the persons seeking to represent the company will affect the administration of justice: Compumark at [20]; Damjanovic at [76]; (f) the manner in which the case has progressed to date and the manner in which it may progress without the party having legal representation: Compumark at [20]; Silberman at [20]; (g) when the company in question is a respondent, a more liberal approach to the exercise of the discretion may be warranted: TermiMesh at [14]. 45 It is also relevant on an application of this nature to consider whether the person seeking to represent the corporation is likely to be a principal witness at trial, particularly if their credit may be in issue: Act General Cleaning Co Pty Ltd v Con Naoum [1996] FCA 1560 at [23]; Bay Marine at 113. The presentation and management of litigation may be practically unworkable without the assistance of solicitors and counsel where the representative is also a principal witness: Checked-Out at [12]-[13]; AA Shi Pty Ltd v Avbar Pty Ltd (No 4) [2010] FCA 878 at [33]. 46 The first consideration identified in Basetec has particular significance in this application. A lack of financial capacity of the company and of those standing behind it to afford legal representation would tend to weigh in favour of granting a dispensation. Even if that is shown, it is necessary to weigh that against all other relevant circumstances, including the capacity of the proposed representative to effectively represent the company in the proceeding: see e.g. ACCC v Dataline.net.au Pty Ltd [2004] FCA 1361 at [4]. 47 Furthermore, it is clear that establishing the impecuniosity of the company alone is insufficient: Termi-Mesh at [13]. It is necessary to also consider the financial capacity of those standing behind the company to fund its representation in the litigation. It is unlikely to be in the interests of justice to grant the indulgence sought where those who stand to benefit from it being granted can, themselves, afford to fund the company's representation in the litigation: Termi-Mesh at [14].

consideration 48 From the outset, it should be noted that there were significant deficiencies in Mr de Closey's material in support of the application. In particular, there was no evidence of his authority to bring the application or to represent Oculus in the proceeding, despite the absence of such evidence having been raised with Mr de Closey at the hearing. That issue alone is a sufficient basis for dismissing the application. However, it also fails on its merits. 49 Here, there are two key considerations: firstly, whether Oculus and the persons standing behind it lack the ability to fund legal representation; and secondly, whether Mr de Closey is a suitable person to represent Oculus if it is not legally represented. 50 Mr de Closey's initial evidence was to the effect that Oculus would imminently be put into liquidation, or that it would be were it to be required to incur further legal fees in respect of this proceeding. Even if it is accepted as a sufficient reason, the evidence does not satisfy the Court that this is the case. Mr de Closey's later evidence was more equivocal as to whether he thought liquidators would be appointed in the near future, even if it were required to incur further legal fees. It is also significant that the directors have had no further discussions with insolvency practitioners since 9 March 2021. Furthermore, while it may be accepted that no further amounts would be received as part of the JobKeeper scheme, Mr de Closey also acknowledged that the second half of the financial year is generally more "financial" for accounting firms. 51 As Mr Turnbull submitted, Oculus is evidently not failing to the extent that the directors are taking any less money out of the business: they have directly or indirectly received significant amounts in the form of salaries, superannuation, loan repayments, and distributions to their family trusts (although there has been a slight increase in the indebtedness of Oculus). There is a limit to the extent to which this can be held against them - they are of course entitled to compensation for services rendered to the company. However, when asking for an indulgence from the Court on the basis that their company has limited funds, it is somewhat inconsistent for the directors to continue to draw significant amounts of money out of the company. 52 Mr de Closey submitted that Oculus continuing to trade did not evidence its ability to fund the legal fees in relation to this proceeding. This misunderstands Oculus' position in respect of this application: it bears the onus of establishing that there is a sufficient reason why it is in the interests of justice that it be granted the dispensation sought (in this case, because the company and the persons standing behind it lack the ability to fund the litigation, and the circumstances otherwise support the grant of the dispensation). This it has failed to do. It did not satisfy the Court that the persons standing behind it, being Mr de Closey and Ms Dallinger, lacked the financial capacity to fund the litigation. It may be accepted that Mr de Closey at least has no assets from which he could fund the litigation. However, the consideration has a broader ambit. It is relevant in this case to consider whether, if Mr de Closey wished to fund the litigation, he could do so by accessing funds from his wife. The evidence to the contrary was unsatisfactory. 53 The lack of satisfactory evidence concerning Ms Dallinger's financial circumstances also weighs strongly against Oculus on this point. 54 Further, there was no evidence of a realistic estimate of Oculus' future costs in the proceeding. For the reasons stated above, the figure of $500,000 is not a realistic estimate. It is also not possible to extrapolate a realistic estimate from the legal fees incurred to date. On the evidence, it cannot be concluded that Oculus or the persons standing behind it cannot afford legal representation absent an estimate of the amount they are said to be unable to afford. 55 It is also not possible to reach the conclusion that Mr de Closey is a suitable person to represent Oculus in this proceeding if it were to be represented other than by a lawyer. He is an accountant. He is not a lawyer and there was no evidence that he has any legal qualifications. He appeared before the Court on 9 March and 9 April 2021. Based on those appearances, his communications with the Court, and his preparation of affidavit material, it is apparent that he does not have an aptitude for navigating the issues that are likely to arise in this proceeding, particularly having regard to its level of complexity and the forensic issues that will arise. His evidence of past experience dealing with legal issues in his capacity as a manager of a credit union branch provides little basis for reaching a contrary conclusion. 56 As was mentioned above, there were significant issues with Mr de Closey's evidence. He also sought to raise an unrelated issue in relation to the applicants' pleading in the midst of the present application for a dispensation. Such conduct might be accepted as a consequence of him not being a legal practitioner and some allowance ought to be made for that in appropriate cases. However, here, it serves to reinforce the rationale for the requirement in r 4.01(2) and the reasons why such a dispensation should not be granted without a consideration of whether it is in the interests of justice, including having regard to the additional costs and delay that it would be likely to impose on the other parties to the litigation. This is a particular problem for Mr de Closey where there is significant work to be done to prepare the matter for trial: cf. Enviro Pak Pty Ltd v New Horticulture Pty Ltd [2013] FCA 306 at [25]. For the reasons stated above, Mr de Closey is unlikely to be able to complete that work, particularly if he is also engaged in practice as an accountant and director of Oculus. 57 Meaning no disrespect, the Court cannot have any confidence that Mr de Closey would be able to provide useful assistance to Oculus and, more importantly, to the Court in the defence of the applicants' claim for the reasons set out above. 58 While it weighs in Oculus' favour that Mr de Closey is likely to be quite familiar with the factual circumstances with which the proceedings are concerned, that also makes it likely that he will be a principal witness for the defence, particularly where the other person involved in those circumstances, a Mr Fenton, is now deceased. This raises a practical issue in terms of the dual capacities in which he would be participating in the litigation, as well as increasing the risk that his personal involvement in the alleged circumstances would mean he is unable to conduct the litigation on Oculus' behalf in an objective and dispassionate way to facilitate the efficient determination of the proceedings. 59 The application of a more liberal approach to the grant of a dispensation, on the basis that Oculus is a respondent in this proceeding, would not overcome the considerations weighing against the grant of the dispensation: Termi-Mesh at [14]. 60 In the circumstances, Oculus and Mr de Closey have not established that there is a sufficient reason why it is in the interests of justice that Mr de Closey be permitted to represent Oculus in this action. A more limited dispensation was not sought and, in any event, would not be useful in the circumstances: what remains to be done in the proceedings will entail significant work being done to prepare the matter for a hearing. 61 The application should therefore be dismissed. 62 It is appropriate that Oculus pay the applicants' costs in respect of this application. 63 The matter will be listed for a further case management hearing in approximately two weeks' time. Oculus may appear at that hearing provided it does so in compliance with the Rules, including by being represented by a lawyer. If Oculus otherwise remains unrepresented and does not appear, that is a matter for the company and its directors.

post-script 64 On 29 April 2021, the applicants and Mr de Closey were informed by the Court that judgment in respect of Oculus' application would be handed down today. Later that day, Mr de Closey purported to file an affidavit sworn by him on behalf of Oculus in this proceeding. Suffice it to say, without the leave sought by Oculus in its application, Mr de Closey is not entitled to represent it in these proceedings, including by filing documents on its behalf. For the reasons stated above, such leave was not granted and the filing should not be accepted. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.