BETWEEN : FRANKLAND RIVER OLIVE COMPANY LTD (ACN 089 521 997)

CHARTERS SECURITIES PTY LTD (RECEIVER AND MANAGER APPOINTED) (ACN 062 520 950)

Injunction - Whether party should be restrained from retaining solicitor to act for that party - Whether administration of justice would be brought into disrepute if the solicitor acted

Black v Taylor [1993] 3 NZLR 403

Kooky Garments Ltd v Charlton [1994] 1 NZLR 587

Oceanic Life Ltd v HIH Casualty & General Insurance Ltd [1999] NSWSC 292

Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501

Tottle Christensen v Westgold Resources NL [2003] WASCA 224

Yunghanns v Elfic Ltd, unreported; SCt of Vic (Gillard J); 3 July 1998

1 PULLIN J: This is an application by the plaintiff for an injunction restraining the second defendant from retaining Bennett & Co or Mr Martin Bennett, to advise the second defendant, to act as instructing solicitor or counsel for the second defendant in these proceedings, or to appear as solicitor on the record for the second defendant.

2 The background is as follows. The first defendant, Chartered Securities Pty Ltd, owns land on which a vineyard is located. The plaintiff, Frankland River Olive Company Ltd, was, on 25 February 2004, the lessee of the land. The land was originally leased to Southern Wine Corporation Ltd ("Southern Wine Corporation").

3 This company held a restricted security dealer's licence, which allowed it to carry on a securities business as a responsible entity of a managed investment scheme, known then as Southern Wine Managed Investment Scheme and now known as Preston Vale Managed Investment Scheme. The scheme was established for the purpose of establishing the vineyard known as Preston Vale.

4 In the scheme, Southern Wine Corporation entered into a licence and management agreement with investors who are called growers. Under the Corporations Act, and in particular under s 601FC and s 601FD, the duties of a responsible entity included the duty to act in the best interests of the members and, if there is a conflict between the members' interests and its own interests, to give priority to the members' interests. The officers of responsible entities have a duty to act in the best interests of the members, and if there be a conflict between members' interests and the interests of the responsible entity, the officers must give priority to the members' interests. These duties override any conflicting duty which an officer has under Pt 2D.1 of the Corporations Act.

5 Each grower was granted a licence by Southern Wine Corporation to use and occupy an area allocated to the grower for cultivating and harvesting wine grapes. Southern Wine Corporation agreed to manage, maintain, and harvest the grapevines. The growers have invested something in excess of $28,000,000 in relation to the scheme.

6 Southern Wine Corporation fell into arrears in payment of rent under the lease, in that the rental payment due on 30 June 2002 was not paid. On 30 July 2002, administrators were appointed to Southern Wine Corporation. At that time, witnesses say that the vines had not been pruned, fumigated, or maintained, and that the vineyard was in a state of neglect.

7 On 23 January 2003, the growers paid in excess of $655,000 to Southern Wine Corporation, $320,000 of this being for payment of rent. The funds were actually paid to the administrators of Southern Wine Corporation.

8 On 28 February 2003, Southern Wine Corporation, by a resolution of creditors, was wound up and a liquidator appointed. On 30 June 2003, Southern Wine Corporation again failed to pay a rental payment due to the first defendant under the lease. On 21 July 2003, Southern Wine Corporation was removed as the responsible entity for the scheme, and the plaintiff was appointed in its place.

9 Under s 601FS, the rights, obligations, and liabilities of Southern Wine Corporation became the rights, obligations, and liabilities of the plaintiff as the new responsible entity, and s 601FT provided, in effect, for the transfer of the lease of the land to the plaintiff.

10 Now, it is important to mention at this point a number of relevant facts relating to Mr Bennett and Bennett & Co. The prospectus which issued in 1998 in relation to this scheme, and which led growers to invest funds, revealed that Mr Bennett was one of four directors of Southern Wine Corporation. Indeed, he was the chairman of the board. He was in that position when, on 30 June 2002, Southern Wine Corporation defaulted in the payment of rent due on that day.

11 Mr Bennett is the principal of Bennett & Co, who were the solicitors to Southern Wine Corporation from the inception of the scheme. Bennett & Co were involved in the preparation of the prospectus, and were paid money for that work. Bennett & Co prepared the constitution for the scheme and the unit trust deed, and they acted for the lessor, that is the first defendant, and Southern Wine Corporation, as lessee, in relation to the lease of the land. Bennett & Co also prepared the licence and management agreement between each grower and Southern Wine Corporation.

12 In July 2002, Mr Bennett, in his capacity as chairman of Southern Wine Corporation, issued a letter to the growers in respect of a meeting to be held on 20 August 2002 to consider a resolution for the growers to make additional financial contributions to the scheme to prevent the scheme from being wound up. Mr Bennett was present at the meeting on 20 August 2002 held in the boardroom of the offices of Bennett & Co, and which failed to produce a resolution by the growers to provide additional funding for the scheme.

13 On 29 July 2003, the plaintiff asked the liquidator of Southern Wine Corporation for the rent funds which had been paid to the administrator in January of 2003. The liquidator refused to release the funds, and said that these had been offset against managing fees owed by the growers. The result was that the rent remained outstanding.

14 The plaintiff had a contractual obligation to deliver the harvest this year to Evans & Tate. I understand that this has happened and that the purchase funds are now held in trust as a result of an order of this Court. As I have said, the owner of the land on which the grapes are located is the first defendant. It was indebted to the Commonwealth Bank. The loan was arranged to allow the first defendant to purchase the land. The loan was secured by a mortgage to the bank and a guarantee by Woodzone Nominees Pty Ltd, the second defendant ("Woodzone").

15 The first defendant defaulted under the loan agreement with the Commonwealth Bank. As a result, the Commonwealth Bank appointed receivers to the assets and undertaking of the first defendant. This happened in 2002. The receivers then made demand on the plaintiff to pay the rent which was due to the first defendant. On 4 February 2004, the receivers again demanded the rent arrears, which then exceeded $600,000, made up of the rent not paid on 30 June 2002 and the rent which was not paid on 30 June 2003. The bank's receivers demanded payment by 10 March 2003. Early in February 2004, the plaintiff began negotiating with the bank's receivers to pay out the debt owed by the first defendant.

16 It is now necessary to mention that a Mr Stroud acquired the shares in Woodzone. This gave him control of Woodzone, and Woodzone then competed with the plaintiff for the favours of the Commonwealth Bank concerning the payment of the bank debt. Woodzone succeeded in its dealings with the bank, and it paid out the debt which was then owing to the bank by the first defendant.

17 As a result, by subrogation, Woodzone took over the Commonwealth Bank's rights under its security documents. Woodzone then had the power to appoint receivers, that is, receivers to the assets and undertaking of the first defendant. Woodzone then exercised that power and appointed its own receiver, a Mr Lyford, to the assets and undertaking of the first defendant.

18 Mr Lyford then made demand on the plaintiff for payment of the outstanding rent. This demand was dated 23 February 2004, and it demanded payment by 25 February 2004, thereby accelerating the date for payment which had been allowed by the bank's receivers when they had made demand. It is to be remembered that their demand was that payment be made by 10 March 2004.

19 Bennett & Co now reappeared on the scene, acting for Woodzone. Bennett & Co prepared the notice of appointment of Mr Lyford as receiver of the first defendant, and prepared the notice of demand which was signed by Mr Lyford and served on the plaintiff. The demand included the demand for rent not paid, including the rent not paid on 30 June 2002, which was, I repeat, the rent which was due and payable by Southern Wine Corporation at a time when Mr Bennett was the director and chairman of Southern Wine Corporation.

20 On 24 February 2004, Corrs Chambers Westgarth, solicitors for the plaintiff, challenged the notice of demand and asked for time to pay to be extended to 10 March 2004.

21 On 25 February 2004, Bennett & Co responded, declining any extension of time as requested by Corrs Chambers Westgarth on behalf of the plaintiff. It seems that on 25 February 2004, Solomon Bros were then appointed to act as solicitors for the receiver, Mr Lyford. Later, on 25 February 2004, Corrs Chambers Westgarth said that the plaintiff intended to make payment on that day of the moneys which had been demanded, and said that payment would be made by electronic funds transfer. Solomon Bros responded to this by saying that they did not agree to payment being made by electronic funds transfer. On 25 February 2004, the plaintiff then says that it arranged for funds to be transferred into Solomon Bros' account to cover the outstanding rent. On the same day, Bennett & Co then reappeared and wrote a letter to Corrs Chambers Westgarth, saying that the funds had not been received and that the receiver, Mr Lyford, had re-entered the land and thereby terminated the lease.

22 On 26 February 2004, Corrs Chambers Westgarth arranged for the issue of the writ in these proceedings, whereby the plaintiff seeks various relief, including a declaration that the notice of demand by Mr Lyford was invalid, and relief against forfeiture of the lease if the lease had been validly terminated.

23 The plaintiff sought an urgent injunction preventing the first defendant from interfering with the plaintiff's possession of the land. The injunction application was heard by McKechnie J on 27 February 2004. His Honour granted an injunction, requiring the first defendant to give up possession of the land, and thereafter restrained it from re-entering the land, pending trial. Mr Bennett appeared at the hearing before McKechnie J for Woodzone, and made submissions opposing the grant of the injunction, even though Woodzone was not a party to the proceedings.

24 Then, on 9 March 2004, Le Miere J made an order that the proceeds of sale of the grapes from the land be paid into an interest-bearing account, pending final orders. The case was then entered into the expedited list, and subsequently, because the validity of the appointment by Woodzone of Mr Lyford as receiver was under challenge, Woodzone was joined as second defendant. Bennett & Co entered an appearance for Woodzone, and Mr Bennett signed the defence on behalf of Woodzone as counsel instructed by Bennett & Co.

25 I now turn to the law which governs this application. It is undoubtedly a serious step to deprive a party of counsel or solicitors of that party's choice: see, for example, Emanuele v Emanuel Investments (1996) 21 ACSR 83 at 107. There is no dispute that the court has jurisdiction to exercise authority over its officers: see Newman v Phillips Fox (1999) 21 WAR 309. Nor is it in dispute that where orders are sought against solicitors who are not parties to proceedings, the court has jurisdiction to direct them to cease acting where they are solicitors on the record: see, for example, Clay v Karlson (1997) 17 WAR 493 and Murcia & Associates v Grey [2001] WASCA 240.

26 While it is a serious step to deprive a party of counsel and solicitor of choice, the Court will do so, if necessary. The justification for intervention by the Court in an application to restrain solicitors from acting for a litigating party is founded usually on one or more of three bases. These are the protection of confidential information, the restraint of a conflict of interest, and the Court's control over the conduct of solicitors as its officers: see Newman v Phillips Fox (supra) at 314. In that case, Steytler J referred to what was said by Sir Lancelot Shadwell, Vice-Chancellor, in Davies v Clough (1837) 8 Sim 262 at 267, where the Vice-Chancellor said, in referring to other cases, that they appeared to afford a general principle, namely, that all Courts may exercise an authority over their own officers as to the propriety of their behaviour. The Vice-Chancellor said:

"Applications have been repeatedly made to restrain solicitors who had acted on one side, from acting on the other, and those applications have failed or succeeded upon their own particular grounds, but never because the court had no jurisdiction."

27 Steytler J went on to say in the Newman case:

"In Australia the courts have, on a number of occasions, shown a willingness to intervene on this third basis. So, for example, in Yunghanns ... Gillard J affirmed that the court has an inherent power to control and deal with members of the legal profession and to ensure that the administration of justice is not brought into disrepute by the conduct of those members."

28 I should also quote from the case of Fordham v Legal Practitioners' Complaints Committee (1997) 18 WAR 467 at 489, where the Chief Justice referred to the well-established rule of public policy that where an attorney has acted for a client, he cannot thereafter assume a position hostile to the client concerning the same matter, or use against the client knowledge or information obtained from him while the relation existed. The Chief Justice then went on to say:

"Thus, the rule not only prevents the use of knowledge or information gained from the client during the course of a retainer, but also prevents the assumption of a position hostile to the client concerning the same matter. In my opinion, the extension to any related matter is both logical and consistent with the public policy which gives rise to the duty of professional loyalty. In the context of loyalty it is the establishment of the hostile relationship against the former client in relation to the same or a related matter which is the breach of professional duty. ..."

29 I should also refer to what was said Holdsworth v Anderson & Associates, unreported; SCt of Vic (Phillips J); 26 August 1994, where, in referring to Davies v Clough (supra), Phillips J said:

"But what matters, I think, in Davies v Clough is that the learned Vice-Chancellor saw as sufficient ground for the court's intervening the fact that the solicitor in question had been retained to act in the first place to effect a transaction which now he was acting on behalf of another to seek to destroy."

30 The question which has to be asked is whether a fair-minded, reasonably informed, member of the public would conclude that the proper administration of justice required that Mr Bennett and Bennett & Co should be restrained from continuing to act for the second defendant: see Grimwade v Meagher [1995] VicRp 28; [1995] 1 VR 446 at 450-452.

31 In my opinion, a fair-minded, reasonably informed, member of the public would find it subversive to the administration of justice if Mr Bennett could act for Woodzone, which is taking action hostile to the continuance of the scheme, and on behalf of his new client, Woodzone, seek to exploit a default by Southern Wine Corporation, the predecessor of the plaintiff, which default occurred when Mr Bennett was the chairman and a director of the board of Southern Wine Corporation.

32 At the time of the default, Southern Wine Corporation and Mr Bennett had a duty to advance the interests of the growers. Mr Bennett now seeks to act for a client seeking to destroy those interests, or acting in a way which will have the effect of destroying those interests.

33 Further, Mr Bennett has signed, as counsel, a defence which challenges events pleaded by the plaintiff in the statement of claim in relation to which events Mr Bennett was a participant. Mr Bennett could not continue to act as counsel at trial, at least for that reason, and, in my opinion, it would be also inappropriate to act before trial in those circumstances.

34 The second defendant seeks to argue that the events which have been pleaded will not be the subject of evidence, because those events which have been pleaded in relation to the claim by the plaintiff for relief against forfeiture are said by the second defendant to be irrelevant. In my opinion, this is not the time to rule on whether the events are relevant or irrelevant. What is relevant is that the plaintiff has pleaded the events which are now in issue.

35 The second defendant also argues that time has passed since the plaintiff took over as the responsible entity, and that this passage of time means that there is now no foundation for the complaints. I disagree with that submission. The relevant failure to pay rent occurred in 2002, and events have been unfolding at a fairly rapid pace since then. In my view, the period of time referred to is not a significant period of time which would neutralise the plaintiff's complaints.

36 I should also refer to the position of Bennett & Co, the firm. Bennett & Co were the solicitors for Southern Wine Corporation when the default took place, and it now appears on the record for a party hostile to the growers' interests and the plaintiff's interests as the responsible entity.

37 The perception of a fair-minded, reasonably informed, member of the public would be, in my opinion, that Bennett & Co have not only changed sides in this matter, but are assisting the new client, Woodzone, to defeat the plaintiff's and the growers' interests in reliance on a default by Southern Wine Corporation which occurred when a member of the firm of Bennett & Co was chairman and director of Southern Wine Corporation, the effect of which default has been visited upon the plaintiff and then taken advantage of by Bennett & Co's new client. For all of those reasons, I would grant the injunction which has been sought by the plaintiff.