Franks v Equitiloan Securities Pty Limited

CATCHWORDS : PROCEDURE - Adjournment - late application for leave to amend - where both parties responsible - when application to amend requires investigation of facts

LEGISLATION CITED : (CTH) Corporations Act 2001 s 444E

CASES CITED : Watts v Rodgers [2005] NSWSC 100 Meagher, Gummow and Lehane's Equity Doctrines & Remedies, 4th ed

Phillip Maurice Franks (plaintiff) Equitiloan Securities Pty Limited (first defendant) Equitiloan Limited (second defendant) PARTIES : Wayne McIvor (third defendant) Mark McIvor (fourth defendant) Equitiloan Limited (first cross-claimant) Equitiloan Securities Pty Limited (second cross-claimant) Windy Dropdown Pty Limited (cross-defendant)

COUNSEL : Mr M S Willmott SC w Mr M W Sneddon (plaintiff/cross-defendants) Mr M G McHugh (defendants/cross-claimants)

SOLICITORS : DTA Lawyers (plaintiff/cross-defendant) Tucker & Cowen (defendants/cross-claimants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4333/00 Phillip Maurice Franks v Equitiloan Securities Pty Limited & 3 Ors JUDGMENT (ex tempore) 1 HIS HONOUR: These proceedings arise from commercial transactions in the late 1990s which broke down in late 2000 whereupon the original Plaintiff, Windy Dropdown Pty Ltd, commenced these proceedings to compel the First Defendant, Equitiloan Securities Pty Limited, to discharge a mortgage it held over Windy Dropdown's development site at North Curl Curl (being folio identifier 8/224940), the development of which was being financed by Equitiloan Securities. The mortgage was ultimately discharged not long after proceedings were instituted, but to procure that discharge Windy Dropdown was required to pay, under protest, an amount that included a component for what is often called penalty interest. Windy Dropdown pursued these proceedings to recover, by way of restitution: from Equitiloan Securities that claimed overpayment; and also from the Second Defendant Equitiloan Limited, an amount that it had paid to Equitiloan under a profit share agreement between Windy Dropdown, Equitiloan Securities and Equitiloan, being Equitiloan's profit share under that agreement in respect of lots 14 and 15 in the subdivision, which Windy Dropdown claims was paid under the mistaken apprehension that there was an enforceable obligation to make the payment when, so it is said, any such obligation was unsupported by consideration moving from Equitiloan. In due course, Equitiloan brought a cross-claim against Windy Dropdown for a further $722,000, said to be its profit share under the profit share agreement in respect of lots other than lots 14 and 15.

2 On 28 June 2004, Windy Dropdown went into voluntary administration and Martin John Green and Peter Krezic were appointed administrators. A meeting of creditors held on 13 August 2004 resolved that Windy Dropdown execute a Deed of Company Arrangement (DOCA). The DOCA was executed on 26 August 2004.

3 On 24 September 2004, Equitiloan lodged a proof of debt with the deed administrators, claiming $24,000 in respect of costs awarded to it in interlocutory aspects of these proceedings, and a further $722,000, being the profit share which is also the subject of its cross-claim in these proceedings. 4 On 1 September 2005, the administrators executed a deed assigning to the present Plaintiff Phillip Maurice Franks, "Any claim or cause of action by WDD against Equitiloan Securities in respect of or arising out of the dealings between WDD and Equitiloan Securities in relation to the development by WDD of property being lot 8 in Deposited Plan 224946 at Molong Street, North Curl Curl, New South Wales, including but not limited to claims which WDD has against Equitiloan Securities."

5 The administrators, on 7 April 2006, rejected Equitiloan's proof of debt in respect of the costs in part (allowing it to the extent of about $16,000 only), and rejected it in respect of the profit share in toto. By originating process filed on 24 April 2006 in proceedings 2473/06, Equitiloan appealed from the decision of the administrators. 6 A further deed dated 10 July 2006 between Windy Dropdown and Mr Franks provided that, for avoidance of doubt, the subject matter of the assignment "includes all matters relating or arising out of" these proceedings, "including the actions by WDD against all Defendants in those proceedings being Equitiloan Securities Pty Limited, Equitiloan Limited, Wayne McIvor and Mark McIvor." 7 Following a contested application before the Registrar on 11 July 2006, Mr Franks, to whom Windy Dropdown's causes of actions had thus been assigned, was substituted as Plaintiff for Windy Dropdown. 8 Equitiloan's appeal against rejection of its proof of debt was fixed for hearing before White J on 7 November 2006. The present proceedings had not yet been fixed for hearing, but a callover was imminent. The parties had some discussions about the manner in which both cases should proceed. At that stage Equitiloan did not have leave to commence or proceed with its cross-claim against Windy Dropdown, which leave was required by reason of (CTH) Corporations Act 2001, s 444E. One of the proposals under discussion involved the possibility that Equitiloan would defer prosecuting the appeal against the rejection of its proof of debt, and instead obtain leave to prosecute the cross-claim against Windy Dropdown in these proceedings. 9 Discussions proceeded about these matters prior to and on 7 November 2006 when the parties appeared before White J. No orders were then made, but the hearing of the appeal did not proceed and it was envisaged that orders regulating the hearing of both matters would be finalised and made in chambers in due course.

10 The matter came before me for pre-trial directions on 6 February 2007 when, by consent, I made the following directions: 1. Subject to paragraph 2 below, pursuant to section 444E(3) of the Corporations Act 2001, leave be granted to the Cross-Claimant, Equititrust Limited (formerly known as Equitiloan Limited) to begin and proceed with its Cross-Claim against Windy Dropdown Pty Limited (subject to Deed of Company Arrangement).

2. The leave granted in paragraph 1, above, is conditional upon Equititrust Limited not taking any step to enforce any judgment obtained by it in relation to its Cross-Claim against Windy Dropdown Pty Limited (subject to Deed of Company Arrangement) without further leave of the Court.

3. Pursuant to section 237(2) of the Corporations Act 2001, leave be granted to Phillip Maurice Franks to defend the Cross-Claim by Equitiloan Limited against Windy Dropdown Pty Limited (subject to Deed of Company Arrangement), on behalf of Windy Dropdown Pty Limited (subject to Deed of Company Arrangement).

11 I made, by consent, further directions by way of pre-trial directions, which provided inter alia for the Plaintiff to file and serve a further amended Statement of Claim by 12 February, the Defendant to file a Defence thereto by 16 February together with any reply to the defence to the Cross-Claim, and permitting both parties to serve additional evidence. Those short minutes, significantly, did not contemplate any amendment to the Cross-Claim; and given my practice at pre-trial directions of clarifying what, if any, amendments to the pleadings are proposed, it can be inferred that no amendment to the Cross-Claim was then envisaged. 12 However, ten days later, on 16 February 2007, Equitiloan's solicitors wrote to Mr Franks' solicitors, as follows: Out of an abundance of caution our clients sought and obtained Consent Orders in terms of the Short Minutes of Order signed on behalf of the administrators, your client and ours. Notwithstanding this we put your client on notice that at the trial of these proceedings our clients will be proceeding on the cross-claim directly against Mr Franks and will be seeking judgment against him. On established principle a cross-claim is available against the assignee. 13 On 22 February 2007, Equitiloan's solicitors forwarded by email to Mr Franks' solicitors' drafts of a reply to the defence to the Cross-Claim, leave to file which had been granted at the pre-trial directions hearing, together with a Proposed Amended Cross-Claim and a Proposed Second Amended Defence. The significant aspect of the Proposed Amended Cross-Claim is that it would substitute Mr Franks personally for Windy Dropdown as the Cross-Defendant, in respect of the claim for further profit share of some $722,000.

14 There appears to have been no meaningful response to the correspondence of 16 February and 22 February from the solicitors for Equitiloan to the solicitors for Mr Franks. I do not understand it to be asserted that at any stage it was clearly said that the proposed amendments would be opposed, nor do I understand it to be asserted that it was ever indicated that they would not be opposed.

15 It was in that state that the trial commenced before me yesterday, when counsel for both parties opened the case, tendered the documentary material and read the affidavit evidence. No oral evidence has yet been taken. That there would be an application for leave to amend by filing the Proposed Second Amended Defence and the Proposed Amended Cross-Claim was mentioned on a number of occasions in the course of yesterday's proceedings, the ultimate position being that it would be dealt with this morning.

16 No objection is taken to the Defendant having leave to amend its Defence by filing the Proposed Second Amended Defence and I will, in due course, make an order that it have that leave. However, objection is taken to its having leave to amend the Cross-Claim by filing the Proposed Amended Cross-Claim. 17 I accept, for present purposes, that it is seriously arguable as a matter of principle that by taking, as he did, an assignment of the benefit of the causes of action that Windy Dropdown had against Equitiloan Securities and Equitiloan, Mr Franks also takes the burden of the equities which affect those claims, including any set-off, counter-claim or Cross-Claim. It is unnecessary for present purposes that I descend to detail, but the arguability of that proposition is supported by Meagher, Gummow and Lehane's Equity Doctrines & Remedies, 4th ed, [6-490] - [6-510], and by the judgment of Master Harrison, as her Honour then was, in Watts v Rodgers [2005] NSWSC 100, [13]-[27]. Whether the liability of an assignee on a Cross-Claim can exceed the quantum of the claim is a matter which does not require resolution at this stage. Accordingly, I would conclude that the proposed Cross-Claim is sufficiently arguable to justify leave to amend, subject to the matter to which I shall come and to other discretionary considerations.

18 However, it is submitted for Mr Franks that he was prejudiced in meeting the application for leave to amend at this late stage, because he would wish to adduce evidence in opposition to it, in order to show that the negotiations which culminated in the outcome on 7 November 2006 before White J and the consent orders made by me on 6 February 2007 gave rise to an agreement or an estoppel, the effect of which is to preclude Equitiloan from asserting any personal liability against Mr Franks, apart from such liability as he might incur in respect of costs.

19 Mr Willmott SC, for Mr Franks, has said that he is instructed that at some point in the course of events there may have been a representation that no personal liability would be pressed against Mr Franks, and/or that there may have been an underlying assumption, on 7 November and/or 6 February, that Equitiloan would abandon its appeal against rejection of the proof of debt and be given leave to prosecute its Cross-Claim against Windy Dropdown, but, implicitly if not expressly, on the basis that it would not press a claim that Mr Franks was personally liable. Accordingly, there is an issue as to the compact that the parties reached which resulted in Equitiloan being given leave to prosecute its Cross-Claim in these proceedings, which might affect whether Equitiloan is entitled to prosecute a claim against Mr Franks personally at all.

20 Given the terms of Order 3 made on 6 February this year, and the time frame - with the first suggestion of personal liability being pressed against Mr Franks apparently only being raised ten days later - and the absence on 6 February of any suggestion that the Cross-Claim as distinct from other pleadings would be amended before the hearing, I cannot say that the defence which Mr Franks wishes to advance on that behalf is unarguable. If it were made good, it would be a complete answer to the application for leave to amend. In those circumstances, on that application, junior counsel for the parties in the trial before me, who were apparently involved in the negotiations, and perhaps their instructing solicitors, would likely be witnesses. It is, therefore, undesirable that the question of leave to amend be determined in these proceedings as presently constituted.

21 The options, as to which I will hear the parties further, seem to me to be, first, that the application for leave to amend could be dealt with by another judge, although that would have some disadvantages, having regard to my present familiarity with the proceedings or, alternatively, I could deal with it in a separate hearing in which, for the purposes of the application for leave to amend, the parties could if appropriate have alternative representation, retaining their present representation for the substantive hearing.

22 I have considered whether I should simply refuse the application for leave to amend, but Mr Willmott did not urge that course, ultimately I think rightly so. Had the application been foreshadowed only in the last few days, such a course might well have been appropriate. But there is no doubt that it was notified on 16 February, six weeks ago, and although for reasons that may be understandable for busy practitioners, had not been the subject of a clear response. The Cross-Defendants must therefore bear some of the responsibility for the issue having crystallised only at this late stage. On the other hand, it is the Cross-Claimant who needed leave to amend, and in the absence of a decisive indication that there would be consent to the application, it could and should have agitated the matter much earlier for the purposes of clarifying the issue.

23 Senior counsel for the Cross-Defendant only learnt of the amendment issue recently, and I accept that it is not reasonable to require that it be dealt with now and that an opportunity to deal with it properly and fairly requires that time be afforded to investigate the factual matrix that surrounds the events of 7 November last year and 6 February this year. Mr McHugh, for Equitiloan - again, I think, fairly and properly - did not press that the Cross-Defendant should be expected to be in a position to deal with these issues now. 24 Accordingly, I will accede to the application to adjourn the hearing of the application for leave to amend. As allowing the amendment may well affect cross-examination and otherwise impact on the course of the trial, it follows, I think, that the trial also must be adjourned. The precise course to be followed will depend on the attitude of the parties to the options to which I have referred.

25 I grant leave to the Defendant to amend its Defence by filing a document in the form which I have marked Second Further Amended Defence, initialled by me, dated this day and placed with the papers. At 2.21pm 26 HIS HONOUR: The Defendants apply for an order that the Plaintiff pay their costs occasioned by the adjournment of the trial.

27 As is apparent from the judgment I have earlier delivered, that adjournment arises as a result of the Plaintiff's inability to meet immediately the Defendants' application for leave to amend their Cross-Claim by substituting Mr Franks as Cross-Defendant for Windy Dropdown. This, of course, is no mere amendment to the form of a pleading, nor even one that raises a new cause of action against an existing party but claiming substantially the same relief. The effect of this amendment, if allowed, would be to expose Mr Franks, for the first time, to a very large personal liability - in excess of $700,000 - if the Cross-Claim were to succeed. Understood properly, it is an amendment of enormous practical significance, and one can readily imagine that had it been known at an earlier stage, Mr Franks' attitude to the proceedings and preparation for them could have been significantly influenced or affected. 28 At the pre-trial directions hearing on 6 February this year, there was no intimation of any intention to amend the cross-claim at all, let alone in this very significant way. True it is that it now appears from correspondence tendered on this (costs) application that the Cross-Claimant's solicitors did everything reasonably conceivable to bring the issue of amendment to a head as early after February as possible, by pressing for a response to the request for consent to the amendment, and I do not overlook the significance of the absence of any apparent response to that correspondence. That is a factor that inclines me against making an order that the Cross-Claimants pay the Cross-Defendants' costs occasioned by the adjournment, which, in the absence of earlier notice of the proposed amendment, might well have been appropriate. But given the history of the proceeding up to 6 February, I do not think that that correspondence at this stage demands a costs order in favour of the cross-claimants.

29 The history I have recited shows that neither party can claim to have done everything appropriate to avoid the situation which has occasioned the vacation, and both prima facie bear some degree of responsibility for it: the Defendant by a late amendment, and the Plaintiff by failing earlier to respond to it. Ultimately, the outcome of the application for leave to amend remains unknown. The fate of that application may well be relevant to who should bear the costs of the adjournment. Ultimately, I think the better course is that advanced by Mr Willmott, that the costs thrown away by the adjournment should abide the determination of the application for leave to amend. 30 Costs of and incidental to and thrown way by the adjournment of the proceedings are reserved until the determination of the application for leave to amend. Counsel should ensure that that matter is raised on 6 July 2007.

31 I make orders in accordance with the document entitled Short Minutes of Order initialled by me, dated this day and placed with the papers, as amended.

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