Gahahan Pty Limited (In Liquidation) & Others v Advance Bank of Australia Limited & Others [2001] ACTSC 118

5. The second and third plaintiffs pay the costs of the second and third defendants in relation to both motions.

1. The second and third defendants (Dibeek and Leda) apply on notice of motion dated 22 August 2001 for an order that, in respect of the first plaintiff (Gahahan) the proceedings be dismissed on the ground that they are vexatious and/or constitute an abuse of process. Dibeek and Leda also apply for an order that, if and to the extent that leave is required to bring the application, such leave be granted.

2. The second and third plaintiffs (Mr and Mrs Notaras) apply on notice of motion dated 21 September 2001 for an order that they be allowed at their own expense and responsibility as to costs to use the name Gahahan Pty Limited and to conduct the proceedings on behalf of Gahahan.

3. By consent, both applications were heard together.

LEAVE REQUIRED TO PROCEED AGAINST OR TO CONTINUE PROCEEDINGS AGAINST A COMPANY IN LIQUIDATION

4. Gahahan was put into liquidation on 2 February 1998. Accordingly, no further steps in the proceedings may be taken by it or against it without leave of the Court: Corporations Law ss 471A and 471B. The liquidator, Mr Barry Anthony Taylor, has indicated that he does not support the continuation of the proceedings by Gahahan but will not oppose any order that the Court is disposed to make, so long as it does not expose him or Gahahan to risk as to costs.

5. Counsel appearing for the first defendant (the Advance Bank) has also indicated that her client does not wish to be heard on the present applications, save as to costs if that question arises.

6. Whilst the two applications cover much that is common in the way of subject matter, the application by Dibeek and Leda was commenced first and it is convenient to deal first with the issues that it raises. In that respect, leave will be granted retrospectively under ss 471A and 471B of the Corporations Law to Dibeek and Leda to proceed with their application, and, in so far as it may be necessary, likewise to Mr and Mrs Notaras to bring under s 471A their application (although they did not seek it).

7. To the extent that the factual background is not in dispute it is as follows.

8. Gahahan is owned and was controlled by Mr and Mrs Notaras. Gahahan obtained a lease from the Commonwealth of a commercial area at Tuggeranong. It mortgaged its interest to the Advance Bank as security for a loan. Mr and Mrs Notaras guaranteed repayments on the loan. Gahahan defaulted in its obligations to make repayments on the loan. The Advance Bank became mortgagee in possession and as such sold its interest in the lease and assigned its rights under the mortgage and loan agreement and the guarantee agreement to Dibeek. Dibeek declared that it held the interests assigned in trust for Leda.

9. In July 1997 all three plaintiffs commenced the present proceedings (of which the present applications are part) seeking damages and other remedies against all three defendants, as against Advance Bank for alleged breach of duty owed to Gahahan to sell at a proper price and for breach of confidentiality, as against Leda for inducing the sale and breach of confidentiality by the Advance Bank. It is less clear on what legal or equitable basis relief is sought against Dibeek.

10. On 21 October 1997, Whitlam J refused to set aside a notice of motion served on behalf of Dibeek upon Gahahan pursuant to s 459E of the Corporations Law. The ground on which Gahahan sought to have the notice of demand set aside was a claim that there was a genuine dispute as to the existence or the amount of the debt alleged to be owing by Gahahan to Advance Bank. The dispute was alleged to arise out of a claim or counter-claim by Gahahan against the Advance Bank in respect of the matters raised and the relief claimed in the present proceedings.

11. On 2 February 1998, as already indicated, the winding-up order was made and thereafter the proceedings could not be maintained by Gahahan and no proceedings could be commenced against Gahahan, without the leave of the Court.

12. The liquidator has declined to pursue Gahahan's claim against the three defendants on the ground that no funds are available and that he is not in possession of any legal advice that the claim is worth pursuing.

13. At a directions hearing before the Registrar on 15 October 2001, Mr and Mrs Notaras, through their solicitor, gave an undertaking to provide a draft amended statement of claim to all parties by 5.00 pm on Wednesday 17 October 2001. I was told that they have failed to honour that undertaking. Dibeek and Leda rely on that failure of Mr and Mrs Notaras as a discretionary ground for refusing leave to them to conduct the proceedings in the name of Gahahan. Dibeek and Leda also asked for that matter to be taken into account in support of their claim that the proceedings as brought by Gahahan be dismissed as an abuse of process.

14. On 31 October 2001, Mr and Mrs Notaras through their solicitors offered to indemnify the liquidator for the costs of continuing the proceedings. Professing to be without resources themselves, they claimed to be able to obtain evidence from a family member who had indicated a willingness to pay the liquidator's reasonable costs.

15. Dibeek and Leda relied upon the decision of Whitlam J to raise what is called variously an issue estoppel, the Anshun principle (see Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1980-1981) 147 CLR 589) or an abuse of process. My attention was drawn to A-PAK Plastics Pty Ltd v Merhone Pty Ltd (1995) 17 ACSR 176, and other authorities, to support the submission that the decision of Whitlam J was final rather than interlocutory, alternatively that even if interlocutory, the decision nevertheless decided the issue or an issue that is determinative of the present applications. Alternatively again, it was submitted that even if no issue estoppel arises, the situation that has arisen is such that the present proceedings are an abuse of process as that concept has been developed in such decisions as Walton v Gardiner (1992-1993) 177 CLR 378.

16. I do not propose to discuss the various issues raised in the authorities. However it is necessary to give some consideration to exactly what it was that Whitlam J decided. There were preliminary issues before his Honour about the validity under the Corporations Law of the application then before the Court. Those considerations may be put aside. As already said, the application before his Honour asserted that there was a genuine dispute as to the existence and amount of the debt owing by Gahahan to the Advance Bank and sought to have the demand set aside pursuant to s 459H(3) or alternatively pursuant to s 459J(1)(b) of the Corporation Law. It was alleged that Gahahan was entitled to bring a claim or counter-claim for accounts to be taken against the Advance Bank and that Dibeek, as assignee of the Advance Bank's interests, was liable to the same claim or counter-claim for the purpose of reducing the amount of the outstanding loan owed by Gahahan to the Advance Bank. As I understand it, his Honour found, with some hesitation, that, assuming that Gahahan had such counter-claim, the evidence "just creeps over" the threshold test of showing that the amount left owing by Gahahan did not exceed the statutory minimum amount. A large quantity of documentary material which Whitlam J felt bound to describe in "tedious detail" left his Honour unconvinced that there was any evidence of breach of confidentiality. His Honour further held that there was "not the slightest evidence that the bank has sold at an undervalue" and that there was "no possible basis upon which the sale could be characterised as improper or irregular by reference to the particulars furnished by the statement of claim". His Honour refused to set aside the demand and consequently, as I was informed, Dibeek caused Gahahan to be wound up for failure to comply with the demand pursuant to s 459Q of the Corporations Law.

17. It is clear that there is no res judicata and no issue estoppel against Mr and Mrs Notaras raised by the decision of Whitlam J. Whether or not the so-called Anshun principle is called into play is less clear, and, again, I hope to refrain from confusing the situation by pronouncing on that matter. At the very least, as I see it, the decision of Whitlam J is a matter of substance to be taken into consideration in two respects: first, as to deciding whether the proceedings, if allowed by Gahahan to progress, would amount to an abuse of process in the broadest sense, and, if so, secondly, in exercising the discretion whether to strike out or stay the claim by Gahahan (on which issue Dibeek and Leda bear the onus) or alternatively to order that the proceedings continue by Mr and Mrs Notaras in the name of or on behalf of Gahahan (on which issue they bear the onus).

18. Mr Aitken, for Mr and Mrs Notaras, conceded that it would or might be necessary for the statement of claim to be amended so as to add or incorporate reliance upon various provisions of the Corporations Law which spell out the duties of directors and other officers of companies and of other persons in relation to companies. As I understand it, some of those provisions were not contained in the Corporations Law until its most recent reformulation. If that amendment were to take place then it may well be arguable that the decision of Whitlam J has less relevance to the issues that will need to be decided in the present proceedings. On the other hand, on the matter of discretion, it is of significance, in my view, that Mr and Mrs Notaras, the persons in control of Gahahan at relevant times, have not previously made that amendment and indeed as I have already pointed out, are in breach of their undertaking to the Court to do so.

19. In the end I have come to the conclusion that the proceedings, if continued by Gahahan, would be an abuse of process, since the decision of Whitlam J has already considered and decided in an authoritative but not binding way that Gahahan's claim against Dibeek has no substance. If the proceedings so continued were not strictly an abuse of process, they would be close to it, and Mr and Mrs Notaras have not discharged the onus of showing that the proceedings should be allowed to be continued by them in the name of Gahahan.

20. As sureties, Mr and Mrs Notaras are subrogated to the rights of the principal debtor and may raise in any action against them any matter by way of defence, set-off or counter-claim that is available to the principal debtor. Counsel was unable to show that, in the event of the Advance Bank seeking to enforce the guarantees against them in respect of the amounts still owing under the mortgage and pursuant to the loan agreement and guarantee agreement, Mr and Mrs Notaras would not be able to rely on any claim to damages that Gahahan had or may have had against the Advance Bank or against Dibeek or Leda.

21. The claim made by Mr and Mrs Notaras, as well as by Gahahan, is that the sale by the Advance Bank to Dibeek was in bad faith and contrary to s 420A of the Corporations Law and, that, as a result of the "reduced" sale price, all three plaintiffs suffered loss. In the case of Mr and Mrs Notaras, the loss is alleged to have occurred by their exposure to a greater liability than if Gahahan's rights under the lease had not been sold at an under value. There is nothing in the claim by Mr and Mrs Notaras as pleaded that makes their claim dependent upon liability being established in favour of Gahahan in the proceedings at the suit of Gahahan. Further, I do not see any way in which the proceedings brought by Mr and Mrs Notaras themselves should be delayed by reason of the dismissal of Gahahan from the proceedings.

CONTINUANCE OF PROCEEDINGS BY MR AND MRS NOTARAS IN THE NAME OF GAHAHAN

22. The application by Mr and Mrs Notaras is made as I understand it under the general law as well as under s 471A in the Corporations Law.

23. Reliance was placed on some authorities which have referred to the Corporations Law in the context of the sort of application now brought by Mr and Mrs Notaras. In Florgale Uniforms Pty Ltd (Rec and Mgr Apptd)(In liquidation) v Orders (No 1) (unreported, Supreme Court of Victoria, 20 October 2000, BC200006746) Warren J dealt with an application brought pursuant to s 477(6) alternatively s 471A(1) of the Corporations Law retrospectively for leave to be granted to some of the plaintiffs to continue the proceedings on behalf of three other plaintiffs that were companies in liquidation. As in the present case, the plaintiffs who sought the orders were providers of securities and guarantees in favour of the plaintiff companies in liquidation. Warren J said, and it is common ground that his Honour was correct, that the discretion under s 477(6) (or its present equivalent) is to be exercised according to the following principles (citations not provided):

"(a) The applicant must establish that the pursuit of the action in the name of the company is not vexatious or oppressive ie that it has some arguable foundation (Aliprandi v Griffith Vintners Pty Ltd; Cadima Express Pty Ltd v DCT; Russell v Westpac BC);

(b) It is appropriate for the court to look beyond the causes of action asserted in the pleadings to determine whether the company in liquidation has at least an arguable case (eg Cadima Express Pty Ltd v DCT);

(c) The test which is applied is akin to that used in considering whether interlocutory relief should be granted ie `a serious question to be tried' (Eros Cinema Pty Ltd v Nassar; Vagrand Pty Ltd v Fielding; Magarditch v ANZ);

(d) It follows that it is not necessary for an applicant to produce to the court evidence sufficient to establish affirmatively that the proposed proceedings will necessarily be successful and the court is entitled to infer, if appropriate, from the evidence which is before it that additional relevant evidence is likely to be or may be available from other sources for the hearing (Eros Cinema Pty Ltd v Nassar);

(e) The attitude of the liquidator to the proceeding is a relevant matter (Cadima Express v DCT)."

24. Whether there is any real difference between the requirements of (a), (b) and (c) above, the material before Whitlam J clearly did not satisfy his Honour that there was any serious question to be tried or an arguable case in relation to the assertion that Gahahan was entitled to damages from any of the three defendants as was alleged and as is still alleged. There is nothing in the material before me, additional to what was before his Honour, from which it may be inferred that additional relevant evidence may be available from other sources for the hearing which would strengthen the case which Gahahan might seek to make, through Mr and Mrs Notaras, against the three defendants. In any event, whatever the rights of Mr and Mrs Notaras against the defendants, they will remain unaffected.

25. In Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250, 252, McLelland J referred to the inherent power of a Supreme Court to appoint a person to pursue an arguable case on behalf of another. His Honour's judgment was approved by a Full Court of the Federal Court of Australia in Magarditch v ANZ Banking Group Limited (1999) 32 ACSR 367. However the availability of an arguable case, whilst essential, is not sufficient. Whereas in the present case the application is made to carry on litigation on behalf of a company in liquidation, the liquidator's attitude is significant. The protection of the company's assets for the benefit of the creditors and the protection of the liquidator is also important. An undertaking to indemnify the liquidator as to costs by an applicant who is without funds can hardly be of great weight. Another matter, as I see it, is that there must be no conflict of interests, that is, between the interests of the company in liquidation and its creditors and the interests of the persons who apply to conduct the case on behalf of the company in liquidation. The conflict between the interests of Mr and Mrs Notaras and the interests of the creditors, who clearly include Advance Bank, is obvious.

26. In my view, the allegations in the statement of claim, of themselves, do not provide a sufficient foundation to grant the application to continue the proceedings in the name of Gahahan. There was in the view of Whitlam J insufficient evidence before his Honour to justify setting aside the notice of demand which essentially raised as between Gahahan and Dibeek the matters alleged in the statement of claim in the present proceedings. There is no evidence before me to support the claim that is proposed to be pressed on behalf of the company against the three defendants. The liquidator does not support the application. If granted, it will have no practical consequences of any utility. The suggestion that the statement of claim may be amended to provide a stronger legal framework for claim of the three plaintiffs to be pursued does not alter the weakness as presently shown of that claim by Gahahan. A refusal of the application will not diminish whatever claim Mr and Mrs Notaras might have against the defendants.

27. In addition to the above, I take into account the failure of Mr and Mrs Notaras to honour their undertaking of 15 October 2001. Mr and Mrs Notaras have not discharged the onus of showing that it would not be an abuse of process for the proceedings to be continued by them in the name of Gahahan. It follows that the proceedings cannot be continued by or against Gahahan as a company in liquidation without the leave of the Court. I grant leave to Dibeek and Leda retrospectively to bring the application commenced by their notice of motion of 22 August 2001. I order that the proceedings in so far as they are brought by Gahahan be struck out and that the name of Gahahan be removed from the record. I order Mr and Mrs Notaras to pay the costs of Dibeek and Leda in these applications. I will hear counsel on behalf of the Advance Bank and the liquidator on the matter of costs if they wish to be heard. Notice of such application to be given within seven days. Liberty to apply.

28. I propose to give directions as to the further conduct of the proceedings as soon as the parties have had a chance to read these reasons.

I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Chief Justice Miles.

Counsel for the second and third plaintiffs: Mr LJW Aitken

Solicitor for the second and third plaintiffs: John Nicholl & Co

Solicitors for the first defendant: Elrington Boardman Allport

Counsel for the second and third defendants: Mr M Einfeld QC with Mr S Habib

Solicitors for the second and third defendant: Clayton Utz