Goodwill Group Pty Ltd v Pongrass Associates Pty Ltd

Federal Court of Australia (Full Court)|2003-03-25|Before: Katz J, Before Katz J, Hely JJ

the court: 1 This is an application for leave to appeal from a judgment of a Judge of the Court given on 26 September 2002 in which his Honour refused an application by The Goodwill Group Pty Limited (a company controlled by Bradley Cooper ("Cooper")) to further amend the Amended Statement of Claim as against the fifth respondent ("Pongrass") and dismissed the proceeding as against Pongrass. There were seven respondents in all to the proceeding. This appeal concerns only Pongrass. Prior to coming before the primary Judge, the proceeding had been case managed by and was part-heard before Katz J. Before Katz J could make a determination his Honour resigned from the Court for health reasons. By consent, the applications were consequently determined by the primary Judge on the papers, his Honour having no previous acquaintance with the matter.

background 2 On 24 April 2001 the respondents, with the exception of the seventh respondent ("Kensey"), filed a Notice of Motion seeking orders that the proceeding be summarily dismissed. 3 Having regard to the earlier non-appearance and the highly unsatisfactory conduct of the proceeding on the part of the applicant, Katz J, on 1 May 2001, made a self-executing order against the applicant in the following terms: "The applicant's evidence (for the purpose of the hearing of the application) be put on by 25 May 2001 in default of which the application will stand dismissed with costs." 4 Affidavits in support of the motion for dismissal of the proceeding were filed on behalf of the respondents on 1 and 2 May 2001. A large number of affidavits were then filed on behalf of the applicant between 16 and 24 May 2001. They were sworn by Rodney Adler ("Adler"), Darryl Swindells, Cooper, Emma Hodgman, Brian Ferguson, and David Gale. Subpoenas were issued by the applicant on 28 May 2001. 5 The subject matter of the proceeding related to claims of misleading and deceptive conduct in the form of misrepresentations on the part of the respondents, which allegedly induced financial support for a management buyout by the sixth and seventh respondents of businesses operated by various companies of which Pongrass was a director. Financial support by the Cooper and Adler interests was provided by two nominee companies, one of which was the present applicant, The Goodwill Group Pty Limited which is controlled by Cooper. The principals behind the two investing companies in the relevant finance transactions were Adler and Cooper. In November 1999, the Adler company (Two Gables Pty Limited), decided not to continue with the proceedings. 6 On 20 June 2001, more than three weeks after the cut-off date specified in the order made by Katz J, the applicant filed a motion for leave to further amend its Amended Statement of Claim and an affidavit in support of that motion was sworn by Ms Hodgman of the applicant's solicitors on 19 June. 7 On 12 July 2001, the motion for dismissal first came on for hearing before Katz J but an Amended Notice of Motion was filed seeking orders that the proceedings be dismissed as to the whole of the relief sought by the applicant and that they be dismissed as disclosing no reasonable cause of action against all respondents, except the third respondent, and, in the alternative, an order that they be dismissed as disclosing no reasonable cause of action against Pongrasss. The matter was adjourned on 12 July 2001. The applications were heard before Katz J on 26 July and on 10 October 2001. Judgment was reserved. 8 The substantive questions for determination on this appeal are as follows: 1. Whether leave ought to have been given by the primary Judge to file the Further Amended Statement of Claim as against Pongrass and, 2. Whether the action against Pongrass should be dismissed.

The facts 9 The factual background is fully summarised in detail in his Honour's judgment and for the purposes of this appeal it is not necessary to repeat that summary.

the judgment below 10 It is common ground that the conduct of the proceedings by the applicant up to the making of the self-executing order was characterised by continuous and repeated defaults over a substantial period of time and that the proceeding was not commenced until shortly before the expiration of the limitation period. 11 The questions as presented to the primary Judge were of considerable complexity and included applications for dismissal, leave to amend and security for costs. In all his Honour made eleven orders in respect of the applications. The primary Judge did not have the benefit of hearing the argument before Katz J and question counsel, although he did have a transcript record of the proceedings. In his judgment his Honour referred to the numerous detailed affidavits which had been filed on the applications and outlined their contents. 12 In relation to the application for dismissal with respect to Pongrass, after setting out the evidence, his Honour first considered whether the application had been automatically dismissed for want of compliance with the self-executing order. His Honour concluded that the applicant's efforts had been sufficient, in filing evidence setting out its case, to satisfy the terms of the order, although the primary Judge did not consider that the evidence as filed, when read in the light of the pleadings as they stood then, disclosed any arguable cause of action against Pongrass. It is common ground on the hearing before this Court that on the basis of the allegations made in the Amended Statement of Claim as they stood then, the claims made were doomed to failure as against Pongrass. 13 His Honour then directed his attention to whether the applicant's claim should be summarily dismissed as against Pongrass under O 20 r 2 of the Federal Court Rules ("FCR"). That rule provides: "Frivolity 2 (1) Where in any proceeding it appears to the Court that in relation to the proceeding generally or in relation to any claim for relief in the proceeding: (a) no reasonable cause of action is disclosed; (b) the proceeding is frivolous or vexatious; or (c) the proceeding is an abuse of the process of the Court, the Court may order that the proceeding be stayed or dismissed generally or in relation to any claim for relief in the proceeding. (2) The Court may receive evidence on the hearing of an application for an order under subrule (1)." 14 His Honour first considered whether, on the pleadings as they then stood without the proposed amendments, and in the light of all the evidence filed up to the date of the hearing, the proceedings should be dismissed as against all respondents. His Honour referred to the high threshold for summary dismissal prescribed by the authorities but nevertheless found that having regard to all the evidence filed by the applicant pursuant to the order made by Katz J on 1 May 2001, there was no case fairly arguable made out against Pongrass consistent with the pleadings as they then stood. 15 His Honour proceeded to consider whether he should grant leave to file the Further Amended Statement of Claim which he considered carried out "major surgery" to the original pleading. His Honour summarised the proposed amendments and made a number of comments in relation to those amendments as set out below. 16 The relevant passages of his Honour's judgment, which describe the amendments and interpolate his Honours' observations in relation to them, read as follows: "118 The evidence filed by the applicant pursuant to the order of 1 May 2001 discloses no case against Pongrass consonant with the pleading. It is difficult to see how the pleading itself discloses any cause of action against him. The representations in par 9 are alleged against "… in particular the sixth and seventh respondents" and Pongrass was said to be "knowingly concerned in them". But at the hearing before Katz J on 26 July 2001 counsel for the applicant disclaimed any reliance upon knowledge of falsity on the part of any of the respondents in connection with the pleading of knowing concern under s 75B. On the basis of the material thus far considered, I would dismiss the proceedings in so far as they relate to Pongrass. At this stage however it is necessary to have regard to the proposed further amended statement of claim. In this document the original pleading has undergone major surgery. 119 In the proposed further amended statement of claim a new par 6 is introduced by which it is asserted that each of Pongrass, Berry and Kensey was in a position to control and/or influence the conduct of each of the corporate respondents in or about the events leading up to the acquisition of the shares. After pleading the Asset Sale Agreement (par 7) and the acquisition of shares in Phoenix by Goodwill (par 8) there is a new par 9 which is in the following terms: 'Immediately prior to the acquisition of the shares by the Applicant the Respondents ought reasonably have been aware that the Applicant, its officers (other than the Sixth and Seventh Respondents) and agents had no experience in or, knowledge of the business being acquired namely, a ski/camping and outdoor equipment business ("the business") and the Respondents ought reasonably have known that the Applicant, its offers and agents were relying on the accuracy of the information provided by, or on behalf of, the Respondents when deciding to acquire the said shares in the Purchaser. PARTICULARS (a) The Respondents' knowledge of the industry and its participants. (b) Conversations between Rodney Adler and Bradley David Cooper on behalf of the Applicant and the Fifth to Seventh Respondents on behalf of the Respondents at various times during the course of negotiations leading up to the acquisition of the shares.' … Paragraph 10 is in the terms of the old par 8 and as indicated earlier, in my opinion, discloses no reasonable cause of action. Paragraph 11 is the old par 9 recast as follows: 'Further, the Respondents represented to the Applicant that the levels of stock so specified were not obsolete stock and that if the stock of the First, Second, Third and Fourth Respondents was to be purchased by the Applicant and/or the Purchaser or any prospective purchaser, the business to be conducted by any such purchaser would achieve earnings before interest and tax of between $1,100,000 and $1,300,000 per annum generated from potential sales ("the Stock/Profitability Representations"). The Stock/Profitability Representations were made by the Respondents expressly and/or, by silence. The Respondents had a duty to disclose that the stock was or, was about to become obsolete and that the business could not achieve earnings before interest and tax, generated from potential sales, of between $1,100,000 and $1,300,000 per annum as represented. PARTICULARS … (l) The Respondents knew that the stock included straight skis and that straight skis were soon to be made obsolete by parabolic skis.' It is then asserted in par 12 that the various representations referred to in par 11, designated the Stock/Profitability Representations, were false. Section 51A is also invoked. The particulars of falsity of the old par 10 are expanded in the new par 12 to include: '(d) Overstatement in Bancorp Report of profits of the First to Fourth Respondents in 1994 by $881,799 and in 1995 by $607,821. (e) Overstatement in Alternative Report of profits by Casa Alpina Sports Pty Ltd in 1995 by $178,429. (f) Overstatement in Alternative Report of profits for Mountain Leisure Products Pty Ltd in 1994 by $594,009 and in 1995 by $55,514.' 120 A new par 13 brings in an entirely new allegation thus: 'Further, the Fifth, Sixth and Seventh Respondents failed to disclose to the Applicant that the Fifth Respondent had been taking cash out of the business and that the financial records pertaining to the business were inaccurate or incomplete in circumstances where they had a duty to disclose that information to the Applicant ("the Representations by Silence").' This is particularised by reference to the Bancorp Report which it is said did not disclose that the financial information contained in it was at variance with the annual accounts and tax returns relating to the companies. Thus the misleading or deceptive conduct relied upon now are the Stock/Profitability Representations and the Representations by Silence, each of which is said to have been misleading or deceptive in contravention of s 52 of the Trade Practices Act or s 42 of the Fair Trading Act as the case may be. 121 There is another new allegation in a new par 22that Pongrass, Berry and Kensey, in causing The Goodwill Group to acquire shares in Phoenix engaged in conduct which was unconscionable in breach of s 43 of the Fair Trading Act. The balance of the amendments are relatively minor. 122 The aspect of the amendments that relates to the so called Representations by Silence is new. The other primary amendment relating to the Stock/Profitability Representations is, in substance, elaboration of the previously existing pleading albeit it puts the primary emphasis on representations as to profitability. In respect of the Representations by Silence so called, these are said to have been introduced following the late discovery in April 2001 of the tax returns of the Pongrass respondents. The amendment in one sense adds little to the representation in relation to profitability pleaded in the proposed new par 11 which representations are falsified by reference, inter alia, to overstatements in the Bancorp Report and the Alternative Report. 123 In determining whether the proposed amendments should be allowed, I have regard to but do not consider that I should be unduly influenced by the possibility that they may introduce a cause of action which is out of time. The Court may permit such an amendment pursuant to O 13 r 2(3) and 2(7). There is no doubt however that the amendment, generally speaking, puts a new focus on the case very late in the piece for reasons which are not really explained apart from the explanation proffered in relation to the alleged Representations by Silence. In my opinion, however, the amendment should be allowed save as against Pongrass. The action as against him should be dismissed. 124 In coming to the conclusion that the action against Pongrass should be dismissed pursuant to O 20 I have regard to: 1. The history of the proceedings including their late initiation and late service upon Pongrass and the repeated delays caused by the applicant's non-compliance with Court timetables, failure in no small part attributable to the unavailability of Cooper to give instructions to his solicitor. 2. Primarily the failure of the applicant to file evidence in response to the order of 1 May 2001 disclosing a case against Pongrass. 3. The prejudice suffered by Pongrass through his continuing involvement in the litigation. 4. The lateness of the attempted construction of a new case against him. The application against Pongrass as presently pleaded, and having regard to the proposed evidence against him, discloses no reasonable cause of action and is frivolous and vexatious. I will not permit an amendment to be made in order that a case may now be constructed against him. 125 I do consider that there is the possibility of an arguable case on the statement of claim as presently pleaded against the corporate respondents and Berry and Kensey. That is not to make any comment upon the strength of the case. The order of 1 May 2001 having, in my opinion, being complied with so far as they are concerned. I will allow the statement of claim to be further amended in relation to those respondents. The applicant will have to pay costs thrown away by reason of the amendment in any event." (Emphasis added) 17 It is apparent from pars [123] and [125] above that his Honour exercised his discretion to refuse the amendment as against Pongrass and then to dismiss the proceeding as against him whilst allowing the amendments as against the other respondents. This was primarily because on the unamended pleading, in his Honour's opinion, there was a fairly arguable case against those respondents but not against Pongrass. His Honour did not make any determination in relation to the claims relating to Pongrass as to whether, in the light of the evidence adduced and the proposed amendments, there was a fairly arguable case raised by the proposed amendments against him.

reasoning on appeal 18 Several matters should be noted from the above passages. The first is that it is not strictly correct to state that the allegation of misrepresentation by silence made in the proposed amendment "in one sense adds little to the representation pleaded in the proposed new par 11". There is, in our view, a significant distinction between an allegation of specific misrepresentation as to the quality of stock and the anticipated profitability of the venture and an allegation of a failure to disclose that Pongrass had been taking cash out of the business and that the financial records were inaccurate or incomplete in circumstances where there was a duty to disclose this information. 19 The second matter to be noted is that no cogent basis is referred to in the reasoning which suggests that the proposed new pars [11] and [13], relating to Pongrass, were not fairly arguable. The fact that the amendments were allowed by his Honour in relation to the Sixth and Seventh respondents indicates that he considered there was a fairly arguable case against those respondents made out on the amended pleadings. The basis for the differential treatment of the application to amend in relation to Pongrass ultimately depended on his Honour's view that the unamended pleading as against Pongrass, even when read in the light of the additional evidence adduced by the applicant, did not indicate a fairly arguable case against him. The material before us demonstrates that there is a significant common factual substratum between the case sought to be made out against Pongrass and that sought to be made out against the sixth and seventh respondents. 20 While it is not disputed that the unamended pleadings, even when considered in the light of the evidence adduced before Katz J, did not disclose a cause of action against Pongrass, this does not mean that the proposed extensive amendments should not be considered and their strengths evaluated when deciding whether to summarily dismiss the proceeding as against Pongrass. The Court must in effect be satisfied that the case, in the light of evidence, is so clearly untenable that it cannot possibly succeed or that for some other reason the proposed amendment should not be allowed. 21 When considering an application to amend the pleadings it is appropriate to bear in mind the observations of the High Court in Queensland v J L Holdings Pty Limited (1997) 189 CLR 146, at 154-155, where Dawson, Gaudron and McHugh JJ said: " … the ultimate aim of a court is the attainment of justice and no principle of case management can be allowed to supplant that aim. In this case, which was of a commercial nature, the litigants are on the one side a developer and on the other side government, and there is nothing which would indicate any personal strain which would justify the conclusion that costs are not an adequate remedy for prejudice caused by the amendment sought to the pleadings. … … the matters referred to by the primary Judge were insufficient to justify her Honour's refusal of the application by the applicants to amend their defence … justice is the paramount consideration in determining an application such as the one in question. Save in so far as costs may be awarded against the party seeking the amendment, such an application is not the occasion for the punishment of a party for its mistake or for its delay in making the application. Case management, involving as it does the efficiency of the procedures of the Court, was in this case a relevant consideration. But it should not have been allowed to prevail over the injustice of shutting the applicants out from raising an arguable defence, thus precluding the determination of an issue between the parties. In taking an opposite view, the primary Judge, was in our view, in error in the exercise of her discretion." 22 Although these observations need to be read in the light of the particular circumstances in that case, they are applicable to the present application. In that case the application to amend was made before a date had been fixed for the hearing and the date, when later fixed, was six months ahead. In the present case no hearing date had been fixed. 23 Their Honours in J L Holdings considered that if the case was arguable the applicants should be permitted to advance it provided that any prejudice to the respondents could be compensated by costs or by other appropriate orders such as adjournments or adjustments to the hearing times. 24 In the present case the considerations which the primary Judge took into account are itemised in his Honour's judgment and it is apparent that his Honour based his decision on the cumulative weight of these matters. 25 The matters referred to by his Honour include the history of the proceedings, their late initiation and late service on Pongrass and the repeated delays caused by the non-compliance of the applicant with Court timetables which was attributable to the unavailability of Cooper to give instructions to his solicitor. These considerations are relevant and they carry some force, but they are not determinative of the question whether a further amendment should be allowed or whether the application should be dismissed as against Pongrass. 26 The second and "primary matter" referred to by his Honour as a ground for the exercise of discretion in favour of Pongrass was the failure of the applicant to file evidence, in response to the order of 1 May 2001, disclosing a case against Pongrass. While his Honour considered that sufficient evidence had been filed to satisfy the self-executing order, he does not appear to have taken into account or given any weight to the question whether the proposed amendments, particularly those in pars [11] and [13], on the evidence filed, raised any arguable case as against Pongrass. This is a failure to consider an important and material issue. The existence of a fairly arguable case on the evidence adduced and whether the allegations in the amended pleading could be characterised as "futile" as against Pongrass are matters requiring consideration before dismissing the proceeding against Pongrass. 27 The allegations have some evidentiary basis to support them. The evidence of Cooper in his affidavit of 17 May 2001, in relation to the "coffee shop" conversation he had with Pongrass and Stephen Berry ("Berry") is in our view, when taken together with his affidavit of 17 August 2001, sufficient to raise a fairly arguable case as to misrepresentation by silence in relation to the allegation that Pongrass had taken out money from the business and that he had misrepresented the nature of the stock and the likely profitability. 28 There is evidence from Cooper in his affidavit of 17 August 2001, that if he had been aware of the alleged removal of cash from the business he would not have allowed the investment to proceed. Counsel for Cooper refers to the "moral risk" deterrent effect of this conduct. Cooper attached to that affidavit a diary note of a meeting at which it records that Pongrass indicated he had regularly removed cash proceeds from the sale of goods direct from the warehouse and local retail stores, up to an amount of $300,000 per annum. There is also a letter from Adler to Kensey of 22 May 1996 to the effect that it is only because of his integrity and that of Berry and Pongrass that the deal was finally agreed to by him. Counsel for the applicant submits that, in the light of this evidence, there is support for the assertion that a material misrepresentation by silence was made by Pongrass in the coffee shop conversation at least in relation to the conduct of the business. 29 With respect to the prejudice likely to be suffered which was referred to by his Honour, we consider that while this must be given some weight, in substance, it is the type of general prejudice with which litigants are frequently faced and is not sufficiently out of the ordinary to outweigh the detriment to the applicant if it is foreclosed from advancing its case against Pongrass. 30 Another relevant matter on the question of prejudice is the consideration that the evidence of the respondents has not yet been filed and a trial date has not been fixed. In these circumstances we do not consider that any substantial prejudice has occurred or will occur which could not be substantially remedied, which would warrant summary dismissal of the case against Pongrass. There is strong public interest in deciding the real questions in issue between the parties. Indeed, s 23 of the Federal Court of Australia Act 1976 (Cth) requires the Court to decide so far as possible all matters in controversy between the parties. 31 Finally, the fourth matter relied on to ground the summary dismissal is the lateness of the alleged construction of a new case against Pongrass. This is closely related to the question of prejudice. 32 We consider that the evidence relied on does raise a fairly arguable issue and it is therefore not accurate to refer to it as "an attempted construction" if that were intended to suggest an unarguable or fabricated case. Counsel for the applicant has informed the Court that the reason for the lateness of the amendment arose from a change of counsel and a fresh appraisal on the part of counsel. 33 In our view, the matters referred to by his Honour as a basis to refuse the amendment application as against Pongrass and the consequent order as to the dismissal of the proceedings as against Pongrass failed to give sufficient weight to the need for a complete determination of all arguable issues between the parties on the evidence before the Court. Accordingly, we consider that the exercise of discretion in respect of the dismissal has miscarried. 34 The appropriate orders in our view are to grant leave to appeal and to allow the appeal in respect of the orders made by the primary Judge concerning Pongrass. The orders of his Honour in respect of Pongrass should be set aside and the application to amend as against Pongrass should be allowed. The costs of the appeal should be the applicant's costs in the cause.

I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore, Tamberlin and Hely.

Counsel for the Applicant: B Walker SC G E Underwood Solicitor for the Applicant: Dibbs Barker Gosling

Counsel for the Respondent: R M Goot SC M J Heath

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