GP Technology Solutions Pty Ltd v Hughes Trading Solutions Pty Ltd

REASONS FOR JUDGMENT 1 By interlocutory application filed on 26 March 2012 Hughes Trading Solutions Pty Ltd, the first respondent in the proceeding, seeks an order that the Court dispense with its need to comply with r 4.01(2) of the Federal Court Rules 2011 (the Rules). 2 Rule 4.01 provides: (1) A person may be represented in the Court by a lawyer or may be unrepresented. (2) A corporation must not proceed in the Court other than by a lawyer. 3 The Court may, however, dispense with compliance with any of the Rules, either before or after the occasion for compliance arises: see r 1.34. 4 In order to consider the first respondent's application, it is desirable to say something about the principal proceeding itself. 5 By its statement of claim filed on 1 November 2011, the applicant, GP Technology Solutions Pty Ltd, alleges that the first respondent and the second respondent (who is the sole director and shareholder of the first respondent) have infringed the applicant's copyright claimed in certain works (namely, a suite of computer programs called the Sentral System and related computer programs), breached contractual or equitable obligations of confidence to the applicant, breached (in the case of the first respondent) certain other contractual obligations under a Reseller Agreement, and contravened the Australian Consumer Law by (in the case of the first respondent) engaging in conduct that is misleading or deceptive or likely to mislead or deceive and making false representations and (in the case of the second respondent) by aiding, abetting, counselling, procuring or being knowingly concerned in the first respondent's contraventions. 6 It is clear from the allegations in the statement of claim that, on the applicant's case, the conduct of the second respondent is, in all respects, intimately related to the conduct of the first respondent giving rise to the infringements, breaches and contraventions that have been pleaded. The pleaded cases against the first respondent and second respondent are so intertwined that, in a practical sense, the case against the first respondent cannot be considered in the absence of the conduct of the second respondent and vice versa. 7 The first respondent and the second respondent were originally represented by the same solicitor. However, a notice of ceasing to act was filed on 8 February 2012. Since that time both respondents have been unrepresented. 8 On 10 January 2012, while the respondents were still represented by a solicitor, I made directions by consent which provided for the filing of a cross-claim by them. A notice of cross-claim and statement of cross-claim were subsequently filed, out of time, on 12 March 2012. No issue was taken about the late filing by the applicant, who was named as the second cross-respondent. However, on 15 June 2012 the applicant filed an interlocutory application seeking to have the notice of cross-claim and the statement of cross-claim struck out on pleading grounds. I decided that I should consider that application in the course of considering the present application and therefore adjourned the hearing of the present application to enable that to be done. My reason for doing so was to obtain an understanding of the legal issues to be raised by the cross-claim to see how those issues related to the applicant's claim. It seemed to me that that might be germane to my consideration of the present application. However, before the hearing of the applicant's strike out application, and without leave, the respondents filed an amended notice of cross-claim and an amended statement of cross-claim on 27 July 2012 in an attempt to overcome the pleading deficiencies which the applicant had identified. Whilst that step should not have been taken without leave being sought, the applicant did not ultimately contest the filing or the pleading of the amended statement of cross-claim and was content for the pleading to remain as filed provided that certain further amendments were made to the amended notice of cross-claim. Those amendments were made on 15 August 2012. 9 The applicant's decision not to contest the pleading of the amended statement of cross-claim appears to have been influenced significantly by considerations of cost and convenience. It has formed the view that the amended statement of cross-claim sufficiently identifies the legal and factual issues to be raised and that any further opposition by it would not be cost-justified and, ultimately, would only be time-wasting in the circumstances. In light of the applicant's attitude, and in an attempt to manage the proceeding in a way that was both expeditious and cost-effective, I was prepared to allow the amended statement of cross-claim to stand even though no prior leave to file it had been granted. I also facilitated the making of the further amendments to the amended notice of cross-claim that the applicant submitted were necessary in order to bring it into line with the claims made in the amended statement of cross-claim. I should state, however, that the amended statement of cross-claim is a somewhat rambling and prolix narrative. I am far from persuaded that it does adequately define the issues for resolution that it seeks to raise. 10 The amended statement of cross-claim alleges that the applicant has infringed the first respondent's copyright claimed in certain computer programs. These claimed copyright works are not the copyright works claimed by the applicant. It appears to be alleged, however, that the first respondent's claimed copyright works are precursors of the applicant's claimed copyright works. The first respondent also alleges that the applicant has breached contractual and equitable obligations owed to the first respondent and contravened the Australian Consumer Law by engaging in conduct that is misleading and deceptive or likely to mislead or deceive and by making false representations. Although it appears that the allegations of fact underpinning the cross-claim arise out of the relationship between the applicant and the first respondent, they do not appear to be conterminous with the allegations underpinning the statement of claim. 11 A review of all pleadings in their current form suggests that the controversy between the parties is both legally and factually complex involving, amongst other things, a consideration of how certain computer software came to be developed, who owns the copyright (if any) in that software, and what rights exist in others to reproduce and communicate any or any part of the alleged copyright works. 12 The discretion of the Court to dispense with the requirement of r 4.01(2) is one to be exercised judicially according to the requirements of justice. The policy of r 4.01(2) is clear: ordinarily a corporation will be required to be represented by a lawyer. As French J observed in Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241 at [14]: There is no doubt that those who [choose] to carry on their businesses through corporate structures enjoy advantages to those carrying on business on their own account do not enjoy. They also acquire disabilities and obligations. One of the disabilities is that which is imposed by the Rules of Court under consideration in this case… 13 In Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68 Smithers J (at 74) said: … The consequence of permitting a non-qualified person to appear will be to deprive the court of assistance in respect of matters of law. It might also, according to circumstances, render difficult the proper assessment of fact. These considerations go to the ability of the court ideally to reach the correct decision on the matters of law and fact involved in the litigation. This may operate to the detriment of a company appearing without a solicitor but such a consequence would be of the company's own making. The application by the court of the correct principles of law and the correct assessment of the facts in a particular case are important objectives, but they are not necessarily unattainable without the assistance of qualified advocates. The attainment of these objectives, so far as possible without qualified assistance, is accepted as appropriate where a party sues or defends in person. 14 His Honour recognised that the discretion to dispense with the requirement that a corporation be represented by a lawyer (as reflected in O 4, r 14(2) of the then Federal Court Rules) was a broad one to be exercised on sufficient cause being shown. I do not understand the position under the present Rules to be any different. Cases decided under the former Rules remain apposite. 15 The position in this Court in this regard stands in contrast to the position in other superior courts in some other jurisdictions where exceptional circumstances must be shown before the discretion will be exercised favourably. In this Court there is no threshold requirement of special or exceptional circumstances: Silkearl Pty Ltd v Ainsworth Game Technology Ltd [2006] FCA 949 at [4]; Termi-Mesh at [12]; see also Simto Resources Ltd v Normandy Capital Ltd (1993) 10 ACSR 776 at 781-782. 16 In Termi-Mesh French J at [13] said: …Relevant factors for dispensing with [the] requirement include the financial capacity or lack of capacity of the corporation and those standing behind it, the effect of diverting company resources to paying legal expenses, the nature of the company's undertaking, its financial structure, its ability to retain and pay its staff and the identity and spread of its shareholders. The factual complexities of the case and the capacity of the proposed representative to conduct it effectively are also relevant - VN International Video Pty Ltd v West End HK TVB Video & Others (1996) 14 ACLC 1308. 17 At [14] his Honour said: … A distinction may be drawn between the case in which the company in question is applicant and that in which it is respondent. In the latter case it may be a more liberal approach to the grant of leave is warranted… 18 In submissions the applicant pointed to the following factors as relevant to the present case: The nature and financial capacity of the corporation, the identity of its shareholders, and the financial position of those behind the corporation or those who would benefit from the action. Whether the lay person would be able to conduct the trial on behalf of the corporation in a meaningful fashion. Whether the lay person will be the principal or a material witness for the corporation in the proceeding. The nature of the likely evidence and whether the proceeding involves complex and difficult matters of fact and law. Whether the proceeding involves access to confidential documents. 19 The essence of the first respondent's application for dispensation is that it was informed that the legal fees to be incurred in the respondents' defence of the applicant's claims would most likely exceed $200,000.00, which sum, according to the second respondent, the first respondent simply does not have. The applicant did not seek to challenge the accuracy of the estimated fees likely to be incurred by the respondents in this proceeding. 20 The second respondent has exhibited to an affidavit sworn by him on 1 June 2102 what he says are the financial statements of the first respondent. Those financial statements are obviously incomplete on their face. They are also unsigned. I do not know who prepared them or from what sources they were prepared. There is reason to doubt their accuracy. For example, the first respondent's balance sheet as at 31 March 2012 shows the amount of $230,793.74 as "Loans to directors" recorded as a liability rather than as an asset. I thought that, having been treated as a liability, the item might be "Loans from directors", but the second respondent confirmed in his oral submissions that in fact the item represented loans made by the first respondent to him. The incorrect attribution of the loan as a liability of the company underscores the questionable accuracy of the financial statements and the care and competence with which they have been prepared. 21 The financial statements record that, in the relevant period, the first respondent suffered a loss of approximately $50,000.00. The second respondent's evidence is that the first respondent's loss for the full financial year ended 30 June 2012 will be approximately $60,000.00. The financial statements show that, as at 31 March 2012, the first respondent's current assets were just over $5,000.00. Its major asset is shown as goodwill recorded as $250,000.00. Net assets are recorded as $28,178.69. The second respondent says that the first respondent has "no capacity to pay legal fees whatsoever". 22 The evidence shows that the second respondent is recorded as a director of a company called Momentum Cloud Pty Ltd (Momentum Cloud). In the relevant period the first respondent received payments from Momentum Cloud totalling $75,192.00. These payments do not appear to be reflected in the first respondent's financial statements. One of the payments received from Momentum Cloud seems to have been used to pay the first respondent's legal costs, presumably incurred before its former solicitors ceased to act. There is no item for legal costs in the profit and loss statement forming part of the financial statements. 23 The second respondent gave evidence that he (which I take to be a reference to the first respondent) sold the intellectual property in software called ESR Momentum to Momentum Cloud in July 2010. He did not give evidence of the consideration for the sale. The second respondent says that the first respondent entered into an agreement with Momentum Cloud to resell ESR Momentum but that, from 12 November 2011, it ceased acting as a reseller. He says that he held one share in Momentum Cloud and accepted a position as a director. He says that he subsequently sold his share for $100,000.00 and that he resigned as a director of Momentum Cloud on 2 November 2011. The second respondent also says that in January 2012 the first respondent sold the domain name to Momentum Cloud "for proper consideration", without giving further details. The evidence also shows that the first respondent assigned registered trade mark 1079327 to Momentum Cloud by letter of assignment dated 15 March 2012. The first respondent's financial statements do not show these transactions. 24 The applicant attacked the first respondent's financial statements. It submitted that, on the basis of other evidence, the financial statements appear to understate the first respondent's financial position and are otherwise unreliable. It referred to evidence given on behalf of the first respondent by the second respondent on an earlier occasion when the second respondent said that, as at 18 November 2011, the first respondent had granted 320 licences of its software products. On the basis that 52 licences were cancelled in 2012 (as the second respondent had said), this would mean that 268 income-producing licences continue to exist. It referred to the gross receipts recorded in the first respondent's financial statements for the year ended 30 June 2011 and said that, even in light of the licence cancellations in 2012, the first respondent should have been making gross receipts for the year ended 30 June 2012 of approximately $238,000.00, a considerably greater sum than that reflected by the gross receipts shown as at 31 March 2012 of $66,475.00. The second respondent had also made an affidavit in November 2011 in which he estimated the first respondent's expected fees for the following 12 months to be approximately $325,000. This stands in stark contrast to the position shown in the financial statements in evidence. The applicant also referred to the item for "Loans to directors" (which the applicant says could be called in) and the payments made by Momentum Cloud (which were not referred to in the financial statements). 25 Significantly, the second respondent, as the person standing behind the first respondent, does not himself disclose in any detail his own assets or means to pay for the provision of legal services. There is evidence that, since at least 5 July 2011, he has received $2,072.58 per month from Momentum Cloud, which is said by him to be from his employment by that company. There is also evidence that he has sold his interest in a jointly-owned residential property which, after repayment of his share of a loan liability secured on the property, left him with approximately $90,000.00. There is also the payment of $100,000.00 received by the second respondent for the sale of his share in Momentum Cloud. It can be taken, however, that, whatever his means, the second respondent does not propose to expend money on legal fees either on his own behalf or on behalf of the first respondent. 26 The applicant also raised the possibility that the second respondent had a continuing relationship with the business of Momentum Cloud which suggested that the first respondent, through the second respondent, might be able to call upon Momentum Cloud to fund, at least in part, the first respondent's defence of this proceeding. 27 In oral submissions, but not in evidence, the second respondent said that the consideration received by the first respondent for the sale of ESR Momentum to Momentum Cloud was the right to retain licences that had been entered into for the 2011 year of income. He said that this was reflected in the first respondent's financial statements in evidence and was included in the gross receipts of approximately $305,000.00 shown for that year. He also said that the amount lent to him by the first respondent by way of a director's loan was, in part, on-lent by him to Momentum Cloud as start-up capital. The second respondent said that the payments to which I have referred from Momentum Cloud to the first respondent are partial repayments of the funds lent by the first respondent to the second respondent and on-lent by the second respondent to Momentum Cloud. 28 The second respondent also said that he sold his share in Momentum Cloud to his father and that the $100,000.00 he received was used by him in part payment for the joint purchase of the real property which has now been sold and which has resulted in the second respondent receiving the net amount of $90,000.00. The second respondent said that he has used this sum to pay legal fees. 29 The second respondent also said that his estimate of the first respondent's anticipated fees for the 12 months from November 2011 was based on the assumption that the first respondent's reseller agreement with the applicant had remained in place. At the time that the estimate was given, the agreement had in fact been terminated. The second respondent said that this estimate had been given for the purpose of showing, in the context of the applicant's earlier application for interlocutory injunctive relief, the loss that the first respondent would suffer if its reseller agreement with the applicant was not maintained. 30 The applicant criticised the state of the evidence respecting the financial position of the first respondent and, in particular, its reliability. It also criticised the state of the evidence respecting the financial position of the second respondent as the person standing behind the first respondent. It submitted that the second respondent has put on extremely limited evidence about his own financial position. In my view these criticisms are warranted. The plain fact is that I simply do not have a clear picture of the true financial position of either respondent. 31 In Molnar Engineering Smithers J said (at 76) that, in an application of the present kind, the party seeking dispensation "should take the court fully into its confidence". This has not been done in the present case. Having said that, I have not gained the impression that the second respondent has deliberately sought to conceal his financial position or the true position of the first respondent. Rather, it seems to me that the incomplete state and dubious quality of the evidence respecting the financial position of both respondents reflects the inability and lack of competence of the second respondent to adequately present the application which has been made. Notwithstanding the shortcomings of the evidence in this regard, I am persuaded that if the respondents were able to afford legal fees of the amount required to fund their defence of the applicant's case, they would do so. I am therefore prepared to proceed, albeit somewhat reluctantly, on the assumption that the first respondent has no capacity to pay legal fees (as its financial statements suggest) and that the second respondent is in no materially better position. This does not mean, however, that it necessarily follows that the first respondent should be granted the dispensation which it seeks. 32 I should at this juncture refer to the other matters on which the applicant relies to oppose the application. The applicant submits that the second respondent is likely to be a material witness in the proceeding and that, as such, his co-extensive presentation and management of the litigation may well be protracted and ultimately unworkable. It submits that the proceeding will involve complex legal and factual issues involving copyright (including the implication of licences), breaches of equitable obligations of confidence and breaches of contract. This applies not only to the defence of the applicant's claim but also to the prosecution of the cross-claim. The applicant also submits that there will be practical difficulties involved in dealing with the respondents' access to confidential material that the applicant feels it is necessary to deploy in the advancement of its own case. It gives as an example the furnishing of a confidential exhibit to an affidavit to the respondents' former solicitors on particular terms of non-disclosure. This facility would not be available should dispensation be granted. The applicant also acknowledges, however, that some of these concerns have been alleviated by the respondents' appointment of an independent expert, Mr Campbell, to whom the applicant has now agreed the confidential material can be supplied. 33 In my view these considerations are of some considerable substance. However, as I have stated above, the pleaded cases against the first respondent and second respondent are so intertwined that, in a practical sense, the case against the first respondent cannot be considered in the absence of the conduct of the second respondent and vice versa. In that context, the second respondent has clearly indicated that he does not propose to engage legal representation in his defence. That is his entitlement: see r 4.01(1). Given that reality, and regardless of the considerations to which the applicant refers, the second respondent will necessarily be required to advance, in his own defence, the defence of the claim against the first respondent. The statement of claim reveals the first respondent to be the second respondent's alter ego in relation to the causes of action that have been pleaded. He is the first respondent's sole director and shareholder. This consideration leads me to conclude that, in relation to the defence by the first respondent of the claim made against it, the requirement of r 4.01(2) should, until further order, be dispensed with and leave should be granted to the second respondent to represent the first respondent. 34 However, it seems to me that the cross-claim stands in a different position. I am not persuaded that there should be any dispensation in relation to the claim as brought by the first respondent against the applicant and one of its officers. That claim also raises complex questions of law and fact. It is clear to me that that claim cannot be properly prosecuted by the first respondent without a lawyer. The second respondent submits that the legal issues and facts thrown up by the case are not so complex that they cannot be understood and rationally argued by him. I disagree. It seems to me that the second respondent's submission is aspirational rather than a reflection of the true position. The pleading of the amended statement of cross-claim illustrates the second respondent's lack of competence to identify and articulate with any real precision the causes of action that are sought to be brought against the applicant. Without meaning any disrespect to him, the second respondent's conduct of even the present application shows that he is not well-equipped to embark upon the more ambitious task of presenting, on behalf of the first respondent, the significantly more complex case envisaged by the cross-claim. In my view it would not be consistent with the objectives of the overarching purpose identified in s 37M of the Federal Court of Australia Act 1976 (Cth) to dispense with the requirements of r 4.01(2) in that regard. 35 In reaching this conclusion I do not leave out of consideration the fact that the second respondent is also named as a cross-claimant in the notice of cross-claim. The second respondent, as cross-claimant, will have standing to sue the applicant for its alleged contraventions of the Australian Consumer Law but not the other causes of action for which only the first respondent has standing to sue. The fact that the second respondent is entitled to advance, in his own cause, part of the cross-claim does not qualify the conclusion to which I have come concerning the first respondent's representation. 36 There should, therefore, be a limited dispensation in respect of the application of r 4.01(2) in the present proceeding. 37 The first respondent has sought an indulgence in relation to the requirements of the Rules and has only been partially successful. The first respondent should pay the applicant's costs of the interlocutory application. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.