Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Pty Ltd & Ors

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50169/01 INGOT CAPITAL INVESTMENTS PTY LTD & ORS V MACQUARIE EQUITY CAPITAL MARKETS LTD & ORS

1 This is another interlocutory application in this large and complex litigation seeking to join a further party to the proceedings. The issues in this litigation have been set out in a number of judgments of judges in this List and I do not intend to repeat them save to say that they have been further expanded by the leave granted by McDougall J in November 2003 for the plaintiffs to file a Fifth Further Amended Summons (the Amended Summons).

2 The Macquarie parties, being the first, second and third defendants, seek by way of motion an order granting leave to proceed against New Cap Reinsurance Corporation Ltd (in liquidation) (NCRA) by way of cross-claim. NCRA was placed into voluntary liquidation on 16 September 1999. It is the Australian subsidiary of New Cap Reinsurance Corporation Holdings Ltd (NCRH) a company in Bermuda.

3 Although the leave sought in this instance is pursuant to s500 of the Corporations Act 2001 the parties have proceeded on the basis that the principles applicable to s471B of the Act apply.

4 NCRA, represented by Mr Coles QC leading Ms McCallum, opposed the application. Both Mr Jackman SC, for the Macquarie parties and Mr Coles QC referred to the often cited passage of the judgment of McPherson J in Ogilvie Grant v East (Liquidator of Gordon Grant and Grant Pty Ltd) [1983] 7 ACLR 669 in which his Honour referred to the test to be applied in such applications as the one before me. His Honour said, at 672: As a matter of history, a winding up by the court was and remains today an administration conducted by the court: Re Phoenix Oil & Transport Co Ltd (No 2) [1958] 1 Ch 565, 570. Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material: Re Kentwood Constructions Ltd [1960] 1 WLR 646. There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than normal proceedings by way of action. If this means that occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so.

The question whether claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of s 230(3) is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that reason is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as " convenience" and "balance of convenience" that appear in judgments on the matter: see, for example, Re The Queensland Mercantile Agency Co Ltd (1888) 58 LT 878, 879; Stewart v Innercity Distributors Ltd [1960] NZLR 944, 946; and cf. Century Mercantile Co v Auckland Provincial Fruitgrowers' Co-operative Society Ltd [1921] NZLR 272,276. It, of course, follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed. 5 The circumstances in which a "good reason" has been demonstrated have been developed over the years and, as MacPherson J said above and Lehane J said in Meehan v Stockmans Australian Cafe (Holdings) Pty Ltd 22 ACSR 123 at 127, those circumstances cannot be stated exhaustively.

6 The Macquarie parties claim that there has been demonstrated good reason for departing from the procedure whereas NCRA submits that the Macquarie parties have failed to discharge their onus. The evidence in support of the Motion is that of Ashley John Black, a partner of Mallesons Stephen Jaques, in two affidavits, one sworn on 5 March 2004 and the other on 27 April 2004. The respondent relied upon the affidavit of the liquidator, John Raymond Gibbons in an affidavit sworn 22 April 2004 and that of the solicitor for the liquidator, Katherine Alison Merrick sworn 23 April 2004.

7 Mr Black sets out the history to the pleadings and annexes to his affidavit the draft cross-claim. In effect, the Macquarie parties claim that as a consequence of McDougall J allowing the Amended Summons certain new claims have arisen. The affidavit evidence of Mr Black demonstrates that allegations made against the Macquarie parties in the Amended Summons include the following: · that the Macquarie parties made representations to the plaintiffs as to the purposes of the converting note issue which were false (see paragraphs 46(f), 50(b), 55(n) and 74). · that the Macquarie parties made representations to the plaintiffs as to NCRH's, future prospects which are alleged to be false for reasons including that the operating losses experienced by NCRH was the poor quality of the business underwritten during 1998 and that the quality and performance of the 1998 book of business was poor, alternatively, that its performance could not be ascertained as at the date of the prospectus (see paragraphs 46(a), 46(e), 48(a), 48(c), 48(d), 48(g), 55(e) and 73) (the quality of business representations). · that the Macquarie parties made representations to the plaintiffs as to NCRH's Net Tangible Assets (NTA), including NCRH's estimated NTA as at the date of the draft prospectus and as at the date of the prospectus, which were false. (see 47(b), 48(b), 48(f), 50(a), 55(b), 55(c) and 71.) · that in the period between lodgement of the prospectus and allotment of the converting notes, circumstances arose which rendered representations allegedly made by the Macquarie parties to the plaintiffs, false. These have been referred to in argument as the post prospectus allegations. · that in breach of a duty of care owed to the plaintiffs in the period between lodgement of the prospectus and allotment of the converting notes, the Macquarie parties failed to obtain the advice or opinion of Trowbridge, another party to the proceedings, who was then conducting NCRH's valuation of outstanding claims as at 31 December 1998 as to the effect of NCRH's recent claims experience, on the claims provision which ought to be adopted by NCRH and the resultant effect on NCRH's NTA. (see paragraphs 85 to 90).

8 Mr Black expressed an opinion that, having regard to the facts alleged by the plaintiffs in the Amended Summons, the Macquarie parties have a proper basis for cross-claims against NCRA; firstly, that NCRA made representations to the Macquarie parties as to the purposes of the converting notes issue on which the Macquarie parties relied in making representations to the plaintiffs as to those matters; secondly, that NCRA failed to disclose what I have referred to earlier as the quality of business representations; thirdly, that NCRA made representations to one of the Macquarie parties as to the NTA position; fourthly, that NCRA was knowingly involved in the contravention by NCRH arising out of the provision by NCRH to one of the Macquarie parties of a draft of the prospectus; and fifthly, that NCRA by three of its executives, Messrs Daya, Williams and Aroney, made representations to one of the Macquarie parties in the period between lodgement of the prospectus and allotment of the converting notes in respect of the Trowbridge valuation to which I have earlier referred.

9 After McDougall J granted the leave to the plaintiffs to further amend the Summons a régime was put in place for an application to be made such as the one that is before me, and Macquarie brought that application within the relevant time frame. They sought to avoid the necessity for the application by having their solicitors, Mallesons Stephen Jaques, write to the solicitors for the liquidator, Henry Davis York, seeking some form of comfort so that proceedings may either be avoided or issues refined. The correspondence is annexed to a number of the affidavits and counsel have taken me to the salient features of it.

10 Put shortly, Mallesons firstly asked whether the liquidator would admit that NCRA was liable to the Macquarie parties for the full amount, if any, for which the Macquarie parties might be held to be liable to the plaintiffs, plus costs. Understandably that request was declined. Alternatively, the Macquarie parties sought from the liquidator, an agreement that NCRA would be bound by all the findings of fact and law made in these proceedings and in the appeal therefrom for the purposes of any proof of debt that may be lodged by the Macquarie parties in the NCRA winding up and not to reject or contest any proof of debt to the extent that it relied on those findings. The liquidator declined that request.

11 Henry Davis York advised that the liquidator had concluded that it was not appropriate for him to agree to the request and he could not foresee circumstances in which he would not take "proper notice" of the factual findings in the proceedings in the event that the Macquarie parties lodged a proof of debt which depended upon those findings. That was as high as the liquidator put it. Mr Coles QC, went a little further in submissions. He suggested it would be quite bizarre for a liquidator not to pay appropriate regard to findings of fact that were relevantly made in respect of the proof of debt that was lodged. That submission was made in support of a submission that no real risk has been demonstrated here to warrant a grant of leave.

12 Mr Katekar, who appeared very shortly for the plaintiffs on this application, simply made the point that the Macquarie parties' claim that this application is consequent upon the amendment allowed by McDougall J needs to be looked at in the light of what was already pleaded in the Fourth Further Amended Summons. Mr Katekar helpfully tabulated the paragraphs of the proposed cross-claim which is, if it is allowed, the 29th cross-claim with the corresponding paragraphs to the Fourth Further Amended Summons. That is a helpful tabular form but I am not satisfied that it will be decisive of any real issue between the Macquarie parties and the liquidator in this application.

13 It is clear that the Macquarie parties can pursue their rights either by way of lodgement of the proof of debt under s553 of the Corporations Act as a contingent creditor, or, with leave, by action against NCRA in these proceedings.

14 The liquidator's evidence in his affidavit and that of Ms Merrick and deals with a number of issues, including the heavy costs burden and the dislocation of the liquidator's tasks under the Act, both matters of relevance and significance in an application such as this. Mr Gibbons gave the following evidence in paragraph 19: Assuming the Macquarie parties' application for leave to cross-claim against the NCRA is granted and NCRA is joined in these proceedings, I have given careful consideration as to whether NCRA may be able to be excused from participation, or whether its participation could be limited thereby minimising costs. However, for the reasons outlined in the affidavit of my solicitor, Ms Katherine Merrick a partner of Henry Davis York sworn in these proceedings, it is likely that NCRA would need to fully participate in these proceedings in order to properly protect the position of NCRA unsecured creditors. In addition, the Macquarie parties' claim against NCRA is potentially very significant (equating to the claim by the plaintiffs against the Macquarie parties of up to approximately $40 million) and therefore such a claim would have a significant impact on the creditors of NCRA. In particular, if joined I would need to seek advice on whether to file cross-claims against existing parties to these proceedings and any third parties.

15 Ms Merrick took that last aspect of the matter a little further in paragraph 15 as follows: If joined NCRA is likely to bring cross claims against at least some of the other defendants seeking indemnification or contribution in respect of any loss for which NCRA may be found liable to the Macquarie parties and I anticipate that if the issues (identified earlier in her affidavit) will become live issues in the cross claims NCRA would also need to consider whether it ought to bring cross claims against parties not presently party to the proceedings. 16 Ms Merrick's apparent advice to Mr Gibbons is that NCRA would have to play what was referred to as an "active role" in the proceedings. On the costs aspect of the matter, may I say a rather sensible approach has been adopted in assessing the time of partners and other lawyers of Henry Davis York, and the fees of senior and junior counsel, making sure that some adjustment is made so that junior counsel would have the main involvement and senior counsel brought in only when really necessary. It is really an estimate and perhaps in some ways a guesstimate, but Ms Merrick expressed the opinion that the total of the likely costs exclusive of GST would be approximately $900,000, taking it up to about a million dollars inclusive of GST.

17 Ms Merrick has annexed to her affidavit very detailed charts, helpful in sorting through the many claims and cross-claims that are made in these proceedings. They no doubt will be helpful on the further interlocutory steps in this case and may also be helpful to the trial judge. What is clear is that the numerous parties and claims are indicative of this type of litigation and it is not unreasonable to describe it as complex and large litigation.

18 Mr Coles QC submitted that there is real prejudice and dislocation which has to be balanced against the prospect of the rejection of a proof of debt. He submitted that it is quite clear that there is no good reason to depart from the usual approach in this case and to refuse leave so that ultimately, if necessary, the Macquarie parties may lodge a proof of debt and in the usual way the liquidator will make an assessment of it pursuant to the statutory obligation. If necessary an appeal would occur, not on all the facts, matters and circumstances fought in the trial only on the limited grounds that would be necessary to be the subject of any appeal from the liquidator's refusal.

19 Mr Jackman SC submitted that guidance can be obtained from Einstein J's judgment in a similar type of application brought by the Macquarie parties and others to join and cross-claim against NCRH. NCRH was in a different position than NCRA because there was a contractual indemnity between Macquarie and NCRH.

20 After setting out the factual background, and indeed referring to McPherson J's judgment, Einstein J referred to the costs that had been outlined to him and they were similar to the costs that have been outlined to me. His Honour also referred to Mr Black's evidence that he had an apprehension that if the Macquarie parties were to lodge a proof of debt, the liquidator of NCRH may contest or not be prepared to accept the factual basis of the proof of debt so far as it related to matters in issue in the proceedings if NCRH was not joined as a party to the proceedings. The same submission is made here in relation to NCRA.

21 What has already happened in the cross-claim as against NCRH is that the representations to which reference has been made earlier in this judgment have already been pleaded in the alternative as against NCRA. I really do not think I can take that matter into account and certainly not in the applicant's favour as having some foot in the door. It seems to me, it is merely a pleading flourish and cannot have any relevance to this application.

22 Einstein J recounted the submissions put by counsel in respect of what a prudent liquidator would do. His Honour also observed that the issue of the liquidator's likely forensic steps is a matter which the liquidator would have to determine according to principle and that would include steps that may include judicial advice or imprimatur from time to time: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd & Ors (2003) 45 ACSR 224, at par 54.

23 Mr Jackman SC's submission is that there is not a great deal of difference between this case and the one that Einstein J heard in respect of the application to join NCRH. It was submitted that where an appeal from a disputed proof of debt would raise the same issues as proceedings on foot to which "it is sought to join the company, there is "good reason" to grant leave to proceed to avoid different findings of fact against different parties and to avoid a multiplicity of proceedings: Capita Financial Group Ltd v Rothwells (1989) 15 ACLR 348; BHG Nominees Pty Ltd v Ellis Young Investments Pty Ltd, (1998) ACLC 1539.

24 So what is the status of this risk? It is a little difficult to ascertain in this case because the liquidator's desire to adhere to his statutory obligations and to protect the assets of the company and yet to try to indicate to the Macquarie parties effectively that he will do his duty, has left the matter in some uncertainty. It is uncertainty where the litigation is indeed large and complex. To indicate that he, the liquidator, would pay close regard to the judgment and reasons for judgment is really of no comfort to anyone. The permutations and combinations of findings possible in this case at the moment on the pleadings, both in the main pleadings and in the 28 cross-claims, are such that paying close regard to the findings anticipated in a reasonably lengthy judgment may not mean anything else than the liquidator might grant some portion of the claims in the proofs of debt, all of them or none of them. 25 If the Macquarie parties do not have the leave to bring this action there is a real risk that there is going to be a multiplicity of actions by way of appellate process if proofs are rejected in whole or in part and the costs that may be incurred ultimately may be greater than if leave is granted so that the matters can be sorted out in this litigation. The emphasis Mr Coles qc places upon the cost and the dislocation must be tempered by realistically looking at costs being incurred now and perhaps large amounts of costs saved later.

26 There is also another matter that needs to be considered and that is THE matter that I raised with counsel, of mediation and alternative methods of settling issues in the litigation. That seems to me to be an important aspect on this application. One cannot simply assume that the litigation will run for months and then a judgment will be delivered. It may well be that multiple parties will settle as against each other, that the issues are refined, that a shorter trial is anticipated and a shorter judgment with crisp reasons might be able to be given. On the other hand, mediation may occur part way through and may even be ordered if the parties are unwilling. However, it would seem to me that with the experienced professionals involved in this case a compulsory mediation would be very unlikely if some parties wish to proceed that way. 27 Having said all that, it seems to me that, albeit that the costs anticipated have been carefully outlined and one must recognise the dislocation, it really should be looked at with the wider range of alternative steps that are taken these days in large and complex litigation. Einstein J expressed the following view at [60]: Standing back from the detailed litigation and bearing in mind the strictures of McPherson J, it does seem to me that the overwhelming weight to be given to the tremendous complexity to be anticipated as being litigated in the proceedings means that the proper exercise of the court's discretion is to accept that reasons have been demonstrated for a departure from the usual procedure in terms of there being substituted for litigation the proof of debt and appeal procedure. The departure is justified in the case of the particular claims in dispute. Indeed any prospect even if, to use Mr Coles' submission, it was unlikely that the liquidator would seek to re-litigate matters already determined is where practicable to be avoided in this class of massive litigation.

28 Mr Jackman SC placed emphasis on his Honour's reference to "any prospect" of re-litigating matters. Although Mr Coles QC submitted that it would be "bizarre" that the liquidator would not pay appropriate regard to findings of fact and law, it is not as simple as it seems. I am of the view, that there is a "prospect" of re-litigating issues and there is demonstrated good reason for departing from the usual procedure. I intend to grant leave on conditions. In doing so I should say that there has been no attack on the proposed terms of the claims within the cross-claim annexed to the affidavit.

29 Accordingly, I grant leave to the Macquarie parties pursuant to s500 of the Corporations Act 2001 to proceed against Newcap Reinsurance Corporation Ltd (in liquidation) in the terms of the draft 29th cross-claim which I will initial and date today on the condition that any judgment against the cross-defendant will not be enforced without the leave of the court. It is a further condition of that grant of leave that the Macquarie parties will use their best endeavours to ensure that case management of the cross-claim against NCRA and NCRA's involvement at any trial are proceeded with so as to minimise the costs that will be incurred by NCRA.

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