Kaji Australia Pty Ltd v Glover

Determination

In Tombling v Universal Bulb Company, Limited [1951] TLR 291, Denning LJ (as his Lordship then was) spoke about the duty of counsel in a civil case. The remarks are equally applicable to a solicitor. His Lordship said (at 297): The duty of counsel to his client in a civil case… is to make every honest endeavour to succeed. He must not, of course, knowingly mislead the Court, either on the facts or on the law, but, short of that, he may put such matters in evidence or omit such others as in his discretion he thinks will be most to the advantage of his client. So also, when it comes to his speech, he must put every fair argument which appears to him to help his client towards winning his case. The reason is, because he is not the judge of the credibility of the witnesses or of the validity of the arguments. He is only the advocate employed by the client to speak for him, and present his case, and he must do it to the best of his ability, without making himself the judge of its correctness, but only of its honesty. (emphasis added) The provisions of Sch 2 of the Uniform Law have, of course, modified that duty, but what was said by Lord Denning as to the lawyer not being the judge of credibility has continuing relevance.
In Degiorgio v Dunn (No 2) 62 NSWLR 284; [2005] NSWSC 3, Barrett J (as his Honour then was) considered the meaning of "without reasonable prospects of success" in s 198M of the Legal Profession Act 1987 (NSW) (the same phrase appears in cl 5 of Sch 2 of the Uniform Law). His Honour said: [20] When that statutory language is examined, it is seen that, while s.198J(4) goes some way towards explaining "reasonable prospects of success", it does so in a way that does not attempt to explain or define "reasonable prospects". The meaning of that expression must be gathered by analogy, with such attention as is permissible paid to Parliamentary materials. [21] In some contexts, "reasonable prospects of success" signifies no more than "arguable". I quote the following passage from the decision of the Australian Industrial Relations Commission in Westend Pallets Pty Ltd v Lally (1996) 69 IR 1 at p.12: "The requirement for an arguable case of either legal error or that the discretion has been miscarried will mean that applicants must demonstrate that their case has a reasonable prospect of success." [22] It may also be said that "reasonable prospects of success" connotes something less than likelihood of success - hence the formulation of Sheppard J, in Ahern v Deputy Commissioner of Taxation (1983) 78 FLR 202, "… will be likely to succeed or at least have reasonable prospects of success" [emphasis added]. That the test is not a particularly stringent one is suggested by an observation of Gleeson CJ, McHugh and Gummow JJ in United Mexican States v Cabal (2001) 209 CLR 165 at p.174: "A constitutional challenge to legislation is always a matter of public importance. If it has even reasonable prospects of success, special leave to appeal will be granted - almost as a matter of course" [emphasis added] .… [26] I accept that this legislation imposes upon lawyers a standard that is more demanding than that applicable in cases where, by reference to general law principles, a costs order is sought against a party's lawyer. Cases of that kind turn upon the lawyer's duty to the court. Here, by contrast, the lawyer is subject to a statutory duty reflective of the interests of the community. A recent statement of the relevant general law approach may be found in the decision of the Queensland Court of Appeal in Steindl Nominees Pty Ltd v Laghaifar [2003] 2 QdR 683. Davies JA there said (at p.689), with the concurrence of the other members of the court and after reviewing earlier authorities: "To the extent that those statements state or imply that it is not improper for a legal representative to present a case which he or she knows to be bound to fail, I would reject them. I would prefer to say that it is one thing to present a case which is barely arguable (but arguable nevertheless) but most likely to fail; it is quite another to present a case which is plainly unarguable and ought to be so to the lawyer who presents it. In my opinion, with respect, it is improper for counsel to present, even on instructions, a case which he or she regards as bound to fail because, if he or she so regards it, he or she must also regard it as unarguable." [27] In drawing a line at a somewhat higher point on the relevant scale of conduct, the Legal Profession Act should not, in my opinion, be presumed to intend that lawyers practising in New South Wales courts must boycott every claimant with a weak case. A statutory provision denying to the community legal services in a particular class of litigation cannot be intended to stifle genuine but problematic cases. Nor do I see the statutory provisions as intended to expose a lawyer to the prospect of personal liability for costs in every case in which a court, having heard all the evidence and argument, comes to a conclusion showing that his or her client's case was not as strong as may have appeared at the outset to be. The legislation is not meant to be an instrument of intimidation, so far as lawyers are concerned. [28] The several factors to which I have referred, including the references in the Premier's second reading speech and the apparent legislative purpose, cause me to adopt the construction of "without reasonable prospects of success" that equates its meaning with "so lacking in merit or substance as to be not fairly arguable". The concept is one that falls appreciably short of "likely to succeed".
This approach was approved in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153 by McColl JA (Hodgson and Ipp JJA agreeing) at [132]: [132] Barrett J's construction of the expression "without reasonable prospects of success" appears to me to accommodate both the purpose of Division 5C and to reflect the language of s 198J. The test, whether a claim or a defence was "so lacking in merit or substance as to be not fairly arguable", must be applied, however, in the context of the constituent components of s 198J. In that context the question becomes whether the solicitor or barrister held a reasonable belief that the provable facts and a reasonably arguable view of the law meant that the prospects of recovering damages or defeating a claim or obtaining a reduction in the damages claimed were "fairly arguable". These are matters about which reasonable minds might differ. The question will be whether the solicitor or barrister's belief that they had material which objectively justified proceeding with the claim or the defence "unquestionably fell outside the range of views which could reasonably be entertained": Medcalf at [40] per Lord Steyn. (emphasis added)
Her Honour went on to say: [135] It is important to recognise that the question whether a s 198M order should be made may arise in several ways each of which may attract different onuses of proof. It may arise because the trial court "hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success": s 198N(1). Alternatively it may arise because "the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success": s 198N(2). In either of these cases there is a rebuttable presumption for the purposes of Division 5C that the legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success. The presumption is rebutted if the legal practitioner establishes "that at the time legal services were provided there were provable facts (as provided by section 198J) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success": s 198N(3). [136] Section 198N is only concerned with whether the facts demonstrated there was "a basis for a reasonable belief that the claim or the defence had reasonable prospects of success". However, the question whether a s 198M order should be made may arise for reasons which do not turn on the facts found by the court. The court may, for example, form a prima facie view that despite the facts found, there was no reasonably arguable view of the law which would support a reasonable belief that "the claim or the defence had reasonable prospects of success".
The principles to be applied when considering costs orders under s 99 of the Civil Procedure Act were set out in Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278 by McColl JA (Beazley JA and Barrett J agreeing) at [60]-[61]: [60] The jurisdiction to make costs orders against legal practitioners referred to in s 99 and UCPR 42.3(2)(g), now commonly referred to as the "wasted costs" jurisdiction, must be exercised "with care and discretion and only in clear cases": Lemoto v Able Technical Pty Ltd & 2 Ors [2005] NSWCA 153; (2005) 63 NSWLR 300 (at 92) per McColl JA (Hodgson and Ipp JJA agreeing). In exercising the jurisdiction, however, the Court takes into consideration the public interest reflected in the legislative provisions to which I have referred, that litigants should not be financially prejudiced by the unjustifiable conduct of litigation by their or their opponent's lawyers: Ridehalgh v Horsfield [1994] Ch 205. It is the public interest in the administration of justice which is the source of duties that lawyers owe to the court: Rondel v Worsley [1969] 1 AC 191 (at 227) per Lord Morris. [61] The wasted costs jurisdiction is based on the court's right and duty to supervise the conduct of its solicitors: Myers v Elman (at 302) per Lord Atkin, (at 318 - 319) per Lord Wright, (at 334 - 336) per Lord Porter. The underlying principle is that the court has a right and a duty to supervise the conduct of its solicitors, and visit with penalties any conduct of a solicitor which is of such a nature as to tend to defeat justice in the very cause in which the solicitor is engaged professionally. The jurisdiction is exercised where it is demonstrated that the solicitor has failed to fulfil his or her duty to the Court and to realise his or her duty to aid in promoting in his own sphere the cause of justice. The order is for payment of costs thrown away or lost because of the conduct complained of and is frequently exercised in order to compensate the opposite party in the action: Myers v Elman (at 319) per Lord Wright; see also Sydney South West Area Health Service v Stamoulis [2009] NSWCA 153 (at [204]) per Ipp JA (Beazley and Giles JJA relevantly agreeing).
Assistance in understanding the meaning of terms used in s 99 is provided in the decision of Ridehalgh v Horsfield [1994] Ch 205 (a decision referred to with approval in a number of decisions of the Court of Appeal of New South Wales). The United Kingdom Court of Appeal was considering the equivalent provision to s 99 which provided: Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause, or are wasted by undue delay or any other misconduct or default, the court may make against any solicitor whom it consider to be responsible…an order…(c) directing the solicitor personally to indemnify such other parties against costs payable by them. The Court relevantly for the present application said (at 232): In our view the meaning of these expressions is not open to serious doubt. "Improper" means what it has been understood to mean in this context for at least half a century. The adjective covers, but is not confined to, conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty. It covers any significant breach of a substantial duty imposed by a relevant code of professional conduct. But it is not in our judgment limited to that. Conduct which would be regarded as improper according to the consensus of professional (including judicial) opinion can be fairly stigmatised as such whether or not it violates the letter of a professional code. "Unreasonable" also means what it has been understood to mean in this context for at least half a century. The expression aptly describes conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case, and it makes no difference that the conduct is the product of excessive zeal and not improper motive. But conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting on a practitioner's judgment, but it is not unreasonable. … We were invited to give the three adjectives (improper, unreasonable and negligent) specific, self-contained meanings, so as to avoid overlap between the three. We do not read these very familiar expressions in that way. Conduct which is unreasonable may also be improper, and conduct which is negligent will very frequently be (if it is not by definition) unreasonable. We do not think any sharp differentiation between these expressions is useful or necessary or intended.
I am not persuaded that the test set out in Mitry Lawyers v Bamden is the correct test for determining costs applications against lawyers under either Sch 2 of the Uniform Law or under s 99 of the Civil Procedure Act. The decision is not referred to in any of the authorities I have set out about, nor in other decisions of the Court of Appeal dealing with such costs.
A significant issue which arose at the present hearing concerned the use that could be made of findings which I made in my principal judgment. Mr Newell submitted, following evidence given to the same effect by Mr Muriniti, that Mr Muriniti could not be bound by those findings because he was not a party to the proceedings. This was a surprising submission in the face of the decision of the Court of Appeal in King v Muriniti [2018] NSWCA 98, a case involving the same firm of solicitors.
In that case, the winning party in litigation sought that the losing party's solicitor pay the costs which the losing party (then a bankrupt) had been ordered to pay. One of the significant bases upon which the solicitors resisted the payment of costs was that since the solicitors had not been a party to the original appeal they were not bound by the findings made by the Court in the proceedings that gave rise to the costs orders (see at [12]). The claim for costs in that case relied on the provisions of s 99 of the Civil Procedure Act. One basis upon which it was suggested that the solicitors were not bound by the findings in the principal proceedings was a reliance on s 91 of the Evidence Act 1995 (NSW) which provided: (1) Evidence of the decision or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding. (2) Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose.
The Court of Appeal concluded that a court may have regard to findings in the court's principal judgment when costs are sought against a solicitor. Basten JA (with whom Gleeson JA and Emmett AJA agreed with additional reasons) said: [44] In short, if the practitioner were entitled to prevent the court having regard to findings in its principal judgment, he would, presumably, be entitled to seek recusal of the whole bench on the basis of pre-judgment. That would obviously be inconsistent with the scope and purpose of s 99 and its historical antecedents. However, if the court is entitled to take account of its findings, to the extent that they are relevant, it would be absurd that it could not have regard to the very judgment in which those findings were expressed. The only contention standing in the way of that approach is the reading of s 91 relied on by the practitioner; however, properly understood, s 91 is not engaged in the present circumstances. Indeed, there is no reason to require that the substantive judgment be tendered or treated as "evidence" on the costs application. [45] Given the nature of the jurisdiction conferred by s 99 of the Civil Procedure Act, in my view s 91 of the Evidence Act has no operation. Indeed, it would be a technicality to require one of the parties to proceedings for a third party costs order to tender as evidence the judgment of the court in the substantive proceedings. The judgment does not need to be tendered for the court to take into account and place reliance upon the findings it had made in the substantive proceedings. [46] Further, it would be an abuse of process for the solicitor to be allowed to challenge the findings made in the substantive proceedings. It was open to him to call such evidence as he wished by way of confession and avoidance or mitigation, but that he did not do. The findings in the substantive judgment as to the conduct of the proceedings therefore warrant the drawing of the inferences required by s 99, supporting an order for costs against the solicitor for Ms Young.
Acting Justice Emmett said at [97]: In any event, it is by no means clear that s 91 has any application. The Court is being asked to make orders as to the costs of proceedings that have been decided by the Court. It is artificial to treat the four applications presently before the Court as separate proceedings simply because Mr Muriniti was not formally a party to the Four Proceedings. He was, of course, intimately involved in the Four Proceedings.
Mr Newell submitted that the statement in King v Muriniti at [46], that it would be an abuse of process for the solicitor to be allowed to challenge the findings made in the substantive proceedings, was a determination made without any authority. In response to a question that I asked of Mr Newell, he accepted that I was bound by that principle from the Court of Appeal, but he said that he made the submission to preserve his rights to argue on appeal from this judgment that the decision of the Court of Appeal in King v Muriniti was wrong.
King v Muriniti was concerned with a claim made under s 99 of the Civil Procedure Act. To the extent that reliance is placed in the present application on s 99, the solicitors are bound by the findings in my principal judgment and by the findings in the judgment of the Court of Appeal.
As far as the claim is made under Sch 2 of the Uniform Law, cl 6 necessarily means that the solicitors are bound by any findings of the kind referred to in cl 6 of Sch 2 by the trial judge, to lead to the rebuttable presumption that the legal services were provided without reasonable prospects of success. To the extent that findings were not made precisely in the terms referred to in cl 6(1), I consider that King v Muriniti is authority for the principle that the solicitors are bound by findings I made in my principal judgment. The issue is then whether that leads to the conclusion that the legal services were provided without a reasonable belief by the solicitors that the claim had reasonable prospects of success.
In the course of my principal judgment I made a number of findings relevant to the costs issue under consideration. Those findings were these: [143] Although the present legal advisors for the defendant put forward a case to suggest that Mr Nicholson was behind the fake loan application and approval from St George, as will be seen later, I do not accept that there is any evidence to suggest that that is so. It is difficult to see what benefit Mr Nicholson could think that he would derive from engaging in such behaviour. The submission made by the defendant's solicitor, Mr Newell, during the hearing that Mr Nicholson was doing this to take "a slice of the equity of the [defendant's] house", or to take "a secret commission derived from the equity in the property" was improperly made because not only was it made without any evidence to support it, it is impossible to see how Mr Nicholson would ever be able to take any equity in the defendant's property. Since the plaintiffs through Mr Shields were conducting the auction they were, presumably, the only party who could pay Mr Nicholson a secret commission. It was never put to Mr Shields that any commission or fee was to be paid or was paid to Mr Nicholson for any reason by the plaintiffs. … [245] In final submissions I asked Mr Newell again what Mr Nicholson was to get out of engaging in this conspiracy with Mr Shields and the plaintiffs. The following exchange occurred…: … HIS HONOUR: So Mr Nicholson makes this fraudulent arrangement with St George to further his relationship with Mr Shields and his lenders, is that the idea? NEWELL: To do whatever it took to send the work Mr Shields' way, the type of contract to Mr Shields' way. Now, there also has to be a suggestion-- HIS HONOUR: And what does Mr Nicholson get out of this? A fee and continuing work from Mr Shields, is that what you say? NEWELL: Yes… [246] As Mr Lloyd of counsel for Mr Nicholson pointed out, this was a wholly new basis for putting the case. In any event, the only evidence that remotely provided any basis for it was evidence obtained from Mr Shields in cross-examination that he had known Mr Nicholson for some time on a professional basis and had been involved in a number of other loan agreements previously. The defendant should not be allowed to change the basis of his case in this way. It would be unfair to all the cross-defendants who are likely to have led further or different evidence concerning the prior relationship between Mr Shields and Mr Nicholson. In any event, the evidence does not support the new basis put forward. The matter must be considered on the basis set out in the pleadings and particulars. … [269] Whether Mr Valentino was saying that the letter was fabricated or that the loan approval was fabricated (it is difficult to see how the letter of approval could be genuine if the loan itself was a fabrication) he had no basis at all for suggesting that the author of the fabrication was Mr Nicholson. His conclusion in that regard was based only on assumption and speculation. His opinion in that regard should not have been put forward by the lawyers acting for the defendant. It was an allegation of fraud and criminality without any basis as Mr Valentino's cross-examination demonstrated and as he ultimately accepted. [270] In the same way, none of the matters identified by the defendant considered singly or together, leads to an inference that Mr Nicholson engaged in fraud or that he conspired with the plaintiffs and Mr Shields to enrich themselves from the sale of the defendant's land. I accept the submissions of Mr Lloyd for Mr Nicholson which demonstrate the improbability of the fraud and conspiracy alleged. … … [275] The defendant also relies on matters which are set out at paragraph 34 of the cross-claim. They are said to inform the agreement to perform the unlawful acts for the combination and conspiracy. The first five are neither facts nor particulars but, rather, conclusions or inferences which it is said should be drawn. That is the difficulty. They assert that (a) Mr Nicholson had a substantial stake in the defendant entering the loan with the plaintiffs; (b) Mr Nicholson, knowing the St George Approval was a fabrication and that the Expected Loan Representations were fraudulent, made himself available to the plaintiffs by swearing an affidavit to resist the application by the defendant to set aside the judgment; (c) Mr Shields and the plaintiffs "sought out and embraced [Mr Nicholson] as part of their camp"; (d) all the cross-defendants cooperated forensically to frame an affidavit case to suggest the St George loan was genuine; (e) Mr Nicholson formed an intention "to avoid a forensic exploration" of the St George Loan Application and Approval. [276] It is very difficult to understand what most of those matters mean. There was no evidence to support any of them except that both Mr Nicholson and Mr Shields swore affidavits for the plaintiffs in relation to the making of the loan. That was hardly surprising when both men were involved in the loan coming about. Neither had been joined to the proceedings at that stage. The matter referred to in (d) above would have been difficult to achieve without the involvement of the lawyers acting for the various cross-defendants. It is not clear if there is a suggestion that they too were involved. … [279] Neither of the failures to remove the caveat or to provide a payout figure suggests anything more than negligence on the part of the plaintiffs' solicitors. The inclusion of those matters as a basis for the allegations of combination and conspiracy can only mean that the defendant is asserting that the plaintiffs' solicitors were part of the conspiracy. Those solicitors were not named as cross-defendants. There is no basis for alleging that those matters were evidence of a conspiracy. The allegations should not have been made. … [288] The matters put forward by the defendant to suggest a conspiracy are entirely insufficient and inadequate to do so. Lawyers have ethical responsibilities not to plead or allege fraud and other criminality without a proper basis to do so. It is difficult to see in the present matter how those ethical responsibilities have been complied with. Any conclusion that there has been fraud or conspiracy here by the cross-defendants is only attainable by speculation and a predisposition to believe it. I certainly accept that the St George loan was a sham. The person who had the most to gain by all that occurred was Mr Lippits. The history of his dealings with the defendant confirms that. [289] The defendant's evidence about why he had not joined Mr Lippits to the proceedings or sued him separately was entirely unconvincing. He knew as little of Mr Nicholson's and Mr Shields' wherewithal as he did about Mr Lippits. Nevertheless, the defendant, having used Mr Lippits' assistance to set aside the judgment for possession, then chose not only not to call him to give evidence but chose not to join him to the proceedings to claim against him. [290] From the point of view of causation, any loss suffered by the defendant was entirely brought about by Mr Lippits, and the defendant himself who was prepared to do anything to borrow money to pay the ATO to avoid losing his house. [291] The claims in fraud and based on a conspiracy fail.
In its judgment the Court of Appeal set out at [30] the summary of my reasons for rejecting the allegations of fraud and conspiracy made against Mr Nicholson. Those were paragraphs [251]-[261] and [270] in my principal judgment. The Court at [31] set out my conclusions for rejecting the conspiracy claim against Mr Shields. Finally, at [32] the Court of Appeal set out my findings at [289]-[291] in relation to the fraud and conspiracy allegations against both Mr Nicholson and Mr Shields.
In dismissing the appeal, the Court of Appeal said: [34] As Mr Glover's case recognised, it was essential for the success of his fraud and conspiracy claims against Mr Nicholson that Mr Glover prove that Mr Nicholson was aware that the purported loan approval from St George Bank was a sham and that with that knowledge Mr Nicholson caused Mr Glover, who was not aware the letter was a sham, to take the subject loan from Kaji and Mr Webster. That the case against Mr Nicholson thus involved serious allegations of dishonesty on his part was a matter to which the Court was required to have regard in deciding whether the case against him was established (Evidence Act 1995 (NSW), s 140(2); Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34). As the plurality in Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 94 ALJR 715 recently confirmed at [39], proof of fraud requires clear evidence. Moreover, as Mr Glover's case was circumstantial, without any direct evidence of Mr Nicholson's alleged fraud, he faced a formidable task in proving it. The matters he relied upon fell well short of doing this. The principal of these are referred to separately below. [35] A particular difficulty that Mr Glover faced in seeking to have the Court draw an inference of fraud on Mr Nicholson's part was that Mr Glover's case did not exclude the possibility that the sham St George Bank loan approval was procured by Mr Lippits without any guilty knowledge on the part of Mr Nicholson. Mr Lippits had a compelling reason, which neither Mr Nicholson nor Mr Shields had, to facilitate Mr Glover's borrowing, whether from St George Bank or otherwise. This was that it was Mr Lippits' borrowing from Mr Glover that gave rise to Mr Glover's CGT liability and to the ATO's consequent bankruptcy proceedings against Mr Glover. Mr Lippits was unable to repay Mr Glover and therefore had, quite apart from their friendship, every reason to want to assist Mr Glover to avoid bankruptcy. [36] Moreover, it is known from the evidence in the proceedings that Mr Lippits was prepared to act fraudulently to provide such assistance. He did so by falsifying the Boston Traders' letter and facilitating its use to deceive the prospective lenders. It is but a short step to conclude that the inference was available that Mr Lippits may have also acted fraudulently in relation to the procuring of the St George Bank letter. Furthermore nearly all of the information Mr Glover received about the St George loan was conveyed to him through Mr Lippits and not verified by any other person (Judgment [35]). [37] The primary judge noted that Mr Glover had used Mr Lippits' assistance earlier in the proceedings but chose not to call him to give evidence, and not to sue him (see [32] above). His Honour concluded that "any loss suffered by [Mr Glover] was entirely brought about by Mr Lippits, and [Mr Glover] himself". This inference was clearly open to his Honour and militated strongly against a finding that Mr Nicholson must have acted fraudulently in relation to the obtaining of the St George Bank approval letter. [38] In these circumstances, Mr Glover's claim against Mr Nicholson was bound to fail, as it did. It followed that the appeal in relation to that claim was likewise bound to fail.
When dealing with particular matters relied upon by Mr Glover in relation to Mr Nicholson, the Court of Appeal said: [42] First, Mr Glover submitted that the fact that Mr Nicholson had been told that the "loan application had stalled due to internal bank audit reasons" was "clearly evidence, given what Mr Valentino had to say about it, that the loan was a sham". [43] The reference to Mr Valentino's evidence was to evidence adduced by Mr Glover from Mr Peter Valentino, an experienced finance broker, of practices within the finance industries. Mr Valentino referred to a number of aspects of the purported St George Bank loan application and approval and concluded that "[t]here is cause for serious suspicion that the alleged loan from St George was not genuine and was a fabrication by the broker [Mr Nicholson]". Leaving aside its admissibility, any support, however small, it gave to Mr Glover's case was removed by Mr Valentino's concession in cross-examination that "there would be no reason whatsoever if a broker received a letter like [the St George Bank approval letter] to think anything other than it's a genuine conditional approval of a loan" (Tcpt, 18 April 2019, p 314). [44] Secondly, Mr Glover referred to various anomalies he said were apparent from the terms of the application to St George Bank and the purported conditional loan approval. Whilst, as his Honour found, the errors in the application indicate carelessness by Mr Nicholson in submitting it, if he did in fact submit it, they fall far short of indicating any fraudulent conduct on his part. Moreover, his Honour did not consider significant the fact that the St George approval letter conditionally approved the loan for an amount less than what was applied for and that the valuation of Mr Glover's house was returned the same day as the conditional loan approval. His Honour dealt with these alleged anomalies without any apparent error in his reasons (see Judgment [253]-[255] quoted in [30] above). [45] Thirdly, Mr Glover submitted that Mr Nicholson's explanation for his inability to produce any files in relation to the subject transaction was inherently improbable "and his account should not be accepted". There was however no inherent improbability in that explanation which was fully described in his Honour's earlier judgment of 9 April 2018 ([2018] NSWSC 414 at [12], [16] and [31]). [46] Fourthly, Mr Glover relied on evidence that he submitted established that on an earlier occasion (in December 2010) a "fake Bankwest approval" was used to obtain an adjournment of the ATO's bankruptcy proceedings. The evidence did not however establish any knowledge of Mr Nicholson that such approval was fake, if in fact it was. Again, his Honour adequately dealt with the argument (see Judgment [257]-[260] quoted in [30] above). [47] Next Mr Glover relied on the fact that the St George loan approval was a sham and that as Mr Nicholson lodged the application for it, he was "integrally involved in the transaction", such that he could be described as "the architect" of it. Mr Glover submitted that no attempt was made at first instance to suggest "some other scenario that did not presuppose [Mr Nicholson's] knowledge and which would explain the St George loan being a sham". [48] It was however for Mr Glover to establish that an inference of fraud should be drawn against Mr Nicholson. One matter clearly against such an inference being drawn was, as I have pointed out above, that Mr Lippits had a strong motive to obtain the purported St George approval letter and in the very same transaction was shown to have dishonestly provided the Boston Traders employment letter for the same purpose as the St George letter was alleged to have been obtained, namely, to fend off the ATO and to obtain a loan to enable it to be paid.
The findings I made, and the acceptance of those findings by the Court of Appeal, clearly identify the absence of evidence to justify the particular claims that were made. In that way those findings give rise to a presumption for the purposes of cl 6 of Sch 2 of the Uniform Law. There is, therefore, an onus on Mr Muriniti to establish that there were provable facts that provided a basis for a reasonable belief that the claim had reasonable prospects of success.
Mr Muriniti swore and relied on an affidavit of 12 June 2020 setting out the investigations he made, and explaining his reasoning for certifying the cross-claim filed on 8 June 2018.
So that I do justice to Mr Muriniti's reasoning put forward to justify the pleading of fraud and conspiracy against the cross-defendants including the Nicholson interests, I set out in full the matters upon which he relies from his affidavit of 12 June 2020 as follows: 10. The following matters exercised my mind and caused me to infer that there was a fraud by Nicholson and a conspiracy to defraud Mr Glover in the manner which has been pleaded in the Amended Cross Claim filed on 8 June 2018. The matters to which I refer below were matters which I knew or considered prior to 8 June 2018. The matters of which I had knowledge or was aware as at 8 June are as follows: (a) The St George loan approval was in fact a sham and has been found by this Honourable Court to be a sham loan. (b) The loan process was initiated and personally managed by Nicholson. In these circumstances, [I] considered that it was highly unlikely, given Nicholson's connection to the loan application, that he did know it was a sham insofar as it was. (c) The St George loan application contained information which I considered from Nicholson's affidavit, and his email to Shields dated 15 February 2011, that Nicholson knew to be false. The facts known to Nicholson showed that he knew the application was false in numerous respects. The answers provided were to the effect that there had been no judgments against Glover and he had not been sued. The History of the matter caused me to infer that the employment letter was highly improbable. In the premises, and considering other information which Nicholson plainly seemed to know was false, I inferred that he probably knew that the employment letter and the statement of income in the St. George application were known to be false. These matters increased the likelihood in my mind that Nicholson knew that the St George loan approval was a sham. (d) The Bankwest loan approval dated 20 December 2010 was a sham. The 20 December 2010 was the day prior to a listing in the Federal Magistrates Court of the bankruptcy proceedings against Mr Glover. By an email dated 23 December 2010, Nicholson sought from Lippits the sum of $2,000 being for services provided by Prestia. Nicholson had a close business association with Prestia in that they shared an office and the $2,000 for work apparently done by Prestia was being paid into Mercia's account. I considered that it was inherently unlikely that Nicholson was receiving the money without knowing what it was that Prestia had done to warrant the payment of that consideration. As at 23 December 2010, Nicholson had only just me (sic) Lippitts. Nicholson's broker's deed was dated 21 December 2010. Exhibited at "LCMI" Tab 2 is a copy of the email dated 23 December 2010. Exhibited at "LCMT' Tab 3 is a bundle of documents to which I had access recording the events in the Federal Magistrate's Court in connection with the Creditor's Petition against Mr Glover. (e) The fact of the sham Bankwest loan approval caused me to understand that there was a propensity on the part of Nicholson to be involved in the publication of false loan indicia. Exhibited is the propensity notice dated 2018 served on Nicholson. (f) Nicholson conducted himself on the basis that the Employment Letter was the basis of the Loan Application. The Employment Letter was dated 14 January 2011 and therefore according to Nicholson predated any question of seeking a short term loan from private lenders. Nicholson in his Affidavit evidence offered no explanation for a purported reliance upon the Employment Letter when there never could have been a genuine loan without a group certificate. I rely upon the Affidavit of Peter Valentino sworn 1 May 2018 that a broker would know that. I considered in light of my investigations, and what Mr Valentino's expert evidence that Mr Nicholson could not have understood the process involving the alleged St George loan as calculated secure genuine loan. (g) Nicholson did not produce any evidence denying that he knew the St George loan was a sham. This was in spite of the fact of Nicholson's knowing involvement in the St George loan sham was alleged in the FACC and a Propensity Notice was served on him. (h) I understood that the purported St George loan approval was not referable to the St George Loan Application. The Loan Application was dated (Thursday) 27 January 2011. The approval was dated (Tuesday) 1 February 2011. The sum purportedly approved by St. George was for $100,000 while the purported application was for the sum of $160,000. it appears to me that on the face of the document that the Loan Application was forwarded to St George, at the earliest, two business days prior to the Loan approval having, been faxed to Nicholson. There was no evidence from Nicholson (or Shields) that any steps intervened to explain the discrepancy between the application and the approval. I considered that it was untenable to suppose that a loan might be approved by a major bank in a sum for which no application had been made and that that was done with no explanation. (i) I considered that the provision of the St George Loan Approval by facsimile at 9:42 am on 1 February 2011 contraindicated the genuineness of the St George loan. I considered it more probable than not that the loan officer must have been astute that the Approval document was required to be used at 9:45am on 1 February 2011. That date was in feet a listing in the Federal Magistrates Court in circumstances that the St George Bank does not lend to borrowers to enable them to pay debts owed by them to the Australian Taxation Office which are exhibited at "LCM1 Tab3. (j) I understood that St George does not in fact lend to pay out ATO debts. I understood this initially from Nicholson's own statement deposed to by Shields in Shields' affidavit sworn 28 June 2015. This was confirmed by Mr. Valentino's evidence. Mr Shields gave evidence in his Affidavit of 28 June 2015 that; "On or about 15 February 2011 I received a telephone call from Nicholson, a mortgage broker whom I had dealings with over a number of years". Also, in his Affidavit of 28 June 2015, Mr Shields deposed to the following conversation: "I have an urgent application for a short-term finance for a Mr Glover. The loan would be secured by a first mortgage. The loan amount is for approximately $100,000 net for a period of one month. The loan amount will be applied to payout a debt to the Deputy Commissioner of Taxation who is in a position to enforce a Bankruptcy in the Federal Magistrates Court in the next few days.... l am told that St George has approved a loan but they cannot do it in time to avoid bankruptcy and will not directly pay a debt to the Taxation Department." (k) By reason of the forgoing matters, I drew the inference that the purported approval of the St George loan application was not given after proper consideration in the ordinary course of business but in order to supply a sham basis to obtain an adjournment of the Bankruptcy Proceedings in the Federal Magistrates Court. I inferred that the St George loan was procured by collusive agreement between Nicholson and Hany Hanna for the principal purpose of enabling procurement of an adjournment from the Federal Magistrate's Court of the Bankruptcy Proceedings and that Nicholson had informed Hany Hanna of the need for the Conditional Letter of Approval by 9:45 am in order to make a representation to the ATO that finance was forthcoming and enable Mr Glover to pay the debt to the ATO. (l) As St George Bank does not lend to borrowers to enable them to pay debts to the ATO, such a disclosure to Hany Hanna contra-indicated to me that the loan process resulting in the provision of the St George Conditional Loan Approval Letter was genuine. It indicated to me that Nicholson knew or must have known that the loan was a sham. (m) Nicholson had filed an affidavit of discovery which contended for the entire disappearance of his physical file and his electronic records, I considered that the circumstances purporting to explain the absence of any documents whatever in connection with the St George loan process was fanciful. Exhibited at "LCM1" Tab 4 is a copy of Richard Nicholson's affidavit affirmed 29 October 2015. If Nicholson was to be believed he had lost of his documents which he needed to conduct his purportedly separate business. My belief was that the disappearance of his business records was further evidence that the Sy George loan was known by Nicholson to be a sham. That is because it was very much against his interests to produce the file if the St. George loan was a sham. (n) Nicholson's October Affidavit account was inconsistent with a genuine loan in that, according to him, the loan process was terminated by a phone call from the loan officer without any writing. In these circumstances, I relied upon the evidence of Mr. Valentino and common sense for inference that the St George loan was a sham and Nicholson knew that the loan was a sham. Mr Valentino included this opinion in his affidavit sworn 2018. (o) I was aware that Nicholson had proposed an approach to private lenders in circumstances that it was purportedly the case that the St George loan had only stalled because of a purported audit. I considered that the answer to this was to frame a representation to the ATO (whether in affidavit or not) as to what had occurred and to seek an adjournment on that basis. I understood that Nicholson had no hesitation in involving himself in measures specifically designed to secure an adjournment. That is because that is precisely what he did in securing the conditional approval from St George. I formed the view that Nicholson's omission to recommend steps to secure an adjournment was because he knew that the loan was a sham. I also drew the inference that Nicholson did not consider it viable to do so because the ATO has already been misled with the Bankwest loan approval. (p) The Bankwest loan application stated what kind of documents were necessary to support the Applicant's claimed income. The employment letter was not such a document. I also considered that as an experienced lender Shields would have understood interpedently of the St George Application form, that St George would not accept the employment letter as proof of income. In those circumstances, I considered that Shields could not have understood that there were reasonable prospects of the St George Application progressing. I considered therefore that there was good reason to believe that Shields knew that the St George loan was as (sic) sham and would not be progressing at all. (q) I consider that there was no reason such approach ought not to be followed and that it was plainly the more rational approach in the absence of knowledge by Nicholson that the ATO was both angry and suspicious by reason that they had been given a story that the Bankwest loan had not gone ahead notwithstanding that it was unconditional. (i) The St. George approval was a sham; and, (ii) Knowledge that the ATO had already agreed to an adjournment on the basis of the Bankwest unconditional loan. Conspiracy So far as the question of conspiracy a is (sic) separate issue, I will note the following matters. Generally, I considered that if Nicholson had engaged in the alleged fraud it would on the balance of probabilities exist in the context of the pleaded conspiracy. The following matters informed my view. (r) Although I believed that compelling evidence had emerged that the loan was a sham, the Plaintiffs took no steps to Cross Claim against Nicholson. Further, in this connection, the Plaintiffs were aware of the service of the Propensity Notice and of the evidence that the Bankwest Conditional Approval was also a sham in addition to the St George Loan Approval being a sham. (s) I was conscious that the evidence of the likelihood of Nicholson sharing the knowledge of the fact of the sham loan approval with Shields was influenced by the antecedent relationship between the two men. The evidence was Nicholson had a business relationship of some year's duration with Shields who organised the Plaintiffs loan to Mr Glover on behalf of the Plaintiffs. In his October affidavit Nicholson deposed; "I then decided to approach Rodney Shields who I had known for some years and was aware had access to private lenders who may assist." (t) I considered that it followed from the forgoing and what appears at [(i)] above, that the relationship between Shields and Nicholson was such that Nicholson was comfortable disclosing to Shields that the St George loan was for the actual purpose of discharging an ATO debt and at the same time disclose that St George would not give a loan for the purpose of discharging debts to the ATO. In other words, I considered that the loan was put on a knowingly false basis. I considered that Shields should have considered that this militated against the loan being genuine. (u) Nicholson had, despite evidence that the loan was a sham to his knowledge, cooperated with the Plaintiffs' legal representatives for the purpose of an account of events, insofar as there was evidence that there was a sham loan (and that there was evidence that supported Nicholson's knowledge of that matter), I inferred from that cooperation that; (i) The state of knowledge of Mr. Shields and the Plaintiffs was such that Mr Nicholson would not have had any anxiety in disclosing the fact of his knowing involvement in the sham loan. (ii) That lack of anxiety would exist despite the fact that the Plaintiffs' lawyers would be expected to ask detailed questions about the transaction and in particular as to where Nicholson's file was. (iii) In the premises there was reason to believe especially as Shields must have known that there was no group certificate to advance the St. George loan (as required by the St George application itself) that Shields was aware that the loan application was not genuine. (v) Shield's (sic) Affidavit evidence contained no suggestion that he had even enquired of anybody as to the existence of a group certificate. Nor does his evidence suggest that had been given any explanation as to why one was not available. (w) The evidence was that Shields did not care whether the loan amounted to asset lending and would not have been concerned if there was no exit strategy. (x) Shields purported to accept the Employment Letter from Boston Traders as a demonstration of income when a group certificate would have been necessary to support the St George loan - if the St George loan was not a sham. Shields did this in circumstances that the claimed income by the employment letter was implausible given the facts of the history of his ATO debt. This was two weeks after the purported St George approval by which time it was a reasonable inference (to be understood by both Nicholson and Shields) and that a copy of the group certificate would have been produced by Nicholson if the loan process was genuine. (y) Finally, it is self-evident that once the loan agreement with the Plaintiffs with concomitant mortgage were entered into by Glover, the St George loan could never have been settled and it is impossible to see how Shields or Nicholson could have understood that the purported St George application might have been advanced after that. Although I did not consciously consider this proposition at the time of filing the FACC, it is an available piece of reasoning on the basis of the basic known evidence. Shields and Nicholson conducted themselves on the basis that the St George approval was the expected exit strategy. Any future loan from St George would have to be a completely separate transaction for the purposes of which Nicholson would have to explain how it came about that the property which had been unencumbered was now the subject of a mortgage to what were obviously lenders of last resort. I infer that neither Nicholson nor Shields believed that the pretended exit strategy existed. In these circumstances, I consider that the known facts support the inference that Shields and Nicholson knew that the St. George loan was a sham and that they shared an intention to mislead Glover about that matter. (z) Finally, it is self-evident that once the loan agreement with the Plaintiffs with concomitant mortgage were entered into by Glover, the St George loan could never have been settled and it is impossible to see how Shields or Nicholson could have understood that the purported St George application might have been advanced after that. Although I did not consciously consider this proposition at the time of filing the FACC, it is an available piece of reasoning on the basis of the basic known evidence. Shields and Nicholson conducted themselves on the basis that the St George approval was the expected exit strategy. Any future loan from St George would have to be a completely separate transaction for the purposes of which Nicholson would have to explain how it came about that the property which had been unencumbered was now the subject of a mortgage to what were obviously lenders of last resort, I infer that neither Nicholson nor Shields believed that the pretended exit strategy existed. In these circumstances, I consider that the known facts support the inference that Shields and Nicholson knew that the St. George loan was a sham and that they shared an intention to mislead Glover about that matter.
The principal difficulty with this explanation is that it largely repeats the arguments put forward both at the hearing before me at first instance and in the Court of Appeal in relation to why the defendant asserted that Mr Nicholson, Mr Shields and the plaintiffs were part of a conspiracy, and why the Nicholson interests engaged in fraud. Mr Muriniti accepted in cross-examination that there was no evidence in his affidavit from his file that was not put before the Court as evidence at the trial. He accepted that the arguments put forward in his affidavit were the same as those put forward at the trial.
In oral evidence given at the hearing of the costs application, when cross-examined about the timing of the agreement that constituted the conspiracy, Mr Muriniti gave evidence about a further matter he said that he took into account. The evidence was this: Q. The pretext that you identified, being the corruption - that's my word, not yours - of the sale process, that must have been something that was the subject of the agreement between Mr Nicholson and Mr Shields on or before 20 February 2011 on your case? That's right, isn't it? A. Yes, I think the plan was to lock Mr Glover into a loan he couldn't get out of and then sell his home and take the proceeds, yes. … Q. Your case must be that that was agreed between Mr Webster, Mr Shields and Mr Nicholson way back on or before 20 February 2011, that there'd be that fraud even at that stage of the distribution of proceeds? A. My inference is that this was an established modus operandi and that they were working to an established modus operandi. Q. Do you have one skerrick of evidence to suggest that assuming that there's any conceivable basis for the making of this allegation about unlawful conspiracy at 32 [of the cross-claim], that these three men, the subject of the allegation, had done this before or after in another case? A. No, I draw an inference from a course of conduct that involved the unusual proceedings - the manner in which the irregular proceedings were brought for the obtaining the order for possession which I believe was designed to mask the fact that the plaintiffs were actually seeking a full five per cent as opposed to three per cent. Their reluctance, and the refusal to provide a payout figure when it might have been possible to - and I believe it was possible - to redeem the equity. Those are matters that are strongly indicative in my mind of a modus operandi and an established one. Q. Are you saying to his Honour that part of your inference drawing exercise was that these three men - Mr Shields, Mr Webster and Mr Nicholson - had used this same kind of modus operandi in other transactions? Is that part of your reasoning? A. That was part of my reasoning.
Mr Muriniti provided no basis for his belief that the cross-defendants had an "established modus operandi", other than the inference he said he drew from the "unusual proceedings…the irregular proceedings were brought for the obtaining the order for possession" (that is, seeking a District Court judgment for the amount owing), for the assertion that Mr Shields, Mr Webster and Mr Nicholson had used the modus operandi he described either in the present case and previously. It was significant that, although this established modus operandi was said to be part of Mr Muriniti's inference drawing exercise, this matter was never put to Mr Shields in cross-examination at the trial. There was not even any evidence identifying particular prior transactions where this modus operandi was said to have been employed. All of this serves to highlight the utter baselessness of Mr Muriniti's reasoning.
As noted above, the Court of Appeal also said (at [34]) that, since the case against Mr Nicholson involved serious allegations of dishonesty on his part, the Court had to have regard to the principle in Briginshaw v Briginshaw (1938) 60 CLR 336 and s 140(2) of the Evidence Act 1995. In a similar manner the solicitor, in determining whether to make a claim that involved dishonesty and criminality had to consider the heavy onus on the part of the client to make out such a case.
In relation to that heavy onus, Mr Muriniti was bound to have regard to his obligations found in the Legal Profession Uniform Law Australian Solicitors' Conduct Rules 2015, which relevantly provide: 21.3 A solicitor must not allege any matter of fact in: 21.3.1 any court document settled by the solicitor, 21.3.2 any submission during any hearing, 21.3.3 the course of an opening address, or 21.3.4 the course of a closing address or submission on the evidence, unless the solicitor believes on reasonable grounds that the factual material already available provides a proper basis to do so. 21.4 A solicitor must not allege any matter of fact amounting to criminality, fraud or other serious misconduct against any person unless the solicitor believes on reasonable grounds that: 21.4.1 available material by which the allegation could be supported provides a proper basis for it, and 21.4.2 the client wishes the allegation to be made, after having been advised of the seriousness of the allegation and of the possible consequences for the client and the case if it is not made out.
I am not here concerned with the solicitor's obligation under cl 21.4.2 because I accept that client legal privilege may operate with respect to it. (It is not clear if privilege has been claimed in relation to this application, but I have assumed in the solicitors' favour that it has been.) However, nothing in Mr Muriniti's affidavit or his oral evidence identifies any available material, as cl 21.4.1 requires, which supports the allegations. In that way, there were no reasonable grounds for any belief that Mr Muriniti claims to have had. As the Court of Appeal said in Fowler, Corbett and Jessop at [25]: In any event, the test to be applied under s 345(2) [an earlier equivalent of cl 2 of Sch 6] will vary according to the circumstances. For example, allegations of criminality or fraud will be treated differently from allegations not carrying a degree of opprobrium;
The significant matter that emerges from Mr Muriniti's affidavit is that at an early time he appears to have made an assumption that, because the St George loan application was a sham, Mr Nicholson must have known that it was a sham and must have been involved in its falsity. His assumption in that regard appears to have come about because he failed entirely to consider alternatives to that assumption. The most obvious one, as I found and as the Court of Appeal found (at [35]-[37), was that it was Mr Lippits who was the person involved with that sham arrangement.
It may be accepted that there were erroneous facts stated in the St George application, but Mr Muriniti did not consider that there might be an alternative explanation for that, namely, negligence on Mr Nicholson's part in submitting it with that erroneous information, and negligence or oversight on Mr Shields' part in not noticing it. The erroneous information provided in the St George application would not, without something more, cause a reasonable person to consider that the application was a sham. The information about Mr Glover's earnings derived from the Boston Traders letter. The solicitors knew by the time of Mr Glover's affidavit of 12 December 2018 that the letter was fraudulent and that Mr Lippits and Mr Glover fraudulently used the letter to persuade Mr Shields to give them the loan. It would not be a reasonable inference to conclude that Mr Nicholson knew, in those circumstances, that the letter was false when he reproduced the earnings said to have been paid to Mr Glover in that letter in the St George loan application. Indeed, the knowledge of Mr Lippits and Mr Glover's fraud on Mr Shields and the plaintiffs ought to have alerted the solicitors that any consideration they had that Mr Nicholson was involved in a sham application was unlikely to be true, and should have caused them to give attention to the possibility that Mr Lippits may have been behind the St George loan application: see also the judgment of the Court of Appeal at [35] and [49].
Mr Muriniti went on to assume knowledge in Mr Nicholson about what Mr Prestia and Mr Lippits had done in relation to the Bank West application. The assumption was based entirely on conjecture arising from the email Mr Nicholson sent to Mr Lippits on 23 December 2010. In this regard, the Court of Appeal said (at [46]): The evidence did not however establish any knowledge of Mr Nicholson that such approval was fake, if in fact it was.
Further, Mr Muriniti never accepted the explanation of Mr Nicholson for the disappearance of his records, despite my having accepted his explanation, and holding that he had complied with his discovery obligations in Kaji Australia Pty Ltd v Glover (No 2) [2018] NSWSC 414 at [42]-[44]. That judgment was given on 9 April 2018. Despite that judgment, Mr Muriniti filed the Further Amended First Cross-Claim on 8 June 2018 which pleaded (inter alia) at paragraph 19(zz): The Third and Fourth Cross-Defendants destroyed or concealed their hard electronic files concerning the purported approval and application from which it is inferred that the file would have revealed that the St George Application and purported approval and the entire purported transaction were a fabrication. That pleading was later picked up at paragraph 31 as support for an allegation that the Nicholson interests made fraudulent representations concerning the St George Loan Approval.
Mr Muriniti persisted with the claim against Mr Nicholson and persisted with the assertion that Mr Nicholson lied about the disappearance of his records despite my ruling and determination. The Court of Appeal said at [45] that there was no inherent improbability in Mr Nicholson's explanation, and made express reference to my judgment about that matter. It was not only unreasonable of the solicitors to rely on the disappearance of Mr Nicholson's files in the face of that judgment, it was in breach of their ethical duties to do so.
It is not without significance that nowhere in his affidavit setting out his reasoning process does Mr Muriniti say anything about the way he viewed Mr Lippits in the events. At the end of his cross-examination I asked him about this matter, and he gave the following evidence: Q. On another issue, just looking at para 10 of your affidavit of 12 June where you set out, in effect, your inferential reasoning that led you to the view that there was conspiracy and fraud on the part of Mr Nicholson at least-- A. Yes. Q. -- it troubles me, Mr Muriniti, that there are only two passing references in the whole of that reasoning to Mr Lippetz (sic) when the knowledge that you had from Mr Glover was that this was a man who had repeatedly borrowed money to the extent of over a million dollars, had never repaid it, had promised to support an ATO instalment scheme and had failed to do so and had brought Mr Glover to the position where he was forced to consult Mr Nicholson and subsequently Mr Shields and yet nowhere in any of your reasoning is there any thought that Mr Lippetz might have been behind the sham loan. Is there anything you'd like to say about that? A. Yes, your Honour. The suspicion that Mr Lippetz was implicated in the sham loan is certainly something that exercised my mind. If I'm permitted to do so, and I would submit, your Honour, that I should be permitted because this is an application against me, I certainly raised questions about these matters with Mr Lippetz. The answers I got from Mr Lippetz were in relation to Bankwest loan bank letter that he didn't see it. That he saw Mr Prestier (sic) handing it over to the solicitor for the ATO. I found that unconvincing. So, I certainly was suspicious about Mr Lippetz but when it came to the St. George loan, the difficulty I had is that there's an affidavit from Mr Nicholson in which he deposes to conversations with Mr Lippetz where he says he's representing to Mr Lippetz that the St. George loan is a genuine loan. So, unless both men are lying, I had to make a decision about which way to go. Now, certainly, I don't suggest to your Honour, that Mr Lippetz is a credible person. I hold a very poor view of Mr Lippetz, but I had to balance the fact that Mr Nicholson is - has deposed to an affidavit in which he asserts that the St. George loan is - was - was a genuine loan and he's making representations to Mr - to Mr Lippetz. What am I to do with that? HIS HONOUR Q. Well, at some stage you must not have thought that Mr Lippetz was a dishonourable person because you used an affidavit of his to obtain the stay of the writ of execution and his evidence formed much of Dr Friend's conclusions. A. Yes, your Honour. Initially, I had no reason to suspect that Mr Lippetz was not an honest person. It was subsequently, as - as matters progressed, that there were events that caused me to have very serious concern about Mr Lippetz. I do not-- Q. And yet nowhere does any thought like that find its way into paragraph 10? A. No, your Honour, because ultimately, I'm focussed on the St. George loan and in so far as the St. George loan was a sham, I had - I had no evidence that suggested that - that Mr Lippetz was complicit in - in a sham loan, simply because on Mr Nicholson's evidence, he's representing to Mr - to Mr Lippitez that, in fact, it's a genuine loan.
These answers also highlight the problem with Mr Muriniti's reasoning. He concluded at an early stage that, because he considered that the St George Loan was a sham, Mr Nicholson must have been behind that sham. The fact that Mr Nicholson spoke to Mr Lippits about the loan application says nothing about Mr Nicholson's knowledge concerning whether or not the loan was a sham. Mr Muriniti failed to give consideration to the fact that almost all of the information his client had about the St George application came from Mr Lippits without Mr Muriniti having any evidence that such information had been provided to Mr Lippits from Mr Nicholson. Even if he had some basis for excluding Mr Lippits as the source of the wrongdoing, he did not have anything beyond conjecture to make the serious allegations of fraud and conspiracy that were pleaded and pursued not only against the Nicholson interests but also against Mr Shields and the plaintiffs.
The material which the solicitors had to consider whether a cross-claim alleging fraud and conspiracy should be brought consisted of the St George loan application, the Bank West loan approval, the employment letter from Boston Traders, the St George loan approval, the affidavit evidence of Mr Nicholson and Mr Shields, and the affidavit they obtained from Mr Valentino. What they did not have was any evidence from Mr Glover to support a claim of fraud or conspiracy. In those circumstances, there was no question of the solicitors being entitled to rely on matters told to them by their client which might later be found by a court not to be correct, as referred to in Tombling v Universal Bulb Company, Limited (see above at [39]).
There was nothing in the affidavits of Mr Nicholson and Mr Shields to provide a basis for the claim made. The fact that they had had a prior business relationship was not even a circumstance that could be relied upon to support such a claim.
To the extent that Mr Muriniti relied on Mr Valentino's opinion, a significant difficulty is that there was no evidence of what information was provided to Mr Valentino nor what assumptions he was asked to make. The reason for that is that he was not provided with a letter of instructions. Mr Newell informed me at the substantive hearing that Mr Valentino went into Mr Muriniti's office "and was asked his opinions". I can put aside for present purposes the fact that instructing an expert in that fashion is entirely inappropriate: Ralston and Collins v Chaffey [2018] NSWSC 1994 at [67]. However, the end result of such a methodology is that Mr Muriniti's reliance on Mr Valentino's opinions cannot be shown to be reasonable when the assumptions and instructions he was given are unknown. Mr Valentino's unwarranted conclusion that Mr Nicholson falsified the loan approval letter (referred to at [267]-[269] of my principal judgment) highlights the difficulty.
There is no additional information contained in Mr Muriniti's evidence which identifies evidence that he had that causes me to alter the conclusion that I reached in my judgment at [288] as follows: The matters put forward by the defendant to suggest a conspiracy are entirely insufficient and inadequate to do so. Lawyers have ethical responsibilities not to plead or allege fraud and other criminality without a proper basis to do so. It is difficult to see in the present matter how those ethical responsibilities have been complied with. Any conclusion that there has been fraud or conspiracy here by the cross-defendants is only attainable by speculation and a predisposition to believe it. I certainly accept that the St George loan was a sham. The person who had the most to gain by all that occurred was Mr Lippits. The history of his dealings with the defendant confirms that.
A significant matter in considering the reasonableness of the solicitors approach concerns the various motivations put forward by them for Mr Nicholson's participation in fraud and conspiracy. The motivation was variously said to be for Mr Nicholson to obtain an opportunity through a mortgagee sale of Mr Glover's house, to get "a slice of the equity of the house", to obtain a secret commission, and subsequently to ensure the obtaining of further work through his relationship with Mr Shields.
In my principal judgment at [143] I discussed this matter and said that the submission that Mr Nicholson was doing it to take a slice of the equity or to take a secret commission was improperly made, "not only was it made without any evidence to support, it is impossible to see how Mr Nicholson could take any equity in the defendants property". I note that in the Court of Appeal, White JA said at [62]: I would also endorse the primary Judge's finding at [143]… that the submission made by Mr Newell, there referred to, was improper.
This issue of motive was not, as Mr Newell submitted, a distraction. As the Court of Appeal noted, the case made against the cross-defendants in fraud and conspiracy was entirely circumstantial. In those circumstances, a reasonable solicitor would need to ask himself or herself why it might be that the cross-defendants would be acting in a fraudulent, improper or illegal way. Mr Muriniti had clearly given that aspect of the matter some thought because of the various motivations put forward by him in answer to the request for particulars and by Mr Newell at the hearing.
In my opinion, the solicitors have failed to rebut the presumption that arose from the findings in my principal judgment. Even if no presumption arose, there is nothing in the evidence of Mr Muriniti which demonstrates that he had provable facts to justify the claims, nor a reasonably arguable view of the law to form a reasonable belief that the fraud and conspiracy claims had reasonable prospects of success. In my opinion, the legal services, insofar as the claim was made against Mr Nicholson, Mr Shields and the plaintiffs for fraud and conspiracy were provided without reasonable prospects of success.
Even, however, if there was some basis for the solicitors to consider on 8 June 2018 when pleading and filing the cross-claim that alleged fraud and conspiracy against Mr Nicholson and others (a proposition I do not accept), the information which ultimately found its way into the defendant's affidavit of 18 December 2018 ought to have led the solicitors to re-assess the claims they had made. They knew that Mr Lippits had prepared a false letter to assist in obtaining the loan from the plaintiffs, and that their client was admitting to being a party to that fraud. They also knew from that admission that their client had lied in prior affidavits in a number of respects as I set out in my principal judgment. The information would have told them that Mr Lippits continued to be an active player in relation to the loan applications, and was someone who was prepared to engage in fraud to achieve his purposes.
Part of Mr Muritini's reasoning (subpara 10(f) of his affidavit) concerned Mr Nicholson's knowledge of, and reliance on, the employment letter. The discovery that the letter was prepared by Mr Lippits and its contents were false meant either that Mr Lippits must have been part of the conspiracy (which was never alleged), or that Mr Nicholson was duped in the same way that Mr Shields and the plaintiffs were. Yet there is no indication that Mr Muriniti ever reconsidered the seriousness of the allegations he had made against the Nicholson interests.
Mr Muriniti says nothing in his affidavit about what he did when he became aware of this information. There is no evidence from Mr Muriniti about any reassessment he made at that time about Mr Nicholson's involvement with the loan. As I said earlier, I have assumed in Mr Muriniti's favour that client legal privilege has not been waived for the purposes of this costs application, so I do not draw any inference from any failure of Mr Muriniti to identify what instructions he might have been given after the defendant made the admission. Nevertheless, this disclosure by the defendant must be seen from an objective point of view as extremely significant, when assessing the matter of reasonable prospects of success on the fraud and conspiracy claims.
Schedule 2 to the Uniform Law is not confined to the time of commencement of proceedings. It sanctions the "provision of legal services". That includes the pursuit of proceedings already commenced and the conduct of the hearing of those proceedings. Notwithstanding the significant disclosure made by the defendant to his solicitors in or about December 2018, the solicitors continued to pursue the fraud and conspiracy claims against the various parties including the Nicholson interests.
In relation to the claim under s 99 of the Civil Procedure Act, for the same reasons, the costs associated with the claims in fraud and conspiracy were incurred, improperly, without reasonable cause and by the serious misconduct of the solicitor. For present purposes, the finding that the costs were incurred without reasonable cause follows from the finding that the solicitor provided the legal services without a reasonable belief that the claims had reasonable prospects of success.
Similarly, providing legal services without a reasonable belief that the claims had reasonable prospects of success is capable of being unsatisfactory professional conduct or professional misconduct: cl 4 of Sch 2. In that way, and because cl 2 of Sch 2 prohibits such provision of legal services, the costs were incurred improperly.
In the present case, the claims that were made without the reasonable belief were claims involving fraud, criminality and serious misconduct. Rule 21.4 is the present iteration of a longstanding rule of legal professional behaviour designed to protect persons from claims of fraud, criminality and serious misconduct which do not have an appropriate basis. The claims included that the Nicholson interests were involved in a sham loan from St George Bank, that Mr Nicholson, Mr Shields and the plaintiffs were engaged in a conspiracy to persuade the defendant to mortgage his house so that the conspirators could deprive him of it entirely and share the proceeds of sale amongst themselves, that those parties co-operated to prepare misleading (at least) or false (at worst) affidavits to mislead the Court, the allegation that Mr Nicholson destroyed or concealed his electronic files in the face of my judgment determining that he had complied with his discovery obligations, and the various allegations of the benefits Mr Nicholson was to receive from the entry by the defendant into the loan agreement with the plaintiffs.
Those claims were made in breach of r 21.4. They were improperly made. In that way, the costs incurred by the Nicholson interests were incurred by the serious misconduct of the solicitors, and they were incurred without reasonable cause. The Nicholson interests are entitled to be indemnified for the costs they are obliged to pay to their solicitors in respect of those claims, pursuant to either or both of r 5 of Sch 2 of the Uniform Law and s 99 of the Civil Procedure Act.
The issue raised by the fraud and conspiracy claims occupied the majority of the time at the hearing. Some time was spent on the claims under the Contracts Review Act 1980 (NSW) and for unconscionablity. The claims under the Australian Securities and Investments Commission Act 2001 (Cth) for misleading and deceptive conduct, as they were run, were scarcely distinguished from the claim in fraud, although it was necessary for the principal judgment to make a clear distinction between the two. My assessment, for the guidance of any costs assessor, is that 60% of the time in the proceedings from the date of filing the Further Amended First Cross-Claim on 8 June 2018 was concerned with the fraud and conspiracy claims which should not have been commenced or maintained.
As noted earlier, Mr Lloyd sought an order that 70% of the costs of the Nicholson interests should be indemnified by Mr Muriniti. Mr Newell at fist accepted that 65% would be appropriate, but then submitted that 50% was the appropriate apportionment. I consider that 65% is the appropriate apportionment, and the order that I will make is that Mr Muritini indemnify the third and fourth cross-defendants for 65% of the costs they incurred in the proceedings.

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