Karl Suleman Enterprizes Pty Limited (in Liquidation) v Philip Viet Dzung Pham

Supreme Court of NSW|2011-11-10

Judgment 1HER HONOUR: By notice of motion filed 31 May 2011, the plaintiff seeks an order that pursuant to s 64 of the Civil Procedure Act 2005 it be granted leave to amended its further amended statement of claim. 2The plaintiff is Karl Suleman Enterprizes Pty Limited (in Liquidation). The first defendant is Philip Viet Dzung Pham. The second defendant is Nedelkja Borak. The fourth defendant is Pham & Associates Pty Limited. The fifth defendant is Pham Atic Pty Limited. The proceedings as against the third defendant have been discontinued. The second defendant neither consents nor opposes this application. Therefore, for the purposes of this application, I shall refer to the first, fourth and fifth defendant collectively as "the defendants". 3The plaintiff relied on the affidavit of Michelle Harpur sworn 9 November 2011. The defendants relied upon the affidavit of Kaveetha Rani Kumar dated 8 July 2011.

Background 4These proceedings were commenced in December 2002. They involve a claim for professional negligence against a solicitor. Over the past eight years there have been over 60 directions hearings. I understand that this matter is now lurching towards a hearing date. 5Karl Suleman Enterprizes Pty Limited (In Liquidation) ("KSE") was incorporated in December 1999 and wound up on 7 December 2001. KSE was owned by Mr Karl Suleman and his wife and was primarily operated by him. 6From its incorporation, KSE operated a trolley collection business on the basis of contracts which it had with various supermarkets. KSE also conducted an investment scheme, which essentially purported to offer investors distributions from the company's trolley collection business or other investments, which from time to time it might make. 7Investors entered into contracts (variously described as loan or investment agreements). However, those investors were never granted an interest or day to day control in the trolley collection business, or any other investment, and were paid their promised fortnightly distribution by monies coming in from subsequent investors. Those returns were in the order of 50 to 60 per cent per annum on their initial investment, over a set period, usually 3, 5 or 10 years. 8After incorporation the trolley business very quickly became an insignificant aspect of KSE's operations. 9In reality, KSE had no real underlying business, and was operating an illegal "Ponzi" scheme from its inception. The only income of KSE was that of ordinary investors lured by the promise of very high returns. 10Over the life of the scheme approximately $123 million was raised from investors from at least 2,600 investment contracts. 11The liabilities incurred by KSE on the face of the investment contracts were in the order of $1 billion. 12In late 200 1 , the Australian Securities and Investment Commission (ASIC) intervened and closed down the scheme. KSE had massive liabilities and the vast majority of investors sustained a significant loss on their investment.

The statement of claim 13The pleadings in the statement of claim are complex and lengthy. It involves a claim for professional negligence against a solicitor in relation to carrying out work for KSE . I propose to refer only to some of the paragraphs in the statement of claim. 14Mr Pham was admitted to practice as a solicitor on 6 June 1997. From June 1997 to April 2000, he was a solicitor employed by Borak & Co. The principal of Borak & Co was Nedeljka Borak, the second defendant. 15From May 2000 to June 2001, Mr Pham carried on his own practice under the name of Pham & Associates Pty Limited, the fourth defendant. 16From July 2001 to May 2002 Mr Pham carried on practice as principal of the firm Pham Atic Pty Limited. Alexander Atic, the third defendant in the proceedings , was the other principal. The plaintiff has settled his claim against Mr Atic. 17Mr Pham's involvement in KSE spans from its incorporation in late 1999 to the appointment of an administrator in late 2001. Over this period Mr Pham was the primary solicitor retained by KSE to assist it in setting up the scheme briefly outlined earlier in this judgment . This involved drafting contracts and advising KSE generally in relation to the scheme. 18The further amended statement of claim ("FASC") at [45] - [49] alleges that the scheme was non-compliant in numerous ways, including: a. The scheme was not registered with ASIC as required by the Corporations Law and subsequently the Corporations Act 2001, and the statutory requirements of Part 5C relating to a registered managed investment scheme, such as an auditor and a responsible entity, had not been complied with; b. Notwithstanding the nature of interests offered by the contracts, there was no proper disclosure as required by the Corporations legislation (for example, there was no prospectus issued); c. The scheme was operated without the requisite securities dealer's licence or investment advisor's licence. 19There were earlier declarations made by this Court in relation to KSE, Karl Suleman and Vivian Suleman. Paragraph 50 of the FASC pleads: "50 On 6 May 2002, in Supreme Court Proceedings Plaint No. 5415 of 2001 commenced by ASIC against amongst others Karl Suleman, Vivian Suleman and KSE, the parties consented to the Court making declarations in relation to the operation of the Scheme. Particulars The Court made the following declarations: 50.1Each of KSE, Karl Suleman and Vivian Suleman did from 17 December 1999 to 13 November 2001 contravene section 601 ED (5) of the Act by operating a managed investment scheme, which was required to be registered under s. 601EB of the Act, but was not so registered; 50.2Each of KSE, Karl Suleman and Vivian Suleman did from 17 December 1999 to 13 November 2001 contravene section 780 of the Act in relation to the operation of the Scheme by: 50.2.1carrying on a securities business; and 50.2.2holding out that they carried on a securities business, in circumstances in which each of them did not hold a dealers licence and none of them was an exempt dealer. 50.3 Each of KSE, Karl Suleman and Vivian Suleman did from 17 December 1999 to 13 November 2001 contravene section 781 of the Act in relation to the Scheme by: 50.3.1 carrying on an investment advice business; and 50.3.2 holding out that they were investment advisers, in circumstances in which each of them did not hold an investment advisers licence and none of them was an exempt investment adviser." 20Relevantly, the FASC pleads that by the time of incorporation of KSE, Mr Pham knew, or ought to have known, that the scheme had the indicia of a managed investment scheme required to be registered with ASIC. It is also alleged that at least by April 2000 Pham knew or ought to have known that the scheme was operated by KSE in contravention of the Corporations legislation's managed investment scheme, disclosure and licensing requirements. 21The FASC alleges that the preparation by Ms Borak and Mr Pham of investment contracts in light of the knowledge it was an unregistered managed investment scheme, and the failure to properly advise of the Corporations legislation's managed investment scheme, disclosure and licensing requirements, was negligent. Paragraph 118.34 of the FASC, for example, expressly pleads that Mr Pham: "[p]repared and drafted the Investment Contracts in circumstances where Pham knew that the Scheme was in contravention of the MIS [managed investment scheme] Provisions, the Disclosure Provisions and the Securities Provisions." 22The FASC also pleads that after the scheme had been operating for some time, Mr Pham was instrumental in setting up a service company called PAL Holdings Pty Limited, which assisted in streamlining payments to investors for a commission. Mr Pham was a director of PAL Holdings. Paragraph 159.2 of the FASC reads: "In circumstances where [Pham] knew or ought to have known that KSE was operating an MIS, continued to act by ... preparing investment contracts and loan agreements... and/or... incorporated PAL Holdings Pty Limited ..."

The proposed amendments to the FASC 23The plaintiff seeks to amend its pleadings by adding the following paragraphs: "169A In the circumstances described in paragraphs 45-49, 115, 118.3-118.34 and 152 herein Pham was involved in the contravention (within the meaning of those terms as used in s 1325(2) of the Corporations Act) of the breaches of the Corporations Act described in paragraphs 49 and 50 above. 169B In the circumstances described in paragraphs 45-49. 115, 118.3-118.34 and 152 herein Pham was involved in the contravention (within the meaning of those terms as used in s 1325(2) of the Corporations Law) of the breaches of the Corporations Law described in paragraphs 49 and 50 above. 169C In the circumstances described in paragraphs 45-49, 115, 118.3-118.34 and 152 herein Borak, by her employed solicitor Pham, was involved in the contravention (within the meaning of those terms as used in s 1325(2) of the Corporations Law) of the breaches of the Corporations Law described in paragraphs 49 and 50 above. 169D In the circumstances described in paragraphs 45-49, 115, 118.3-118.34 and 152 herein Pham & Associates Pty Ltd was involved in the contravention (within the meaning of those terms as used in s 1325(2) of the Corporations Law) of the breaches of the Corporations Law described in paragraphs 49 and 50 above. 169E In the circumstances described in paragraphs 45-49, 115, 118.3-118.34 and 152 herein Pham Atic Pty Ltd was involved in the contravention (within the meaning of those terms as used in s 1325(2) of the Corporations Act) of the breaches of the Corporations Act described in paragraphs 49 and 50 above. 171.2A An order for damages pursuant to s 1325(5)(e) of the Corporations Act . 171.2B An order for damages pursuant to s 1325(5)(e) of the Corporations Law ."

Amendments generally 24The provisions of the Civil Procedure Act 2005 are the starting point in determining this application. 25Section 64(1) of the Civil Procedure Act is the source of the Court's power to allow amendments to pleadings. Section 64 reads: "64 Amendment of documents generally (1) At any stage of proceedings, the court may order: (a) that any document in the proceedings be amended, or (b) that leave be granted to a party to amend any document in the proceedings. (2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings..." 26The power under s 64 must be exercised subject to s 58 of the Civil Procedure Act . That section reads: "58 Court to follow dictates of justice (1) In deciding: (a) whether to make any order or direction for the management of proceedings, including: (i) any order for the amendment of a document, ... and (b) the terms in which any such order or direction is to be made, the court must seek to act in accordance with the dictates of justice. (2) For the purpose of determining what are the dictates of justice in a particular case, the court: (a) must have regard to the provisions of sections 56 and 57, and (b) may have regard to the following matters to the extent to which it considers them relevant: (i) the degree of difficulty or complexity to which the issues in the proceedings give rise, (ii) the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities, (iii) the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties, (iv) the degree to which the respective parties have fulfilled their duties under section 56 (3), (v) the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court, the practice of the court or any direction of a procedural nature given in the proceedings, (vi) the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction, (vii) such other matters as the court considers relevant in the circumstances of the case." 27Subsection 58(2)(a) provides that the Court must consider the matters in s 56 and s 57 of the Civil Procedure Act in order to determine what are the dictates of justice in a particular case. The matters enumerated in s 58(2)(b)(i)-(vii) may be taken into account by the Court in determining what are the dictates of justice. 28Section 56 relevantly provides as follows: "56 Overriding purpose (1) The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. (2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule. (3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court..." 29Section 57 relevantly provides that: "57 Objects of case management (1) For the purpose of furthering the overriding purpose referred to in section 56 (1), proceedings in any court are to be managed having regard to the following objects: (a) the just determination of the proceedings, (b) the efficient disposal of the business of the court, (c) the efficient use of available judicial and administrative resources, (d) the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties. (2) This Act and any rules of court are to be so construed and applied, and the practice and procedure of the courts are to be so regulated, as best to ensure the attainment of the objects referred to in subsection (1)." 30In addition to these mandatory and discretionary factors, the observations of the High Court in Aon Risk Services Australia Limited v Australian National University [ 2009] HCA 27; (2009) 239 CLR 175 are relevant. While the High Court in Aon dealt with the Rules of the Supreme Court of the Australian Capital Territory , they are similar to those in New South Wales. The High Court in Aon stated at [102] and [103]: "[102] The objectives stated in r 21 do not require that every application for amendment should be refused because it involves the waste of some costs and some degree of delay, as it inevitably will. Factors such as the nature and importance of the amendment to the party applying cannot be overlooked. While r 21 assumes some ill-effects will flow from the fact of a delay, that will not prevent the parties dealing with its particular effects in their case in more detail. It is the extent of the delay and the costs associated with it, together with the prejudice which might reasonably be assumed to follow and that which is shown, which are to be weighed against the grant of permission to a party to alter its case. Much may depend upon the point the litigation has reached relative to a trial when the application to amend is made. There may be cases where it may properly be concluded that a party has had sufficient opportunity to plead their case and that it is too late for a further amendment, having regard to the other party and other litigants awaiting trial dates. Rule 21 makes it plain that the extent and the effect of delay and costs are to be regarded as important considerations in the exercise of the court's discretion. Invariably the exercise of that discretion will require an explanation to be given where there is delay in applying for amendment. [103] The fact that an explanation had been offered for the delay in raising the defence was regarded as a relevant consideration in JL Holdings . Generally speaking, where a discretion is sought to be exercised in favour of one party, and to the disadvantage of another, an explanation will be called for. The importance attached by r 21 to the factor of delay will require that, in most cases where it is present, a party should explain it. Not only will they need to show that their application is brought in good faith, but they will also need to bring the circumstances giving rise to the amendment to the court's attention, so that they may be weighed against the effects of any delay and the objectives of the Rules. There can be no doubt that an explanation was required in this case." 31Therefore, it is necessary to consider first, the nature and importance of the amendments; secondly, the extent of the delay and the prejudice caused to the defendants; thirdly, the point the litigation has reached when the amendments are sought; and fourthly, the plaintiff's explanation for delay. 32The first, fourth and fifth defendants oppose the amendments being made on the basis that the plaintiff does not have standing to pursue the amendment to the statement of claim. They also oppose the amendments being made upon discretionary grounds. The plaintiff submitted there are no new material allegations of fact made by the proposed amendment. The plaintiff says that it does not intend to serve any further evidence as a result of the amendment, and expects that the defendants would be in the same position.

Standing 33The defendants submitted that the plaintiff does not have "standing" to pursue a cause of action under s 1325(2) of the Corporations Act because the company cannot be both the contravenor of the legislation and a plaintiff against a person who was involved in the contravention. 34However, the plaintiff relies upon contraventions by Karl Suleman and not KSE. It is Karl Suleman's contraventions that the plaintiff alleges Mr Pham was involved in. The plaintiff submitted that if KSE could not pursue its own director (the contravenor) and his accomplice (being a person involved in the contraventions) where KSE has suffered loss, this would defeat the purpose of the section. To decide whether or not to grant an amendment I need only to be satisfied that these amendments are arguable. It is my view that it is an arguable proposition that the plaintiff can take action against its own director and a person (Mr Pham) involved in the contravention.

The nature and importance of the amendments 35The proposed amendments essentially plead that Mr Pham, pursuant to the operation of s 1325(2) and (5) of the Corporations Act , is personally liable to KSE for loss and damage. 36The amendment is a very serious one. In addition to a professional negligence claim, Mr Pham, if the amendments were permitted, faces a claim that he may be personally liable for damages between $22,000,000 to $174,000,000. 37Sub-sections 1325(2) and (5) of the Corporations Act relevantly read: "(2) The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of subsection 201P(1), Chapter 5C, 6CA or 6D, subsection 798H(1) or Part 7.10, ... make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person. (5) The orders referred to in subsections (1) and (2) are: ... (e) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage..." 38Shortly stated, s 1325(2) makes a person who has engaged in conduct in contravention of certain parts of the Act, referred to above, liable to pay damages.

The explanation of delay, extent of delay and prejudice 39As I have previously stated, these proceedings commenced in 2002 and are nearing their ninth anniversary. Over that time the plaintiff has engaged a number of counsel to give advice in these proceedings. The penultimate senior counsel became involved in an intestate workload and was no longer available to give advice. I accept that there have been two prior amended statements of claim. On 23 December 2002, the original statement of claimed was filed. On 22 September 2003 an amended statement of claim was filed and on 22 August 2006 a further amended statement of claim was filed . Now the current proposed second FASC is sought to be filed. 40On 16 February 2011, the current senior counsel Mr Ashhurst was briefed. On 11 April 2011, he advised the plaintiff's solicitor, Ms Harpur, that KSE should consider a claim against the defendants under s 1325 of the Corporations Act and its predecessor. On 12 May 2011, the solicitor for the defendants was notified of the proposed changes. This notice of motion was subsequently filed. Particulars have been sought and supplied to the defendants. Senior counsel for the defendant submitted that this is not a proper explanation for delay, particularly when the proceedings have been on foot for so long. The reality is that different counsel have different views on matters such as pleadings and I accept the explanation for delay. Once advice was given, the plaintiff acted expeditiously in seeking to make these amendments. 41The plaintiff submitted that there is no relevant prejudice which would be suffered by any of the defendants should the amendments be allowed. The matter has not yet been allocated a hearing date. However, counsel for the defendants submitted that they would suffer real and actual prejudice because they would have to reconsider the entirety of their evidence, determine whether any further discovery is required and consider whether there were any further defences available to them. To some extent, the role Mr Pham played and his knowledge in relation to the scheme has already been traversed in detail. 42In Ibrahim v Pham [2005] NSWSC 246, Levine J at [104] to [133] outlined that Mr Pham sought counsel's advice in relation to the scheme and the advice that was given. Dr Robinson gave evidence in the Ibrahim proceedings, as did Ms Locke who worked with Mr Pham. They supported his version of events. Unless something more specific in terms of evidence and further discovery can be identified, I cannot conclude that the defendants will suffer real and actual prejudice, particularly as a hearing date has not yet been allocated. 43Finally, counsel for the first, fourth and fifth defendants submitted that they would suffer prejudice because they might be statute barred from bringing claims against others. Counsel referred to the effective 10 year limitation period provided by s 26(1)(b) of the Limitation Act 1969, in respect of a claim for contribution under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 as between joint tortfeasors . The plaintiff submitted that s 26(1)(b) would be relevant to the negligence claims made against the defendants that are not the subject of any amendment, yet the defendants have not previously sought contribution against any joint tort feasor for those claims. The plaintiff also submitted that this section is clearly limited to a claim against a "tort feasor" for damages suffered as "a result of a tort". 44Section 5 of the Law Reform (Miscellaneous Provisions) Act relevantly reads: "5 Proceedings against and contribution between joint and several tort-feasors (1) Where damages is suffered by any person as a result of a tort (whether a crime or not): ... (c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by that person in respect of the liability in respect of which the contribution is sought." 45The amendments are not against the defendants as tort feasors but rather against the defendants as persons "involved in the contravention" of another person of Chapter 5C of the Corporations Act . The plaintiff further submitted that the damage claimed by it in the amendment is damage caused by breach of ss 601ED(5), 789 and 801 of the Corporations Act , not as a result of a tort and therefore, s 26(1)(b) does not apply to the amendments sought by the plaintiff. I agree. 46Overall, it is my view that these amendments ought to be permitted. The amendments go to the real issues in dispute and I accept that they are serious so far as Mr Pham is concerned because they expose him personally to a claim for damages of a large magnitude. I am satisfied that the first, fourth and fifth defendants will not suffer prejudice. 47I grant leave to the plaintiff to file a further amended statement of claim so as to add the pleading reproduced earlier in this judgment at paragraph [23]. Such further amended statement of claim is to be filed and served within seven days. 48Costs are reserved.

The Court orders that: (1) Leave is granted to the plaintiff to file a further amended statement of claim in accordance with paragraph [ 23 ] of this judgment. (2) The further amended statement of claim is to be filed and served within seven days. (3) Costs are reserved.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 November 2011

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