Karl Suleman Enterprizes Pty Ltd (In Liq) v Pham & Ors

The proceedings and the proposed amendments 2The background to the proceedings brought by KSE is summarised in an earlier judgment of Beech-Jones J: Karl Suleman Enterprizes Pty Ltd (In Liq) v Pham & Ors [2012] NSWSC 645; 90 ACSR 554 (Suleman No 1), esp at [4]-[16]. That judgment allowed an appeal from a decision of Harrison AsJ granting KSE leave to amend its pleading: Karl Suleman Enterprizes Pty Ltd (In Liq) v Philip Viet Dzung Pham [2011] NSWSC 1405. That decision was delivered on 23 November 2011. 3KSE sues the first respondent (Mr Pham) and the second and third respondents (the Pham respondents) for breaches of contract, negligence and breaches of fiduciary duty occurring during the period December 1999 to December 2001 when Mr Pham was the solicitor retained by KSE to assist and advise it in establishing and operating an investment scheme. That investment scheme purported to offer investors the opportunity to receive returns from KSE's trolley collection business and other investments. The scheme was brought to an end by the Australian Securities & Investments Commission (ASIC) in late 2001 because, among other things, it involved the operation of an unregistered managed investment scheme. It later became apparent that KSE had no real underlying business and that it was using moneys received from incoming investors to make distributions to existing ones. 4The proceedings brought by KSE were commenced in December 2002. In August 2006 a Further Amended Statement of Claim (FASOC) was filed. In November 2006 the Pham respondents filed defences to the FASOC. Those defences included that Mr Suleman, the governing mind of KSE, had been advised at a very early stage that the business of KSE involved the conduct of an unregistered managed investment scheme and that had the Pham respondents withdrawn the provision of their services to KSE at that time, as it was alleged they should have, KSE and Mr Suleman would have retained another solicitor and continued to operate the unregistered and unlawful scheme. 5By May 2011 the parties had filed their lay and expert evidence and were ready to take a hearing date. That evidence had been prepared and served over the period from late 2007 to May 2011, and on the basis of pleadings which had been finalised by January 2007. One further expert report was served by the applicant in early June 2011. 6In mid-May 2011 KSE notified the Pham respondents that it proposed to make a claim against them for damages under s 1325(2) of the Corporations Act on the basis that they were "involved" in contraventions by KSE of that Act. The motion seeking leave to make those amendments was filed on 31 May 2011, and heard by Harrison AsJ in early November 2011. In her judgment, delivered in November 2011, her Honour granted that leave. The Pham respondents appealed from that decision. That appeal was heard by the primary judge in June 2012 and allowed: Suleman (No 1). The allegations made by the proposed amendments did not fall within s 1325(2) because the applicant was the person claiming to have suffered loss and damage, and also the person whose contraventions the Pham respondents were said to have been "involved" in. There was not, adopting the language of s 1325(2), "another person" who engaged in the conduct which was the cause of the loss or damage sought to be made the subject of orders for compensation against the Pham respondents. 7On 4 July 2012 the primary judge fixed the proceedings for final hearing for a period of four weeks commencing on 3 June 2013. In Suleman (No 1) at [45], the primary judge noted that should there be any further application for leave to amend (to make allegations of involvement by the Pham respondents in contraventions of Mr Suleman rather than KSE) it would have to be "considered against the backdrop of a fixed hearing date". On 24 July 2012 KSE made its application for leave to file the Proposed FASOC. That application was heard by the primary judge in late October 2012 and judgment in Suleman (No 2) was delivered on 28 February 2013. 8The Proposed FASOC addresses the difficulties identified by the primary judge in Suleman (No 1). It pleads contraventions of the Corporations Act by Mr Suleman and that Mr Pham was "involved" in those contraventions. In the existing FASOC, KSE is alleged to have contravened the same provisions of the Act. In general terms, the new allegations are that Mr Suleman personally undertook various steps in the operation of the unregistered managed investment scheme. 9In addition, the Proposed FASOC pleads contraventions by Mr Suleman of s 999 the Corporations Act by the issuing of misleading "investment contracts" and that Mr Pham was "involved" in those contraventions within the meaning of s 1005(1). Those allegations were not included in the earlier proposed pleading which was the subject of the judgment in Suleman (No 1). 10The primary judge refused KSE leave to amend to plead claims under s 1005(1) in respect of breaches by Mr Suleman of s 999 of the Corporations Act: Suleman (No 2) at [61]-[63]. His Honour also refused KSE leave to bring claims under s 1325(2) in respect of breaches by Mr Suleman of ss 601ED(5) and 727 of the Act: Suleman (No 2) at [115]-[126]. In its application to this Court, KSE only seeks leave to appeal from the primary judge's refusal to allow it to bring the claims under s 1325(2).

Some relevant principles 11The subject matter of this application is a matter of practice and procedure involving the exercise of the discretion to grant leave to amend. It follows that for it to succeed on any appeal, KSE must demonstrate error by the primary judge of the kind described in House v The King [1936] HCA 40; 55 CLR 499 at 505 and in Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; 203 CLR 194 at [21]. 12It is necessary to consider whether the primary judge arguably erred in that decision-making process. It is necessary also to consider the injustice which would result to KSE from the order appealed from, assuming it be wrong and that leave to appeal is refused: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170 at 177. KSE relied upon the following statement of Powell JA in Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 as to the approach which this Court should take when considering an application for leave to appeal from a refusal to grant leave to amend (at 599): "... [Leave to appeal should be granted] in a case in which, in all the circumstances, the subject decision is attended with sufficient doubt to warrant its being reconsidered by the appellate court, and in which substantial injustice would result, if leave were refused, supposing the decision to be wrong". 13Leave to appeal may more readily be granted where leave is sought to appeal from a decision on a matter of practice and procedure which has the effect of finally determining the legal rights of the parties than if the exercise of discretion does not actually or in its effect have that result: In re the Will of F B Gilbert (dec) (1946) 46 SR (NSW) 318 at 323; Adam P Brown Male Fashions Pty Ltd at 177; Garrard (t/a Arthur Andersen) v Email Furniture Pty Ltd (1993) 32 NSWLR 663 at 664-665. 14There is little doubt that if it is assumed that the primary judge erred in the exercise of his discretion, substantial injustice would be suffered by KSE if leave to appeal was refused. KSE alleges that it suffered loss of between $22m and $100m as a result of the contraventions in which Mr Pham was "involved". The claim to compensation from Mr Pham on the basis that he was "involved" in contraventions of Mr Suleman relies on his direct participation in the operation of an unregistered managed investment scheme. As such, it may not give rise to the same causation questions as arise in relation to KSE's claims to damages or equitable compensation for breaches of contract, negligence and breaches of fiduciary duty. 15In oral argument before Harrison AsJ, senior counsel for KSE explained the significance of the amended claim as being that it provided an answer to causation defences relied upon by the Pham respondents. He said (Tcpt 10/11/11 at p 18): "One of the allegations that [KSE] makes against Pham in negligence is that he should have withdrawn his services because it is said without those services the managed investment scheme couldn't have continued. The defendants say in response that Mr Suleman would have just gone and got another solicitor. This is an answer to that argument, and this is why it is so hard fought, your Honour, we expect anyway. This is an answer to that argument. This says irrespective of whether you say that you actually doing this would have made any difference or whether somebody else would have come in to take your place, under the Corporations Act if you are knowingly involved in a contravention that causes loss you are liable. Irrespective of whether somebody else would have come in and they would have been liable, you are now personally liable. So it is a very important amendment because it removes a potential line of defence from the defendant." The defences referred to are those pleaded in the defences filed by the Pham respondents in November 2006.

Disposition of the argument as to arguable error in the exercise of discretion 16KSE argues that the primary judge erred in the exercise of his discretion in the following three respects. It is said that considered separately and together they justify the conclusion that the primary judge's decision is "attended with sufficient doubt" to justify a grant of leave. It is argued that: (1)His Honour took into account what he described as a failure to provide a "proper explanation" for the delay. His doing so involved a misunderstanding of the significance of the explanation of delay referred to in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; 239 CLR 175 at [102]; (2)Whilst his Honour referred to the importance of the proposed amendments to KSE's claim, he did not consider that significance as a reason for granting leave as distinct from one which simply overcame a basis for why leave should otherwise be refused; and (3)His Honour failed to take into account that although the proceedings had been fixed for hearing, the hearing date had only recently been fixed, and in circumstances where the application to amend was anticipated by the parties and the Court. 17Before addressing these arguments, it is to be noted that KSE does not submit that, having regard to the relevant considerations as they were at the time of the application to the primary judge, his Honour's decision to refuse leave was so unreasonable or plainly unjust that it should be inferred that there was in some way a failure properly to exercise the discretion: cf House v The King at 505. On the contrary, KSE accepted in oral argument that a decision-maker could reasonably have exercised the discretion by refusing leave to amend, properly taking into account the matters referred to above as well as those otherwise referred to by the primary judge.

(1) The explanation for delay 18Having referred to KSE's evidence as to delay (at [32], [33]), the primary judge found that KSE was aware by late 2006 that there was a causation issue in relation to its existing claims. He also found that no application had been made to add a claim under s 1325(2) prior to 2011 because, until Mr Ashhurst SC had been retained in February 2011 and given advice in April 2011, "no one [had] thought of it": [34], [35]. His Honour was not prepared to conclude that KSE had deliberately held back in making its application to amend for any tactical reason: [35]. 19When addressing the exercise of discretion in relation to the claims sought to be brought under s 1325(2), the primary judge noted: "[116] ... From May 2011 until present those responsible for the conduct of the proceedings have pursued the application to amend with reasonable diligence although the first attempt to amend failed because the amendments were bad in form. ... Those circumstances still warrant a description of the delay as "gross" especially having regard to the inaction during the period prior to the retention of Mr Ashhurst SC, which included the date the limitation period expired. The material explaining the delay does not justify it." 20After referring to three specific matters concerning the effect of the delay, the primary judge continued: "[125] A consideration of whether to exercise the discretion to grant the amendments necessary to mount a claim under s 1325(2) is more finely balanced than the consideration of whether to allow the amendments pleading a cause of action under s 1005 for an alleged breach of s 999. In light of conclusion I have reached at [109] the claim cannot be characterised as being of doubtful strength. In light of the explanation given to Harrison AsJ as to its rationale I accept that the proposed cause of action under s 1325(2) is likely to be "important" to KSE (Aon at [102]) or "critical" as asserted in its written submissions. However I am still left with an application that is made far too late with no proper explanation for the delay. The proposed amendments raise new factual issues. If granted they will require further particularisation and clarification which will cause additional delay and may expose more factual issues not previously raised by the pleading. The matter is now close to the allocated hearing date. If the application is granted, it is likely to lead to its vacation. To allow the amendments is otherwise capable of causing prejudice to the Pham defendants. To paraphrase Aon at [102] this is a case where it can "properly be concluded that [KSE] has had sufficient opportunity to plead [its] case and that it is too late for a further amendment, having regard to [the interests of the Pham defendants] and other litigants awaiting trial dates." 21KSE makes the following criticisms of this analysis and reasoning. It says that the reasoning involves a misunderstanding of the requirement for an "explanation" referred to in Aon; that it proceeds on the basis that it is necessary to characterise the explanation proffered as either "proper" or "not proper"; and that it treats an explanation characterised as "not proper" as determinative of the fate of the application and as "trumping" other relevant considerations. In relation to this last matter, reference was made to the statement of Gaudron J in Jagot v District Court (NSW) [1989] HCA 46; 168 CLR 23 at 76 in which her Honour described a discretionary power as generally one "exercisable by reference to considerations no one of which and no combinations of which is necessarily determinative of the result". Finally, it is said that the primary judge should have considered, as a factor to be weighed in the balance when exercising the discretion, that the amendment had not previously been made because of the inadvertence of KSE's legal advisers. 22As the plurality judgment in Aon makes clear at [102] and [103], the exercise of the discretion to allow an amendment necessarily involves a weighing process in which factors for and against the grant of leave must be identified and considered. Those factors include, if there has been delay in applying for the amendment, an explanation for the delay. At [103], it was said that the importance attached by Rule 21 (which is set out in Aon at [60] and is in similar terms to ss 56(1) and 57(1) of the Civil Procedure Act 2005) to the factor of delay "will require" in most cases that the moving party bring the circumstances giving rise to the amendment, and explaining the delay, to the Court's attention "so that they may be weighed against the effects of any delay and the objectives of the Rules". Those circumstances ought explain the delay, and in doing so may justify it, in the sense that they may provide reasons for it which are not consistent with any failure on the part of the moving party, or its legal advisers, to act diligently and expeditiously in the prosecution or defence of the relevant claim. If those circumstances provide some justification for the delay, for those or some other reasons, they may be weighed against the effects of the delay on the other parties, as well as on other litigants. 23The primary judge's observation, at [125], that there was "no proper explanation for the delay" is his assessment that the explanation proffered by KSE did not justify the delay, in the sense of being a factor which was able to be weighed against the effects of the delay and in favour of a grant of leave. This understanding of his Honour's observation is consistent with his earlier statement, at [116], that the material explaining the delay "does not justify it". None of this reveals any misunderstanding by the primary judge of the reason for any requirement for an explanation from the party seeking the exercise of the discretion. Nor does it proceed on the basis that it was necessary to characterise any explanation as being either proper or not proper. The primary judge used the latter description in this case as a shorthand way of saying that no good reason was put forward by KSE which provided some justification for the delay so as to be able to be taken into account in the balancing exercise necessary when exercising the discretion. 24The reasons at [125] do not indicate that the primary judge treated his assessment that there was "no proper explanation" as determinative of KSE's application. Having referred to the significance of the proposed amendments and to the absence of a satisfactory explanation for the delay, he considered a number of other factors which weighed against the grant of leave. His Honour did not in his analysis treat any one factor or combination of factors as "necessarily determinative" of the outcome of KSE's application. Finally, the primary judge did consider the explanation provided as a factor to be weighed when exercising his discretion. Having referred to the underlying evidence and his findings, he noted that the "only matter potentially favourable to KSE in this analysis is that I am not prepared to conclude that it deliberately held back" on making the amendment application: at [32]-[35]. That conclusion was the basis for his observations in [116] and [125]. The explanation was considered and given no weight as a factor in favour of leave. 25In our view, none of the criticisms made by KSE identify error on the part of the primary judge in relation to his consideration of KSE's explanation for the delay in making its amendment application.

(2) The importance of the proposed amendments to KSE's case 26KSE submits that that the primary judge did not explain in his reasons the significance of the amendment to KSE's case, or take account of that significance as a matter strongly in favour of the grant of leave to amend. In its written submissions in reply, KSE describes its "primary contention" as being that his Honour "failed to have the importance of this amendment to the proceedings (and thereby the just determination of the proceedings) as a focal point of the decision-making process". KSE stressed that the Court was required, by s 57(1)(a) of the Civil Procedure Act 2005, to have regard to the "just determination of the proceedings" when giving effect to the overriding purpose of the Act and Rules. That purpose, in relation to their application to civil proceedings is, as identified in s 56(1), "to facilitate the just, quick and cheap resolution of the real issues". KSE argues that the primary judge failed to have regard to the "just determination of the proceedings" as a fundamental matter to be taken into account in the exercise of his discretion. Reference was made to the significance of the need to have regard to s 57(1)(a), as expressed by Allsop ACJ in Hans Pet Constructions Pty Ltd v Cassar [2009] NSWCA 230 at [43]. KSE also submits that in undertaking the weighing process involved in the exercise of his discretion, the primary judge erred in treating the fact that the application was made "too late" and "without proper explanation" as disentitling factors which necessarily overrode the relative importance of the amendment in the exercise of discretion. 27In his reasons at [29], the primary judge referred to the "rationale for the amendments" as advised to Harrison AsJ by senior counsel for KSE. It was accepted in argument before this Court that this reference should be read as incorporating the fuller explanation of that rationale contained in the transcript of proceedings before Harrison AsJ, part of which has been extracted earlier in these reasons. Express reference was again made to that rationale at [116] and [125] and the primary judge accepted that the amendment was likely to be "critical" to KSE's claim, as was asserted in its written submissions: at [125]. That undoubtedly substantial factor in favour of the grant of leave to amend was then considered with other relevant factors. That consideration and weighing process is principally to be found in [125] of his Honour's reasons. 28The foregoing shows that the primary judge did understand and explain the significance to KSE's case of the amendment and take it into account. The decision whether to exercise the discretion was described as "finely balanced", and the importance of the amendment to KSE was the single factor in favour of the grant of leave, and against which other factors had to be weighed. Whilst the primary judge did not expressly refer, in [125], to s 57(1)(a) and the requirement that he have regard to the "just determination of the proceedings", it is clear from his earlier observation at [41] ("whether the amendments should be allowed depends upon the "dictates of justice" ... which include the matters set out in ss 58(2); 56 and 57") and from his reasoning in [115] to [125], that he regarded the importance to KSE's case of the amendment, and the detriment which it was likely to suffer if it was not permitted to make it, as fundamental matters to be taken into account. 29KSE's submissions do not identify error on the part of the primary judge in considering this factor. Having identified the significant matter in favour of the grant of leave, he weighed in the balance a number of other factors, none of which is said to have been irrelevant or to have involved any mistaking of the relevant facts. The submission that the primary judge regarded the delay and absence of explanation as in some way cancelling out the significance of this factor is not an accurate description of the balancing exercise undertaken in [125] of the reasons.

(3) The vacation of the hearing date 30The primary judge recorded at [2] that following his decision in Suleman (No 1), KSE had filed a further notice of motion seeking leave to amend. At [26] his Honour noted that the proceedings have "now been listed for final hearing on 3 June 2013". That statement makes sufficiently clear that the primary judge was conscious of the fact that the proceedings had been fixed for hearing after the Pham respondents had first been notified in May 2011 of the proposed amendments and during a period in which the application to amend had been pursued with reasonable diligence. It nevertheless remained the case that at the time the present application was heard and determined, there was a hearing date allocated and that it was likely that the date would have to be vacated if the amendments were allowed. That matter was taken into account by the primary judge: at [124], [125]. We do not understand KSE to suggest that it was not a relevant factor to which regard should be had. 31KSE argues that whilst its application to amend was late by reference to the commencement of the proceedings, it was not late by reference to the milestone referred to by the High Court in Aon, namely the fixing of a trial date. In Aon the plurality observed at [102]: "Much may depend upon the point the litigation has reached relative to a trial when the application to amend is made". KSE says that the primary judge did not take into account the fact that its application for leave to amend was first made before a hearing date was allocated. KSE also says that the primary judge, when considering this factor, erred in not taking into account that at the time its amendment application was made, "there was a hearing date pending in 11 months' time" and that "through no fault" of either party, the hearing and determination of the application took longer than anticipated and made more likely that the hearing date would have to be vacated. 32In our view neither of these arguments reveals error on the part of the primary judge. His Honour referred to, and took into account, events from May 2011 when the amendment was first foreshadowed. They included that notice of the amendments was given before the hearing date was fixed, that the hearing date was fixed before the second amendment application was made, that at the time of judgment the position was that if the amendments were allowed it was likely that the hearing date would have to be vacated, and that from 2011 until delivery of judgment KSE had pursued the application to amend with reasonable diligence: esp at [25], [26], [116], [124]. His Honour did take account of the fact that the hearing date had been fixed before KSE's first amendment application was foreshadowed. The statement at [26] that the proceeding had "now been listed for final hearing" makes that clear. The primary judge's assessment at the time of judgment that he considered it very likely the hearing date would need to be vacated if the amendments were allowed must have taken account of the fact that the hearing was scheduled to commence in three months. His Honour treated KSE as having pursued its application with reasonable diligence from May 2011 to the delivery of judgment. He did not therefore regard the lapse of any part of that period as in some way due to its fault. He nevertheless had to, and did, consider the effect of granting the amendment on the maintaining of the hearing date. In doing so, his Honour took account of the matters KSE submits that he was required to consider, including the absence of any relevant "fault" on its part.

Conclusion 33The arguments made on behalf of KSE do not persuade us that there is a realistic prospect that the primary judge's exercise of discretion would be set aside on appeal. In the language of Powell JA, that decision is not attended with "sufficient doubt" to warrant its being considered by an appellate court. That being the position, notwithstanding the significance of the proposed amendments to KSE's case, leave to appeal is refused with costs.

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