Koadlow v Atkins

MCEVOY J: 1 This proceeding was commenced on 4 July 2022. Broadly, the applicants allege that in the period March to November 2021 they made investments and investment decisions pursuant to, and in reliance on, specified representations made by the first respondent, Mr Mitchell Atkins, including about the establishment of a jointly owned investment fund. The applicants claim that the representations made to them were false, inaccurate and incorrect in contravention of provisions of the Australian Securities and Investments Commission Act 2001 (Cth), the Corporations Act 2001 (Cth) and/or the Australian Consumer Law (being Sch 2 of the Competition and Consumer Act 2010 (Cth)). The final orders sought by the applicants in this proceeding include declarations of contraventions, orders for the transfer and/or delivery of specified shares and securities, damages, and, or alternatively, an account of profits. 2 Since the commencement of the proceeding the respondents have repeatedly failed to comply with timetabling orders, or have sought the extension of time to comply with orders made by the Court. These occasions have included the following: (a) Orders made on 5 July 2022: order 3 required that "[b]y 4.00pm on 7 July 2022, the respondents file and serve any affidavit material and written submissions …". No affidavit material or written submissions were filed or served. Mr Atkins' first affidavit in the proceeding was that sworn on 29 July 2022. (b) Orders made on 8 July 2022: (i) order 2 required the respondents by 15 July 2022 to produce all documents "by which the Microcap Fund, as referred to in paragraph 11 of the Statement of Claim, is said to be constituted", and produce all documents "recording or evidencing the applicants' investment of $9,500,000 in the Microcap Fund …". Limited production occurred on 15 July 2022 but that production was incomplete. It is said, and I accept, that the documents produced did not show or record margin calls sufficient effectively to erase the full value of the applicants' Microcap Fund and Joint Fund Shares investments, as those terms are defined in paragraphs 8 and 11 of the Statement of Claim. (ii) order 3 required the respondents by 22 July 2022 to "file and serve an affidavit sufficiently informing the applicants as to: (a) how the funds totalling $11,917,334.20 paid by the applicants have been applied … (b) the details of the current registered owner(s) of those shares, units or other securities; and (c) in the event that any of those shares units or other securities have since been sold, details of where the funds are presently held, and/or how the funds have since been disbursed." No such affidavit was sworn until 29 July 2022. That affidavit was incomplete and did not provide "sufficient information". (iii) order 4 required the respondents by 27 July 2022 to "file and serve any affidavit material upon which they intend to rely in connection with the applicants' claim for interlocutory relief, along with any written submissions …" No affidavit was sworn until 29 July 2022. (c) Orders made on 25 July 2022: orders 1 and 2 respectively extended the time for the respondents' compliance with orders 3 and 4 of the 8 July 2022 orders to 29 July 2022. As mentioned, the affidavit so sworn was incomplete and did not comply with the order. (d) Orders made on 5 August 2022: order 1 required the respondents by 8 August 2022 to produce "… all documents in their possession or control: (a) evidencing the margin calls upon and subsequent liquidation of the Joint Fund Shares, as referred to in paragraph 54 of Mr Atkins' affidavit sworn 29 July 2022; and (b) regarding the allegation of the first respondent of the need to use the "Magnolia Equities Trust" account with Lazarus Capital Partners, as opposed to a personal account of Mr Atkins, to hold Joint Fund Shares." No such production occurred until that provided over 8 and 10 August 2022 and that production was incomplete. It would seem that the respondents have still not produced documents evidencing margin calls on margin loans secured over the joint fund shares or the Microcap Fund sufficient to erase the applicants' investments. (e) Orders made on 11 August 2022: (i) order 1 required the respondents by 19 August 2022 to produce "… an electronic copy of each document evidencing or recording any margin lending which in any way reduced or affected the Microcap Fund and/or the Joint Fund Shares …" Some production occurred on 19 August 2022 but that production was incomplete as it did not record or evidence any clear, coherent or concise accounting as to the asserted impact of margin calls, let alone calls sufficient effectively to erase the full value of the applicants' Microcap Fund and Joint Fund Shares investments. (ii) order 2 extended the time for compliance with order 1(b) of the orders made on 5 August 2022 to 19 August 2022. As mentioned, the production then provided was deficient. (f) Orders made on 26 August 2022: order 1 required the respondents by 5 September 2022 to "… file and serve a further affidavit in further compliance with order 3 of the orders made on 8 July 2022, sufficiently informing the applicant as to how the funds totalling $11,917,334.20 are alleged to have been lost …" No such affidavit was sworn until 13 September 2022. The affidavit did not sufficiently inform or explain whether and how the whole of the funds provided by the applicants (or the securities purchased with those funds) were placed with lnvast, CIMB or Lazarus, what margin calls were made by those lenders that were satisfied by the sale of shares placed in those funds in amounts sufficient to erase the whole of the applicants' investments, and how sums of $1.05 million withdrawn from the Invast account, or about $4.05 million withdrawn from the CIMB account, were applied. (g) Orders made on 7 September 2022: order 1 extended the time for compliance with order 1 of the orders made on 26 August 2022 to 12 September 2022. No relevant affidavit was sworn until 13 September 2022, and that affidavit was noncompliant, as set out above. (h) Orders made on 19 September 2022: (i) order 1 required the respondents by 28 September 2022 "… to file and serve a further and better affidavit fully complying with order 1 of the orders made 26 August 2022, and in particular, such further and better affidavit is to provide a sufficient explanation so as to properly inform the applicants of … (a) [how the applicants' investments of $11,917,334.20 million were transferred to Invast, CIMB and/or Lazarus or became secured in respect of margin lending facilities of Invast, CIMB and/or Lazarus] (b) what the total funds or securities of the Microcap Fund contributed by Mr Koadlow (or his entities) and Mr Atkins (or his entities) were over the period 1 November 2021 and 31 July 2022 and how those funds or securities were transferred to Invast, CIMB and/or Lazarus or became secured in respected of margin lending facilities of Invast, CIMB and/or Lazarus; (c) how the funds and securities referred to in paragraphs 1(a) and 1(b) above were respectively reduced or expended in order to meet margin calls by Invast, CIMB and/or Lazarus or otherwise reduce any liabilities owed by the respondents or their associates to Invast, CIMB and/or Lazarus; (d) in respect of each withdrawal between 1 November 2021 and 31 July 2022 from any of the Invast, CIMB and/or Lazarus accounts the subject of paragraphs 1(a) and 1(b) above, explain the purpose and circumstances of each such withdrawal, including the name of the ultimate recipient of the funds so withdrawn, how those funds were used and where the funds or any securities or assets purchased with them are presently held or located; …" No such affidavit was sworn until 5 October 2022 and that provided was incomplete and not "sufficient information". It disputed, without producing any supporting documentary records, the quantum of the applicants' investment. It gave a purported estimate of Mr Atkins' own supposed corresponding investment, again without producing any supporting documentary records. In essence it asserted that Mr Atkins could not give a better account of the Microcap Fund trading without him having access to the Alphadesk software. Whilst this affidavit referred to the purported terms of alleged margin lending arrangements, it provided no sufficient account of withdrawals or erosion of the Microcap Fund due to such alleged margin loans (or advice by Mr Atkins to the trustee, or any authorisation by the trustee or the applicants), and Mr Atkins again blamed this deficiency on his lack of access to Alphadesk. The affidavit asserted that the transfer of various shares by Mr Atkins in respect of the Microcap Fund and Joint Account shares, but Mr Atkins again claimed that he could not give a full account without access to Alphadesk. No complete or coherent account was given as to the other deductions and withdrawals from the Microcap Fund nor the substantial sums that have apparently disappeared without a proper explanation or any accounting. (ii) order 4 extended time for the filing of the respondents' defence until 14 October 2022. No such defence was filed and served until 19 October 2022 and only after the applicants' solicitor had written to the Court to have the matter listed for a further directions hearing. (i) Orders made on 28 October 2022: order 2 ordered the respondents by 3 February 2023 to "… file and serve outlines of evidence for each of the witnesses they intend to call at trial that clearly identify the topics in respect of which evidence will be given and the substance of that evidence, including the substance of each important conversation." No outlines have been filed and served. 3 Having regard to the above matters I accept that there has been a protracted and consistent pattern of noncompliance with Court orders by the respondents. They have complied with very few orders at all, either in whole or in part, without either seeking ex post facto extensions or being brought back to Court as a result of their defaults. The latest default (a failure to provide outlines of evidence) is not an isolated or atypical breach of orders by these respondents. 4 Against this background the applicants now seek orders requiring that the respondents' outlines of evidence, in accordance with order 2 of the orders made on 28 October 2022, be filed by 4.00pm on 1 March 2023, and if they are not, that a self-executing order be made that the first and second respondents' defence filed 19 October 2022 be struck out and judgment be given against them for the relief claimed in the amended statement of claim, with damages and, or alternatively, equitable compensation, to be assessed. 5 This application came before the Court on 23 February 2023. There was no appearance for the respondents, although the first respondent had communicated with my chambers in relation to the hearing and was aware that it had been listed for 9.30am that day. 6 The applicants rely on s 37P of the Federal Court of Australia Act 1976 (Cth) and r 5.21 of the Federal Court Rules 2011 (Cth) in support of their application for self-executing orders. 7 Rule 5.21 of the Rules provides: Self-executing orders A party may apply to the Court for an order that, unless another party does an act or thing within a certain time: (a) the proceeding be dismissed; or (b) the applicant's statement of claim, or alternative accompanying document referred to in rule 8.05, be struck out; or (c) a pleading of the respondent be struck out; or (d) the party have judgment against the other party. 8 Rule 5.23 provides that, if an applicant is "in default", a respondent may apply to the Court for an order that a step in the proceeding be taken within a specified time, or the proceeding be stayed or dismissed immediately or in conditions specified in the order. 9 Rule 5.22 then defines what is meant by a party being in default: When a party is in default A party is in default if the party fails to: (a) do an act required to be done, or to do an act in the time required, by these Rules; or (b) comply with an order of the Court; or (c) attend a hearing in the proceeding; or (d) prosecute or defend the proceeding with due diligence. 10 Senior counsel for the applicants submitted that a self-executing order was now warranted because of the respondents' continued non-compliance with the Court's orders, and their unwillingness to cooperate in the conduct of the proceeding. He argued that given the history of this matter the Court could have no confidence that the respondents would comply with the orders to file their evidence. 11 I note also the provisions of s 37M and 37N of the Act. It is important to emphasise that the Court's powers must be exercised in a way that best promotes the overarching purpose of the civil practice and procedure provisions of the Act and the Rules, which is to facilitate the just resolution of disputes as quickly, efficiently and inexpensively as possible. 12 The position is, however, somewhat complicated by an affidavit sworn by Mr Atkins on the evening of 22 February 2023. In substance Mr Atkins alleges that he has filed for bankruptcy by submitting a debtor's petition to the Australian Financial Security Authority (AFSA) and nominating a registered liquidator to be the registered trustee of his bankrupt estate. 13 Obviously enough, and as was effectively conceded by senior counsel for the applicants, the fact that Mr Atkins may by now have submitted a debtors petition may be a reason not to make a self-executing order of the kind sought by the applicants at the present time. 14 In the face of this potential scenario, but in the circumstances where it was not apparent that Mr Atkins had in fact submitted a debtor's petition to AFSA, senior counsel for the applicants proposed that a self-executing order should be made, but that it should be stayed until further order unless by 12.00 noon on 27 February 2023 the applicants produce to the Court an AFSA search of the first respondent, dated on or after 9.00am on 27 February 2023 showing "no matches" for the first respondent on the National Personal Insolvency Index. The intention was to stay the operation of the self-executing order if Mr Atkins had not, in fact, submitted a debtors petition as he had claimed. 15 In all the circumstances, particularly having regard to the respondents' persistent pattern of non-compliance with the Court's orders, I am satisfied that a self-executing order broadly in the form proposed by the applicants but stayed as described above is appropriate. The respondents have been given repeated indulgences by the Court, and their refusal or inability to comply with Court orders is inexcusably complicating and delaying the conduct of the proceeding. If Mr Atkins has not, in fact, submitted a debtor's petition as he has asserted he has, a self-executing order is appropriate. 16 The self-executing order proposed by the applicants but stayed for sufficient time to determine whether a debtor's petition has been filed, will give the respondents one last chance to file and serve their outline of evidence for trial (unless Mr Atkins has filed a debtor's petition). Far too many of the judicial and administrative resources of the Court have already been consumed on this matter to the detriment of other matters. If orders in the terms sought are not made, additional unwarranted strain will be placed on those resources and the applicants will continue to incur unnecessary costs: see in this regard, Lu v University of New South Wales [2022] FCA 588 at [39] (Katzmann J). 17 Senior counsel for the applicants also urged the making of further discovery orders, and that Mr Atkins do all in his power to obtain access to the Alphadesk Software account held in the name of Magnolia Capital Group Pty Ltd and to provide to the applicants certain reports able to be produced by that software. This material has already been requested and it has not been provided. I accept that it is appropriate for orders to be made requiring the respondents to provide all of this material. 18 Finally, the applicants sought their costs of this application on an indemnity basis and that those costs be paid forthwith. It was submitted that the applicants have once again been forced to come to Court to enforce compliance with Court orders, that this is an ongoing occurrence, and that the costs that have been incurred should not, ultimately, turn on which party succeeds in the litigation. On this basis it was submitted that the default position that costs will not be ordered to be paid forthwith should not operate. 19 In the circumstances, and for the reasons submitted by the applicants, I am satisfied that the applicants should have their costs of and incidental to this application on an indemnity basis, as agreed or assessed, and that those costs should be paid forthwith. 20 Orders consistent with these reasons were made on 23 February 2023. I note, however, that at 5.46pm on Friday 24 February 2023 Mr Atkins forwarded to the solicitors for the applicants and my chambers an email from AFSA confirming that AFSA had received Mr Atkins' application for a debtor's petition and that the application was "in the work queue" and could take up to 10 business to be completed. In these circumstances it would seem that order 2 will be stayed until further order by operation of order 6. Should the applicants contend for a different position they will need to approach the Court. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McEvoy.

SCHEDULE OF PARTIES VID 374 of 2022 Respondents Fourth respondent: MAGNOLIA ABSOLUTE RETURN FUND II PTY LTD