KTC v David

Supreme Court of NSW|2019-03-14|Before: Kunc J

Summary

These reasons should be read as a continuation of the Court's judgment in KTC v David (No 1) [2019] NSWSC 281 (the "First Decision"). Terms defined in that judgment have the same meaning in these reasons. Because of the strike out motion, references in these reasons to "local defendants" means Mr Singh and XALT.
These reasons determine the jurisdiction motion. As I explained in the First Decision (at paragraph [3]), at the conclusion of the hearing of the three notices of motion before the Court, it was necessary to make provision for further brief written submissions on the jurisdiction motion.
It was common ground that Mr David's Australian solicitors had accepted service of these proceedings on the basis that he would be entitled to challenge the Court's jurisdiction. Although KTC submitted that there were several bases on which the Court had jurisdiction over Mr David, notwithstanding his current domicile in the United States, most of the argument turned on whether Mr David was a necessary or proper party to these proceedings insofar as they were properly brought against the local defendants.

The jurisdiction motion

By motion filed on 26 September 2018, Mr David sought orders including: "2. An order under UCPR rule 12.11(1)(c) declaring that the originating process has not been duly served on the first defendant. 3. An order under UCPR rule 12.11(1)(a) setting aside the originating process as against the first defendant. 4. An order under UCPR rule 12.11(1)(b) declaring that the originating process has not been duly served on the first defendant. 5. An order under UCPR rule 12.11(1)(g) declaring that the Court has no jurisdiction over the first defendant in respect of the subject matter of the proceedings."
Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") Part 12 rule 12.11 includes: (1) In any proceedings, the court may make any of the following orders on the application of a defendant: (a) an order setting aside the originating process, (b) an order setting aside the service of the originating process on the defendant, (c) an order declaring that the originating process has not been duly served on the defendant, … (g) an order declaring that the court has no jurisdiction over the defendant in respect of the subject-matter of the proceedings, … (i) an order granting such other relief as the court thinks appropriate…. (4) The making of an application for an order under subrule (1) does not constitute submission to the jurisdiction of the court."
The parties accepted that the Court would have jurisdiction over Mr David if the originating process could be served on him outside of Australia without leave under UCPR Part 11 rule 11.4, which required bringing the proceedings within the circumstances set out in Schedule 6 to the UCPR. The circumstances set out in that schedule contended for by KTC were: SCHEDULE 6 - SERVICE OUTSIDE OF AUSTRALIA WITHOUT LEAVE An originating process may be served outside of Australia without leave in the following cases: (h) when any person outside of Australia is: (i) a necessary or proper party to a proceeding properly brought against another person served or to be served (whether within Australia or outside Australia) under any other provision of these rules, or … (l) when a claim is made for restitution or for the remedy of constructive trust and the alleged liability of the person to be served arises out of an act or omission that was done or occurred wholly or partly in Australia,… (n) when the claim is founded on a cause of action arising in Australia,… (s) when the claim, so far as it concerns the person to be served, falls partly within one or more of the above paragraphs and, as to the residue, within one or more of the others of the above paragraphs."

Necessary or proper party - overview

The argument over whether Mr David was a necessary and proper party focused on the damages claimed against each of the defendants. The particulars of those damages were the same in relation to each defendant: "(i) By reason of the SIL Share Issue and the IBC Sale, KTC lost the opportunity to continue to participate as 40% stakeholder in, and profit by the operation of, the Waste Facility. (ii) Alternatively, by reason of RAAL and SIL selecting the IBC Bid and declining the First KTC Offer to purchase 100% of GRL's shareholding KTC lost the opportunity to participate as a 100% shareholder in, and to profit by the operation of, the Waste Facility. (iii) Alternatively, by reason of RAAL selecting the IBC Bid and declining the Second KTC Offer to purchase ECL's shareholding in GRL, KTC lost the opportunity to participate as a 50% stakeholder in, and to profit by the operation of, the Waste Facility. (iv) Alternatively, the IBC Sale was a sale of ECL's shares in GRL at undervalue. (v) Further or alternatively, the SIL Share Issue caused ECL's shareholding in GRL to be 50% rather than 80% at the time of the IBC Sale depriving KTC of the benefit of a further 15% of the value of the shares in GRL."
In his written submissions, Mr David conceded that on the assumption the proceedings against the other defendants (including the local defendants) were properly brought, he would be a necessary or proper party to the actions against them. However, he submitted that the proceedings against the other defendants could not be said to have been properly brought if they were doomed to fail: OZ-US Film Productions Pty Limited v Heath & Ors [2001] NSWSC 298 ("OZ-US") applying Witted v Galbraith [1893] 1 QB 577 ("Witted"); Rosler v Hilbery [1925] 1Ch 250 ("Rosler"); and Tyne Improvement Commissioners v Armement and Anversois S/A (The Brabo) [1949] AC 326 ("Tyne").
The submission that the proceedings were doomed to fail divided the particulars of damage set out in paragraph [9] above into two groups. Damage of the kind set out in sub-paragraphs (ii) and (iii) could not arise because, it was submitted, no relevant fiduciary duty had been pleaded or could be said to be owed by Mr David and RAAL to KTC in relation to the selection of the IBC Bid and sale of the Waste Facility (the "Alleged Sale Duty").
The damages identified in sub-paragraphs (i), (iv) and (v) were said to be irrecoverable by KTC because they were really ECL's losses. So understood, KTC's claim had to fail by reference to the principle that reflective losses were irrecoverable, including in equity (the "Alleged Reflective Losses").
The Court will first analyse the content of the "doomed to fail test" and then deal with each of Mr David's objections in turn. Finally, the other bases for jurisdiction relied on by KTC will be considered.

"Doomed to fail"

Mr David relied on the decision of Master McLaughlin (as his Honour then was) in OZ-US. Like these proceedings, OZ-US was a case where fiduciary and Barnes v Addy claims were advanced.
The relevant parts of Master McLaughlin's judgment are: "28 It is submitted on behalf of the applicant Defendants that the requirement contained in paragraph (i) of Part 10 rule 1A(1) that "the proceedings are properly brought" against a person in the situation of the Second Defendant is not satisfied if it appears that the proceedings have been commenced merely for the purpose of facilitating or enabling proceedings against a foreign Defendant. In this regard the applicant Defendants rely upon the decision of the English Court of Appeal (constituted by Lindley and Kay L.JJ) in Witted v Galbraith [1893] 1 QB 577; the decision of the English Court of Appeal (constituted by Pollock MR and Warrington and Sargent L.JJ) in Rosler v Hilbery [1925] 1 Ch. 250; and the decision of the House of Lords (constituted by Lord Porter, Lord Simonds, Lord du Parcq, Lord Normand and Lord MacDermott) in Tyne Improvement Commissioners v Armement Anversois S/A (The Brabo) [1949] AC 326. 29 The effect of paragraph (i) of rule 1A(1) is to authorise service on, and in consequence to confer jurisdiction over, the person to be served outside the State ("the Foreign Defendant"), where proceedings are regularly brought against a person served or to be served in the State ("the Local Defendant") and the Foreign Defendant is, under the rules relating to joinder, properly joined as a Defendant. It will be seen that paragraph (i) contains two requirements: firstly, that the proceedings be properly brought against the Local Defendant; and, secondly, that the Foreign Defendant is properly joined as a party. 30 As to the first of the requirements of paragraph (i), proceedings are properly brought against the Local Defendant so long as the claim against the Local Defendant is genuine and not doomed to failure. A claim is "genuine" in the relevant sense if brought with the intention that it be prosecuted to finality in order to effect an object within the scope of the remedy claimed, regardless of the circumstance that the Defendant might be completely unable to satisfy any ultimate judgment. (See Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 (especially per Mason CJ, Dawson, Toohey and McHugh JJ at 518f); but see, also, Dowling v Colonial Mutual Life Assurance Society Limited [1915] HCA 56; (1915) 20 CLR 509 at 521 per Isaacs J.) 31 The three authorities (Witted, Rosler and Tyne Improvement Commissioners) relied upon by the applicant Defendants do not in absolute terms support the proposition for which they are cited, that the proceedings against the Local Defendant are not properly brought if commenced solely for the purpose of facilitating or enabling an application against the Foreign Defendant, if that submission is taken to mean that the proceedings against the Local Defendant would not otherwise have been commenced. Those three authorities relied upon by the applicant Defendants do, however, support the proposition that proceedings against a Foreign Defendant cannot be supported by a claim against a Local Defendant which is not a genuine claim or which is doomed to failure."
Master McLaughlin understood the "doomed to fail" test to be on all fours with the well-known test in General Steel Industries Inc v Commissioner for Railways [1964] HCA 69; (1964) 112 CLR 125 ("General Steel"): "61 Further, I am of the view that it is for the present applicant Defendants to establish that there is no cause of action disclosed against either the Second Defendant or the Fifth Defendant; that is, that it is for the applicant Defendants to establish that the claims of the Plaintiff against those Defendants are hopeless or are doomed to failure. It is not for the Plaintiff to establish that it must necessarily succeed in its claims against those Defendants; it is for the applicant Defendants to establish that the Plaintiff will not succeed against either the Second Defendant or the Fifth Defendant (see General Steel Industries Inc v Commissioner for Railways [1964] HCA 69; (1964) 112 CLR 125 at 128-130 per Barwick CJ; see, also, Tyne Improvement Commissioners, at 341 per Lord Porter, at 358-360 per Lord MacDermott.) 62 In this regard, it will be appreciated that, for the purposes of the present application, it must be assumed that the Plaintiff at a final hearing will be able to establish the factual matters asserted in the amended statement of claim. 63 The present application is not an appropriate vehicle by which to determine whether or not the Plaintiff will ultimately succeed against the Fifth Defendant. It is not necessary for me to express any concluded views concerning the precise nature of the relationship between the Plaintiff and the Fifth Defendant, and the assertion on the part of the Plaintiff that the conduct of the Fifth Defendant constituted a breach of fiduciary duty owed by that Defendant to the Plaintiff arising out of their relationship in the pursuit of the Opportunity, or the assertion that the Fifth Defendant was liable as an accessory under the second limb of the principle in Barnes v Addy for giving knowing assistance to the breaches by the other Defendants of their fiduciary obligations to the Plaintiff. 64 It is sufficient for me merely to say that the claims of the Plaintiff against the Fifth Defendant are certainly arguable, and are not in my view necessarily doomed to failure. … 109 I am not satisfied that the applicant Defendants have established (in accordance with the principle outlined by Barwick CJ in General Steel Inc.) firstly, that the law of California would treat the relevant limitation provision of the California Code as being a substantive law rather than a procedural law; or, further, that the law of California would reject a tolling of the relevant limitation period during the period whilst the Plaintiff was de-registered. 110 It follows, therefore, that I am not satisfied that, on account of the application of California law to the cause of action asserted by the Plaintiff against the applicant Defendants, the Plaintiff's claim against those Defendants is doomed to failure in consequence of being statute barred."
In order to understand better the test to be applied in this case, it is helpful to review the three authorities relied on by Master McLaughlin. In the citations which follow I will emphasise what seem to me to be the critical passages.
In Witted, Lindley LJ said (at 579 - with Kay LJ expressing a view to like effect): "Supposing that both the defendant firms were resident within the jurisdiction, would they both have been joined in the action? I cannot think so; there is no plausible cause of action against the brokers. I come to the conclusion that the brokers have been brought into the action simply to enable the plaintiff to bring the other defendants within the jurisdiction. It is not a bona fide case of an action properly brought against a person who has been served within the jurisdiction."
In Rosler, the English Court of Appeal was considering the case against a local defendant, Mr Hilbery. Pollock MR said (at 26O) "It seems to me that there is no substance in the claim against Mr Hilbery". Warrington LJ was of the same opinion, saying (at 262) "That it is not shown by the plaintiffs that the action is properly brought against Mr Hilbery, the defendant in this country. The affidavit does not say so, and it shows no facts from which we can infer that there is any right of action in these plaintiffs at all against Mr Hilbery". Sargeant LJ delivered a concurring opinion.
Tyne was a claim by the authority responsible for the River Tyne against the owners of a Belgian steamship which sank in the river and became an obstruction. The commissioners used their statutory powers to salvage such portions of the wreck and the cargo as were salvageable and to disburse the rest. The commissioners claimed damages in relation to the expenses incurred by them in relation to the wreck and the cargo from the Belgian shipowners, as first defendants, and against those to whom the ship's cargo had been consigned, being the Minister of Supply and a British company, the British Islands Steel Corporation Limited.
In considering the claim against the Belgian defendant, Lord Porter said (at 338-343): "But this view still leaves open the difficult question, what cases can be said to be properly brought within the jurisdiction? Is it enough that there is a reasonable doubt either in law or in fact as to what the result of the case against the defendants within the jurisdiction may be, or must the Court decide on the hearing of the summons whether the plaintiffs will succeed against them or not? My Lords, where all the facts necessary for a decision are set out by one side or the other and not contradicted, I think that the tribunal must make up its mind on the hearing of the summons, at any rate where the law is plain. … One may say generally that serious disputes of fact cannot as a rule be decided upon a summons, whereas questions of law can, except perhaps in exceptional and complicated cases. Ultimately, I think, the granting or withholding of leave must be a matter of discretion, but in exercising it the considerations, which I have dealt with, must be borne in mind. It is not enough to say there is an arguable point of law because, as in the present case, a series of legislative enactments has to be considered and collated. The question is whether the law is plain as a result of comparing them and analysing their effect. If after a careful scrutiny the law is plain this House will interfere with the judge's discretion. … In my opinion, these circumstances do not constitute a sufficient ground for granting leave. Where there is a substantial question of fact in issue no doubt leave should be given. It may even be that the existence of an exceptionally difficult and doubtful point of law would of itself be enough. In the present case, however, when the various Acts and provisions are collated the answer is clear. The cause of action is statutory only. … In this case, however, the action against the two parties within the jurisdiction must plainly fail and in those circumstances I cannot think that the action is properly brought against them …"
Lord Simons, after acknowledging that the relevant facts could not be regarded as seriously in dispute, went on to say (at 345-350): "What, then, is here the basis of the respondents' objection to being served with the process out of the jurisdiction? It is simply that on the facts, which cannot fairly be regarded as in dispute, the action against the second and third defendants is not sustainable in law and is bound to fail, and that, if so, it cannot be regarded as properly brought against them … I come then to the conclusion that this action is bound to fail against the second and third defendants, and it appears to me that once a court has come to that conclusion it cannot say that none the less the action is "properly brought" against them so as to permit service of a writ out of the jurisdiction upon another party … Fourthly, if on the available materials the court comes to the conclusion that the action against the defendants within the jurisdiction must fail, it must equally conclude that the action is not properly brought. … Where the defendant out of the jurisdiction does take upon himself that burden, the court should not easily be deterred by any apparent difficulty or complexity of subject matter from considering and, if it can do so at that stage, forming an opinion on the question whether the action is bound to fail against the defendants within the jurisdiction. If, having done so, the Court answers that question in the affirmative, then it must conclude that the action is not "properly brought".
Lord du Parcq said (at 354-356): "For myself, I do not differ from the view expressed by the Court of Appeal that, assuming all the facts to be admitted, an action is not "properly brought" if "on those facts" if it is "apparent that the plaintiffs cannot succeed against the defendants joined within the jurisdiction" and I think that they correctly stated the question for decision as being whether "it can be reasonably argued" that those defendants are liable to the plaintiffs. … I have thus reached the conclusion that the Court of Appeal rightly decided that, on a fair reading of the available evidence, it was apparent that the appellants' claim against the second and third defendants could not succeed and that it was therefore not properly brought".
Lord Normand (at 357) said: "The words "properly brought" if narrowly construed would not afford to the foreign defendant the protection to which he is entitled and I think they are wide enough to oblige the Court, whether it be the Court to which the original application is made, or any court reviewing the order made by that court, to refuse the application when on all the material before it comes to the conclusion that the action as laid against the English defendant cannot succeed, either because the plaintiff has failed to state a valid ground of action or because on the facts established by admissions or by uncontradicted affidavits the English defendant has a valid defence."
Although Lord MacDermott adopted a slightly different approach, on the facts of the case before him he ultimately concluded (at 360) that "I accordingly reach the conclusion that in law, and assuming the defence of immunity to be taken, the plaintiffs would not succeed against either of these defendants".
In my respectful opinion, a proper understanding of the authorities to which I have referred by reference to the emphasised passages supports the conclusion that the test which the Court must apply in a case such as this is an even higher one than the General Steel test. In paragraph [17] of the First Decision I referred to the decision of the New South Wales Court of Appeal in Shaw v State of NSW [2012] NSWCA 102 ("Shaw") which explained that test as inviting the question whether the relevant claims are so obviously untenable or groundless that there is a "high degree of certainty" that they will fail if allowed to go to trial. It seems to me that the authorities which stand behind the decision in OZ-US to which I have referred go further than "a high degree" and require a position of certainty on the part of the Court that the case against the local defendants must fail.
If the analysis in the preceding paragraph is wrong, perhaps creating a distinction without a difference, then the Court must apply the test laid down in Shaw. I will now set out the reasons why the Court is not satisfied to either the standard of "a high degree of certainty" or, if applicable, "certainty" that KTC's claim against the local defendants will fail if allowed to go to trial.

The fiduciary duty

Before finally coming to Mr David's arguments it is necessary to set out some of the paragraphs of the ASOC to demonstrate how Mr David (and RAAL's) fiduciary obligation to KTC is said to arise: "21B. There were terms of the ECL JV Agreement as follows: … (d) RAAL and/or David would provide services to ECL such as were necessary to manage and oversee the day to day operations of any business in which ECL (sic); ... 21C. Pursuant to the ECL Joint Venture Agreement: … (d) David managed and oversaw the day to day operations of ECL in IPS and the Waste Facility. … 22. At all material times: (a) David acted as chairman and chief executive officer of ECL; and (b) RAAL and/or David was the operator and manager of ECL, IPS and the ECL Joint Venture; (c) David, representing the interests of ECL, was a director of GRL; (d) David and/or RAAL refused to permit the Kazals or any other person to represent the interests of ECL on the board of GRL; (e) David wrongfully believed that he had agreed with Charif Kazal that he would have complete control of ECL; (f) David and/or RAAL conducted the affairs of ECL on the basis that KTC had no rights to be involved in them; (g) David and/or RAAL was the sole provider of instructions to ECL's lawyers and accountants; and (h) by reason of the matters referred to in sub-paragraphs (a) to (g) inclusive (b): (i) David and/or RAAL had full knowledge of all of ECL's affairs, operations and finances; and (ii) David and/or RAAL had authority to call meetings of the board of ECL and notify its directors of the business proposed at such meetings; (iii) KTC and the Kazals were reliant and dependent on David and/or RAAL to inform them of all of the affairs of GRL, GRA and its subsidiaries. PARTICULARS Justice Jones held in the Share Issue Proceeding in the Judgment referred to in the particulars under paragraph 40: [8] "I do not accept Mr David's evidence that he actually agreed with Charif Kazal the he would have complete control of (ECL). This is not what the email says. It merely sets out what Mr David thought should be agreed between the parties in the circumstances." In or about mid 2008. David took up residence in the United Arab Emirates for the purpose of managing and operating the interests of the IPS Joint Venture with a local Abu Dhabi developer. On 5 December 2008 the board of IPS, comprising the Kazals and David, unanimously voted with David to resolve that David be authorised to generally represent IPS in connection with all issues arising out of IPS' shareholding in International Property Services LLC and to sign any type of document, contract, undertaking or agreement on behalf of IPS on any issue whatsoever arising out of its ownership of a shareholding in International Property Services LLC. Further, from the time on or about 1 January 2009 until the sale of ECL's shares in GRL in or about December 2010 David managed ECL's interest in GRL on ECL's behalf. By a report prepared by Ernst & Young, dated 19 August 2011 pursuant to the Order of the Grand Court of the Cayman Islands made on 27 August 2010 it was recorded that: (i) David had claimed consulting fees in the sum of AUD469,998; (ii) David had claimed directors fees of AUD45,000 in respect of ECL; (iii) David had claimed directors fees of AUD984.732 in respect of IPS; (iv) David had claimed relocation expenses in respect of the operation of IPS in a sum of AUD894.322: (v) David had claimed AUD225,000 as a termination payment from IPS; (vi) RAAL had claimed the sum of AUDI 1,544.383 in respect of travel and accommodation expenses; (vii) RAAL had claimed AUD715,833 in respect of "wages and salaries"; and (viii) RAAL had claimed professional fees of AUD266.785; (ix) Davids Group Limited (a company controlled by members of David's family and himself) had claimed AUD832,000 for the provision of corporate support to ECL. Further, David and/or RAAL, although not being involved in the day to day operations of GRL or GRA, and David irregularly attending the Waste Facility for less than a few hours a month, acted with the consent and authority of Singh to arrange for GRL to pay David remuneration of approximately AUD50,000 per month. Upon the acquisition by GRL of the Waste Facility on 21 January 2009 referred to in paragraphs 27 and 28, David and/or RAAL were responsible for communicating with GRL and SIL. KTC and the Kazals were excluded from communications with GRL, GRA and Singh, save for few exceptions relating primarily to a shareholders' agreement between GRL, ECL and SIL. Specifically such exceptions included the draft shareholders' agreement; sent by email sent on 14 November 2009 and explanatory email sent on 1 December 2009 regarding the draft shareholders' agreement: draft consulting agreements between SIL and R3Con Pty Ltd (a company owned by Singh) and GRL and the initial informal feedback on the terms of Interim Operating Protocol. David, representing the interests of ECL. and Singh, representing the interests of SIL were the only directors of GRL. Save for the few exceptions referred to in the preceding paragraph, Singh did not communicate directly with the Kazals regarding the affairs of GRL and did not provide access for any direct communication between KTC or the Kazals and any officer of GRA and its subsidiaries. David, representing the interests of ECL was appointed a director of GREC, GRT, ECO and GRO. Only David and/or RAAL provided instructions to: (a) Walkers, ECL's lawyers in the Cayman Islands; (b) MGI, ECL's accountants, which accountants were also accountants for David and Davids Group Pty Limited. KTC and the Kazals were totally reliant and dependent on David and/or RAAL to inform them of all of the affairs of GRL and GRA and its subsidiaries. … 37. By reason of the matters set out in paragraphs 21B(d), 21C(d) and 22, and, or alternatively, the matters referred to in the preceding paragraphs 22A to 22E inclusive, at all material times, in his capacity as a director of ECL, David, or alternatively ECL, owed the following fiduciary duties to KTC: (a) not to act contrary to the interests, or to the detriment, of KTC; (b) to deal with the equity and interests of KTC in ECL in the best interests of KTC; (c) not to permit the use of David's and/or RAAL's position to improperly gain an advantage for himself or itself or any other person; (d) not to act in circumstances where the interests of David or RAAL conflicted with the interests of KTC; (e) not to act so as to prefer David's personal interests (including the interests of RAAL in ECL) over the interests of KTC; (f) not to obtain a secret profit or benefit; and (g) to account to KTC for any secret profit or benefit that he, it or other person received. 38. Further or alternatively, by reason of the matters referred to in paragraph 22(a) to 22(e) inclusive, and, or alternatively, paragraphs 22A to 22E inclusive and 36, at all material times, RAAL owed the following fiduciary duties to KTC: (a) not to act contrary to the interests of KTC in ECL; (b) not to use its position as a shareholder to improperly gain an advantage for itself or any other person; (c) not to act so as to prefer its interests (or the interests of David) over the interests of KTC; (d) not to obtain a secret profit of benefit; and (e) to account to KTC for any secret profit. … 92. At all material times, each of David, ECL and RAAL had actual knowledge all of the circumstances in which the Share Issue had occurred, as alleged in paragraphs 33 to 35 (inclusive) and 40. 93. By reason of the matters referred to in paragraph 92: (a) upon receiving the Share Issue, RAAL held 24,950 shares in the Share Issue, or alternatively 49.99% of the equity of ECL on constructive trust for the benefit of KTC (Constructive Trust) as a knowing recipient of property obtained by breach of fiduciary duty by David; (b) David owed a fiduciary duty to KTC: (i) not to act contrary to the interests of KTC in ECL; (ii) not to use his position as a shareholder in RAAL to improperly gain an advantage for himself or any other person; (iii) not to act so as to prefer his interests (or the interests of RAAL) over the interests of KTC; (iv) not to obtain a secret profit or benefit; and (v) to account to KTC for any secret profit. (c) RAAL owed a fiduciary duty to KTC: (i) not to act contrary to the interests of KTC in ECL; (ii) not to use its position as a shareholder in ECL to improperly gain an advantage for itself or any other person; (iii) not to act so as to prefer its interests over the interests of KTC; (iv) not to obtain a secret profit of benefit; and (v) to account to KTC for any secret profit."

The alleged sale duty

The essence of the case against Mr Singh and XALT is that they are accessorily liable for the breaches of fiduciary duty by David and RAAL. So much appears from these paragraphs at the ASOC: "112. By reason of the matters set out in paragraphs 110 and 111 Singh knowingly assisted in the Fraudulent Design of RAAL and the Fraudulent Design of David. 113. By reason of the matters referred to in the preceding paragraph, Singh is liable to pay equitable compensation to KTC, alternatively, Singh secretly profited or improperly benefitted as a consequence of the Fraudulent Design of RAAL and/or the Fraudulent Design of David. PARTICULARS [Inserted here are the particulars reproduced in paragraph [9] above] Further particulars of KTC's loss and Singh's improperly obtained profit will be provided upon the filing of expert evidence. 114. Further, or alternatively, by reason of the matters referred to in paragraph 110 to 112 (inclusive), Singh holds all: (a) monies he has received as a consequence of the Fraudulent Design of RAAL, the Fraudulent Design of RAAL for Singh and/or the Fraudulent Design of David on trust for KTC; and (b) the shareholding in XALT on trust for KTC. … 118. By reason of the matters set out in paragraphs 115 to 117 inclusive, XALT knowingly assisted in the Fraudulent Design of RAAL, the Fraudulent Design of RAAL for Singh and/or the Fraudulent Design of David. 119. By reason of the matters referred to in the preceding paragraph, XALT is liable to pay equitable compensation to KTC, alternatively, XALT secretly profited or improperly benefitted as a consequence of the Fraudulent Design of RAAL, the Fraudulent Design of RAAL for Singh and/or the Fraudulent Design of David. PARTICULARS [Inserted here are the particulars reproduced in paragraph [9] above] Further particulars of KTC's loss and XALT's improperly obtained profit will be provided upon the filing of expert evidence."
Mr David's argument was that the case against Singh and XALT was doomed to fail because the allegations of breach of fiduciary duty against him and RAAL were doomed to fail.
Mr David made a detailed attack on the ASOC. However, it is sufficient for the Court to concentrate on what he submitted was the fundamental defect in KTC's case on this point. That defect was said to be that to the extent there was any fiduciary duty owed by him and RAAL to KTC, it was that of a fiduciary joint venturer, being owed as a co-investor from the inception of their relationship in mid-2008. Only later did KTC act as a purchaser. The pleaded scope of any fiduciary duty was one owed to KTC as a co-investor and not a duty to KTC qua purchaser of ECL's shareholding in GRL with its interest in the Waste Facility.
Similarly, insofar as RAAL was said to be a constructive trustee of KTC's shares in ECL, its fiduciary duties were those of a bare trustee with an obligation to restore the shares or rectify the register. No greater duty was pleaded or could be identified.
Mr David's submissions on both of these points were summarised in the proposition that KTC had approach the matter "backward". This point was encapsulated in Mr David's supplementary submissions: "28. KTC's submissions are, with respect, backward: it is seeking to define the scope of the duty by reference to the causative effects of the actions alleged to constitute its breach, the consequence being that it missed out on the opportunity of ownership. But that is not how breaches of fiduciary duty are determined: firstly, one identifies the duty, secondly, one identifies its scope, and lastly one identifies the consequence of the breach of that duty within the scope so identified. KTC's approach appears to be: first, identify the duty, second, identify the causative effects of the acts said to have breached that duty, and lastly, identify the scope of the duty be reference to those causative effects."
It was submitted that a further difficulty was that because any interest of KTC qua purchaser was not within the scope of the duty allegedly owed by Mr David and RAAL, KTC was not entitled to compensation of the kind which it sought. Rather, any liability Mr David had was to account or to pay equitable compensation in order to restore the fund or property held on trust for the subject of the fiduciary duty to the state it would have been in had there been no breach: Agricultural Land Management Limited v Jackson (No 2) [2014] WASC 102; (2014) 48 WAR 1 per Edelman J (then sitting as a judge of the Supreme Court of Western Australia) at [341]-[343].
KTC's response was, in essence, that Mr David had misunderstood KTC's case. That case had as its foundation precisely the duties owed between Mr David and RAAL, on the one hand, and KTC, on the other, as shareholders in ECL. Ms Loughnan QC put the submission this way (T117:16-40): "LOUGHNAN: Well as a constructive trustee, RAAL was meant to restore the equity to KTC immediately. And we've discussed that yesterday. It didn't. Instead it used that equity to exercise absolute control over ECL. It then went about a course of conduct that culminated in the sale of the waste facility. Now it could only have done that as a constructive trustee of our equity. It wouldn't have been able to achieve that outcome in the way it was achieved, with all the characteristics of the sale, unless it had held our equity. And as a result of holding our equity as a constructive trustee it acted, we say, contrary to our interests. Now we have pleaded that Mr David had done these things in a way that favours the interests of RAAL over KTC. And that is reflected in the fact that in the proceeding in the Cayman Islands, Mr David maintained that he was entitled to the total shareholding that he had achieved in the share dilution. He never wavered from that position. And whilst he was defending that proceeding he went about the course of conduct that we've described in paras 60 to 90. All of those acts, we say, were inconsistent with his duties to KTC. The Grand Court has agreed that there was a fiduciary duty owed. We say that it will follow that our equity was held by Mr David as constructive trustee. And whatever he's done, if it's found to have been inconsistent with our interests, and as a result thereof we have been prejudiced, we say RAAL and David will either have to account or compensate. And whether it's an account or compensation the same principles apply."
KTC submitted that its case was of the kind identified by Young JA in Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 (with whom, on this point, Allsop P and Macfarlan JA agreed): "120 With respect, this is too narrow a reading of Brunninghausen and is out of line with other authorities. 121 There will be a variety of situations where a shareholder or director/shareholder holds a special position where he or she may owe duties to another shareholder. 122 Without being an exhaustive list, this will occur where: one shareholder undertakes to act on behalf of another shareholder; where one shareholder is in a position to have special knowledge and knows that another shareholder is relying on her to use that knowledge for the advantage of another shareholder as well as herself; and where the company is in reality a partnership in corporate guise, nowadays termed a quasi partnership."
KTC also submitted that the reasoning sought to be applied by Mr David was exactly that which was criticised by the High Court in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; (2018) 92 ALJR 918 (per Kiefel CJ, Keane and Edelman JJ) ("Foresters"): "4. Foresters submitted that its liability to account and disgorge should be confined to those profits that are the direct result of each of the particular acts by which it committed the equitable wrong of knowingly assisting Woff and Corby in a dishonest and fraudulent design to breach their fiduciary obligations to Lifeplan and FPM. By focusing on each act of knowing assistance and its direct consequences, rather than the overall effect of Foresters' wrongful conduct, the submission ignores the obvious reality that Foresters' particular interactions with Woff and Corby resulted, as they were always apt to do, in the wholesale acquisition by Foresters of the business connections that Lifeplan and FPM had with funeral directors, these connections being, as Foresters well knew, essential to Lifeplan and FPM's funeral fund business."
KTC emphasised this passage in the judgment of the plurality: "14. There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby. 15. The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing. For example, in Frank Music Corp v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a "sufficient nexus" with the performance. But the direct profit from the performance to be disgorged was limited to nine per cent because the copyright infringement comprised only the substantial part of Act IV in a ten-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of "the advertising value" of the hotel. 16. No precise test has been prescribed for determining when it will be inequitable to account for a benefit on the basis that it has no reasonable connection with wrongdoing. Nor is there any need for such a test. All of the circumstances must be considered, including the nature of the conduct. It is pertinent here that the profits were from deliberate and dishonest conduct, and were those desired to be achieved. The advantage to be valued in this case was not limited to the flow of funds derived during the five-year period identified in the "Funeral Fund Business Concept" ("the BCP") prepared by Woff and Corby to encourage Foresters to participate in the despoliation of the business of Lifeplan and FPM. No doubt, as the Full Court held, the confidence in the success of the proposed strike against Lifeplan and FPM engendered by the five-year projections in the BCP influenced the decision of Foresters to fall in with Woff and Corby; but the advantage to be obtained was not limited to what might be obtained by way of deposits during that period. The advantages of the business connections appropriated from Lifeplan and FPM were to be enjoyed by Foresters for as long as those connections could be retained in its business."
Weighing the parties' respective submissions, I am unable to conclude that Mr David's analysis is so obviously correct and KTC's analysis is so obviously untenable that KTC's case in relation to the alleged sale duty is doomed to fail (either on the General Steel test or the more stringent test of certainty which, in my respectful opinion, is the correct one in a case of this kind). On the contrary, this is a case which raises substantial questions of fact and difficult questions of law of the kind referred to by Lord Porter in Tyne (see paragraph [21] above) where, for that reason, the Court cannot accept Mr David's argument that KTC's accessorial case against the local defendants is doomed to fail because the case against Mr David is doomed to fail. To recall the language of the plurality in Foresters (at [16]), this is a case in which "all of the circumstances must be considered, including the nature of the conduct". That will be done at trial. The result is that the Court concludes that in relation to alleged sale liability Mr David is a necessary or proper party to the proceedings such that the Court has jurisdiction over him.

The alleged reflective losses

Mr David made a strong case that the particularised losses could not be recovered at the suit of KTC because they were in fact ECL's losses. This is an application of the reflective loss principle, which was considered by Campbell JA (with whom Spigelman CJ and Allsop P agreed) in Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 233 FLR 283 ("Oates"): "Reflective Loss 207 The "one matter" that I referred to earlier is this. Mr Gleeson submitted that any action that CCL Australia might bring against Messrs Hawkins and Tyne for breach of directors' duties in transferring the shares it held in CCL UK for an undervalue would fail because of the reflective loss principle. I now turn to consider that principle. 208 In Prudential Assurance v Newman Industries (No 2) at 222-3 the English Court of Appeal considered a situation where a shareholder sued directors alleging that the directors had conspired to injure the company, and indirectly, the shareholders. The directors were alleged to have carried out their conspiracy by issuing a fraudulent circular inducing shareholders to vote in favour of the company purchasing certain assets at what proved to be an overvalue. For the shareholder to suffer loss in consequence of the conspiracy was an essential part of its cause of action. Their Lordships held, at 222G-3E, that the shareholders' claim for personal loss was misconceived: "... if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, 99 of which are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all of its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company." 209 In Gould v Vaggelas (1984) 157 CLR 215, a misrepresentation had caused Mr and Mrs Gould to enter a contract to purchase, on behalf of a company yet to be incorporated, certain business assets. The company was then incorporated, as a two dollar company, and on settlement of the contract took title to the assets. The Goulds personally succeeded in recovering damages for deceit, consisting of (i) the value of property they transferred to the vendor in partial payment of the purchase price, (ii) the value of property the Goulds mortgaged to banks to secure guarantees given to the banks for loans to the company, and that the banks sold, (iii) the amount of a residual obligation of the Goulds under the guarantees, plus (iv) an amount of interest. 210 Gibbs CJ stated the principle for assessing damages at 219-20: "Any loss suffered by Gould Holdings as a consequence of the fraud can be recovered only by the company itself. Even if the company had not commenced an action within the limitation period, its failure to enforce its own rights would not have enhanced the rights of the Goulds: see Prudential Assurance v Newman Industries (No 2) [1982] Ch 204 at 223. However, although the Goulds cannot recover damages merely because Gould Holdings has suffered damage, and cannot recover damages which are merely a reflection of a loss suffered by the company, they may recover damages for the loss which they personally have suffered and which is separate and distinct from the loss suffered by the company." See also at 231-2 per Murphy J, 245-6 per Wilson J, and 253-4 per Brennan J. The losses that the Goulds claimed were held to be separate losses to those that the company had incurred, and thus to be recoverable by the Goulds. 211 In Johnson v Gore Wood & Co [2002] 2 AC 1 at 35E-36A Lord Bingham of Cornhill (with whom Lord Goff of Chieveley agreed on this point) said, at 35-36: "These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223, Heron International [Ltd v Lord Grade [1983] BCLC 244], particularly at pp 261-262, George Fischer [(Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260], particularly at pp 266 and 270-271, Gerber [Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443] and Stein v Blake [1998] 1 All ER 724], particularly at pp 726-729. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by a breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other." 212 Lord Cooke of Thorndon, at 43B, accepted Lord Bingham's three propositions, but regarded them as not exhaustive. 213 Lord Hutton, at 55G, followed the principle laid down in Prudential Assurance, but said: "... it is important to emphasise that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company." … 221 To put it another way, if the view of the facts that is most favourable to Mr Oates were to be adopted, the principle on which any loss caused by transfer of the shares would be assessed is to notionally put CCL Australia into the position it would have been in if that transfer had not occurred. That position would be that it was the owner of shares that had become, through a wrong done by Messrs Tyne and Hawkins to CCL UK, of no value. It would be restoring CCL Australia to the position of the shareholder who had been tricked into handing over the key to the company's cashbox considered in Prudential Assurance v Newman. Indeed, the position of CCL Australia is somewhat less favourable than that of the key-owner, in that it was not even a necessary step for Messrs Hawkins and Tyne to obtain a single CCL Australia share to be able to appropriate to themselves the CCL Products and the CCL Business Opportunities."
In response, KTC submitted that, again, Mr David's submissions in relation to reflective loss misapprehended the causes of action that KTC sought to make out against Mr David in the ASOC. It was submitted that those causes of action stem from what were described as the "fact based fiduciary duties owed to KTC by Mr David and RAAL" as a shareholder in ECL. The breach of that duty, it was submitted, gave rise to damages shareholder to shareholder distinct from any losses suffered by ECL. KTC referred to the third proposition extracted in paragraph [211] of the judgment of Campbell JA set out in the preceding paragraph.
Despite the initial attraction of the arguments put on behalf of Mr David, in the context of the present application it seems to me that, with respect, they should be approached with caution. That caution derives from this observation of Campbell JA in Oates: "216 As the various judgments in Johnson v Gore Wood show, application of these principles requires close attention to be paid to each head of damage that is claimed in an action to see whether that particular head of damage is one that, if awarded, would result in a shareholder receiving compensation for a loss which is nothing more than a reflection of a loss that has been suffered by the company.
The Court accepts that at the final hearing there will have to be careful scrutiny of the damages claimed by KTC qua shareholder to ensure that they do not fall foul of the reflective loss principle. However, the "close attention" referred to be Campbell JA is a reminder that the principle of reflective loss will often raise mixed questions of fact and law which a court would rarely, if ever, be able to adjudicate upon in what is, in effect, a summary judgment application.
I am unable to conclude on the basis of the ASOC that it will be impossible for KTC to prove losses qua shareholder/joint venturer which are not simply reflective of ECL's losses. Contrary to the position adopted by Mr David, it seems to me that the possibility of such recovery is stronger (rather than weaker) when it is understood that ECL was the vehicle for the conduct of the joint venture. This is because the legal relationship between the parties is arguably juridically different from, and more complex than, the relationship between two parties that happen to be shareholders in a company. It is that arguable juridical difference which leaves open the prospect of KTC being entitled to damages against the local defendants and Mr David which are not simply reflective of ECL's losses.
For these reasons, Mr David has failed to satisfy the Court to the high standard (on either basis I have identified) that KTC's case in relation to the alleged reflective losses is doomed to fail.

Other bases for jurisdiction

Because of the conclusions I have reached above, I will deal only briefly with the other grounds for jurisdiction asserted by KTC, all of which fail.

Constructive trust

This basis relies on item (l) in Schedule 6 which refers to "when a claim is made for … the remedy of constructive trust and the alleged liability of the person to be served arises out of an act or omission that was done or occurred wholly or partly in Australia".
It was submitted for Mr David that there was no evidence of any act or omission in Australia.
In response, Ms Loughnan QC submitted that many of the factual matters that formed the basis of the claim against Mr David set out in paragraph 60-90 of the ASOC, being acts inconsistent with his alleged fiduciary duty, occurred in Australia.
The facts proven before me do not support Ms Loughnan QC's submission. What the evidence established was that Mr David was in Sydney on 27 September 2010 when he swore an affidavit and that he had been in Australia for meetings with Mr Mavro and Mr Bullock in November and December 2009. Otherwise, it was submitted for KTC that insofar as Mr David gave G+T instructions, irrespective of where Mr David was physically located at the time, those instructions (and therefore Mr David's conduct) took place where the instructions were received, namely by G+T in Sydney.
I do not think any of those matters is sufficient to engage item (l) of Schedule 6 because I do not accept it can properly be said that Mr David's alleged liability pursuant to the constructive trust can be said to "arise out of" any of those matters that were said to have been done in Australia. It is clear from the ASOC, and the way in which KTC has sought to defend its pleading generally, that any liability in Mr David arises out of the dilution of KTC's shareholding in ECL. That was done at a board meeting in the UAE. All of the matters of which KTC complains flow from that event.

Cause of action arising in Australia

KTC next relied on item (n) in Schedule 6 being "when the claim is founded on a cause of action arising in Australia". KTC submitted that "a fundamental part" of its claims is the advice alleged to have been given by Mr Bullock to Mr David in December 2009 at a meeting in Sydney.
Mr David drew attention to the treatment of this item in Nygh's Conflict of Laws in Australia, 9th edn, Lexis Nexis Butterworth, Australia 2014 at 3.53: "For a cause of action to arise in the jurisdiction it is not necessary that every element arose locally; rather the test is to ask: "Where in substance does the cause of action arise?" Reference was also made to the decision of French J (as his Honour then was) in Traxon Industries Pty Ltd ACN 009 318 987 v Emerson Electric Co (2006) 230 ALR 297 at [62], where his Honour observed that the expression "cause of action" did "not refer to all the elements of the cause of action. It refers rather to the act on the part of the defendant which gave the plaintiff his cause for complaint".
I do not agree that, even if the advice allegedly given by Mr Bullock was given by him in Sydney, the advice "in substance" gave rise to the causes of action pleaded against Mr David in the ASOC. That is because the advice may or may not have been followed. It was the acting on the alleged advice which "gave [KTC its] cause for complaint". That occurred in the UAE at the board meeting which authorised the dilution of KTC's shareholding in ECL. This basis for jurisdiction is not made out.

The catch-all

Finally, KTC relied on item (s) in Schedule 6 being "when the claim, so far as it concerns the person to be served, falls partly within one or more of the above paragraphs and, as to the residue, within one or more of the others of the above paragraphs". KTC submitted that its claim, insofar as it concerns Mr David, fell partly within one or more of paragraphs (h)(i), (l) and (n) of Schedule 6 while the residue of the claim falls within one or more of the other paragraphs of Schedule 6, namely paragraph (g).
Reliance on item (s) in this way does not assist KTC. The Court has found that jurisdiction under items (l) and (n) of Schedule 6 has not been made out. Furthermore, Ms Loughnan QC properly recognised that at the time of purported service on Mr David's solicitors, Mr David was not "domiciled or ordinarily or habitually resident in Australia" for the purposes of item (g) of Schedule 6.

Conclusion

The Court has jurisdiction over Mr David because he is a necessary or proper party to the proceedings which are properly brought against Mr Singh and XALT within the meaning of item (h)(i) of Schedule 6. The jurisdiction motion will be dismissed.
The Court will give the parties an opportunity to bring in short minutes of order to reflect these reasons and the First Decision. 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: 27 March 2019

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