Lemery Holdings Pty Limited v Reliance Financial Services Pty Ltd;School Holdings Pty Ltd v Dayroll Pty Ltd

CATCHWORDS : PRACTICE AND PROCEDURE - COSTS - Civil Procedure Act 2005 (NSW), ss 56 and 99(1) - where orders of Court and directions not complied with as a consequence of conduct on the part of legal practitioners - whether costs were incurred by serious neglect or serious misconduct on their part within the meaning of s 99(1)(a) of the Civil Procedure Act - duty of barrister and solicitor under s 56(4) of Civil Procedure Act not to cause client to be put in breach of the duty to assist the Court to further the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings and to comply with directions and orders of the Court - application of s 99(1) to employed solicitors

Corporations Act 2001 (Cth) Supreme Court Rules 1970 (NSW) Practice Note SC Gen 5 LEGISLATION CITED : Civil Procedure Act 2005 (NSW) Legal Profession Act 2004 (NSW) Uniform Civil Procedure Rules 2005 (NSW) District Court Act 1973 (NSW)

Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Tyrell v Bank of London (1862) 10 HL Cas 26; 11 ER 934 O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 Kendirjian v Ayoub [2008] NSWCA 194 Kendirjian v Ayoub (No 2) [2008] NSWCA 255 CASES CITED : Newmont Yandal Operations Pty Ltd v The J Aron Corporation [2007] NSWCA 195 Dennis v Australian Broadcasting Corporation [2008] NSWCA 37 Whyked Pty Ltd v Yahoo!7 Pty Ltd [2008] NSWSC 477 Wentworth v Rogers [1999] NSWCA 403 Ideal Waterproofing Pty Ltd v Buildcorp Australia Pty Ltd [2006] NSWSC 155 Ridehalgh v Horsefield [1994] Ch 205 Myers v Elman [1940] AC 282 Knaggs v J A Westaway & Sons Pty Ltd (1996) 40 NSWLR 476

Lemery Holdings Pty Limited ACN 002 858 353 - Plaintiff Reliance Financial Services Pty Limited ACN 003 478 966 (in liquidation) - Defendant Reliance Financial Services NSW Pty Limited ACN 131 889 766 - Applicant Reliance Financial Services Pty Limited ACN 003 478 966 (in liquidation) - First Respondent Maxwell Christopher Donnelly in his capacity as liquidator of Reliance Financial Services Pty Ltd (in liquidation) ACN 003 478 966 - Second Respondent Annette Theresa Zeiter - Third Respondent Josephine Mizzi - Fourth Respondent PARTIES : Marthas T Market Pty Ltd - Fifth Respondent Francesco Criniti, Caterina Castellano, Josephine Joan Romano - Sixth Respondents Dennis Phillip Griffiths ACN 089 263 310 - Seventh Respondent Ghandi Faiz Sobbi, Zaneh Faizi Sobbi - Eighth Respondents: School Holdings Pty Limited ACN 118 317 098 - Plaintiff Dayroll Pty Limited ACN 074 628 774 (in liquidation) - Defendant Dayroll NSW Pty Limited ACN 131 996 651 - Applicant Dayroll Pty Limited ACN 074 628 774 (in liquidation) - First Respondent Maxwell Christopher Donnelly in his capacity as liquidator of Dayroll Pty Limited (in liquidation) ACN 074 628 774 - Second Respondent

D.B. McGovern SC with D.A. Allen (Plaintiff/Applicant) COUNSEL : P.B. Walsh (First & Second Respondents) A.F. Fernon (Third Respondent) T.G. Feerick (Solicitor) (Fourth Respondent)

Proctor & Associates (Plaintiff/Applicant) SOLICITORS : Church & Grace (First & Second Respondents) Mccabe Terrill Lawyers (Third Respondent) Frontier Law Group P/I (Fourth Respondent)

• 29 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2445/2008 LEMERY HOLDINGS PTY LTD -V- RELIANCE FINANCIAL SERVICES PTY LTD 2710/2008 SCHOOL HOLDINGS PTY LTD -V- DAYROLL PTY LTD JUDGMENT FACTUAL BACKGROUND The Reliance proceedings 1 HIS HONOUR: On 26 June 2008 Reliance Financial Services Pty Ltd ACN 003 478 966 (in liquidation) ("Reliance") was wound up at the instance of Lemery Holdings Pty Ltd, supported by the Commissioner of Taxation and another creditor. Mr Max Donnelly was appointed liquidator. 2 By Interlocutory Process dated 25 July 2008 a company styled Reliance Financial Services NSW Pty Ltd (as Applicant) ("Reliance NSW") commenced proceedings ("the Reliance proceedings") seeking leave pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed against Reliance, seeking an order giving it conduct of a series of proceedings pending between Reliance and a number of other parties, and seeking a declaration that it is the trustee of a trust styled the Reliance Financial Services Trust. 3 In the Reliance proceedings, Reliance is cited as First Respondent and the liquidator as Second Respondent. 4 The Reliance proceedings are presently set down for hearing on 10 November 2008. 5 Ms Nancy Morvillo is the sole director of Reliance NSW. 6 The Interlocutory Process in the Reliance proceedings bears a signature under which the following appears: " [signature] Signature of the Applicant's legal practitioner Jim Kekatos Proctor & Associates" 7 The document reflects it as having been filed by Proctor & Associates, Solicitors. The letterhead of the firm (under cover of which submissions referred to below were provided to the Court), discloses that the principal of the firm is Mr Proctor and that Mr Kekatos is an Associate. Mr Kekatos is the solicitor with carriage of the Reliance proceedings. Mr Proctor does criminal work. No other solicitors are employed by the firm. The Dayroll proceedings 8 On 1 July 2008 Dayroll Pty Ltd ACN 074 628 774 (in liquidation) ("Dayroll") was wound up at the instance of School Holdings Pty Ltd. Mr Max Donnelly was appointed liquidator. 9 On 25 July 2008 Austin J gave leave to a company styled Dayroll NSW Pty Ltd (as Applicant) ("Dayroll NSW") to file an Interlocutory Process commencing proceedings ("the Dayroll proceedings") in which Dayroll NSW seeks leave pursuant to s 471B of the Corporations Act to proceed against Dayroll and declarations that Dayroll NSW is the trustee of various trusts. 10 In the Dayroll proceedings, Dayroll is cited as First Respondent and the liquidator as Second Respondent. 11 The Dayroll proceedings are presently set down to be heard together with the Reliance proceedings on 10 November 2008. 12 Ms Morvillo is the sole director of Dayroll NSW. 13 As with the Reliance proceedings, the Interlocutory Process in the Dayroll proceedings bears a signature under which the following appears: " [signature] Signature of the Applicant's legal practitioner Jim Kekatos Proctor & Associates" 14 The document also states that it was filed by Proctor & Associates. Mr Kekatos is the solicitor with carriage of the Dayroll proceedings.

The orders and breach of them 15 On 4 August 2008, by consent, in each of the Reliance proceedings and the Dayroll proceedings I made orders numbered 3A in the terms set out below. 16 The reference to the Applicant (in the orders numbered 3A and the other orders referred to below) is a reference to Reliance NSW in the Reliance proceedings and to Dayroll NSW in the Dayroll proceedings respectively. I shall refer to Reliance NSW and Dayroll NSW collectively as "the companies". The reference to the First Respondent is a reference to Reliance and Dayroll respectively and the reference to the Second Respondent is a reference to the liquidator in that capacity in each of the proceedings: "3A. The Applicant produce to the court all books and records of the First Respondent (including those relating to its actions as trustee of any trust) by 4 pm on 5 August 2008, the First Respondent and the Applicant to have first access for seven days and the Applicant, by its director Nancy Morvillo verify on oath that the Applicant has complied with its obligations under this order." 17 By 26 August 2008 Ms Morvillo had not given the verification on oath which the 4 August 2008 order required. 18 On 26 August 2008, by consent, I made orders in each of the Reliance and the Dayroll proceedings in the following terms: "2. The Applicant, by its director Nancy Morvillo file and serve an affidavit no later than 4pm on Thursday 28 August 2008 verifying that the Applicant has complied with its obligations pursuant to Order 3A made on 4 August 2008." 19 No doubt in recognition that there had been non-compliance by them with the earlier orders, the companies consented to pay the costs of the day (26 August 2008) of the First and Second Respondents, and I so ordered. 20 The Reliance proceedings and the Dayroll proceedings came before me again on 1 September 2008. Mr D A Allen of counsel appeared for the companies. 21 In breach of the orders of 4 August 2008 as varied by the orders of 26 August 2008 (by the insertion of a later deadline) no affidavits by Ms Morvillo had either been filed or served at that time. 22 Despite being requested to do so, I declined to extend the period for compliance. I made it clear to those present in Court that the default was a continuing one. I directed that any application to extend the time for compliance was to be filed and served by 4 pm that day, together with any affidavit in support, and was to be made returnable on 15 September 2008. 23 I stood both the Reliance proceedings and the Dayroll proceedings over to 15 September 2008. I suggested to Mr Allen that Ms Morvillo be present on that occasion. 24 No application for an order extending the time for compliance with the 26 August 2008 orders was filed or served on 1 September 2008. 25 Neither had any such application been filed or served by 15 September 2008 when the proceedings were called on before me at 10 am. 26 On that occasion the companies were represented by Ms Dolenec of counsel. Ms Morvillo was not present. 27 The liquidator was represented by Mr Walsh of counsel. He informed me that no affidavits by Ms Morvillo as required by the orders earlier referred to had been received. 28 I enquired of Ms Dolenec as to the position. Her response was that she had no instructions. Mr Kekatos was not in Court. I directed that he be present at 2.00pm. 29 At 2.00pm Mr Allen appeared for the companies, instructed by Mr Kekatos. He too provided no explanation for the default but gave me to understand that there was one, and that it would be given on affidavit. 30 It appeared to me that Ms Morvillo was guilty of contempt (possibly in the face) of Court. Hence, by oral order I directed that she be brought before the Court as contemplated by Part 55 r 2(a) of the Supreme Court Rules 1970 (NSW). However, I gave Mr Allen an opportunity to ascertain whether Ms Morvillo undertook to be before the Court on 22 September 2008, and upon being informed that such an undertaking was given, I stayed the oral order. 31 I then made orders in the following terms: "By Thursday 18th September 2008 at 12.00 noon, the applicant referred to in the orders of 4th August 2008 and Nancy Morvillo are to serve on the other parties and file by delivery to my Associate, an affidavit which counsel on their behalf has informed the Court will be so provided, explaining the reason for the failure to comply with the orders of 4th August 2008 and verifying that the applicant has complied with its obligations under order 3A made on 4th August 2008." 32 I stood the proceedings over to 22 September 2008 before me. The explanations 33 I received, within time, an affidavit of explanation by Ms Morvillo, sworn 17 September 2008. Its cover page stated that it was filed by Proctor & Associates. 34 As to the required production of books and records, Ms Morvillo deposed to the fact that prior to their liquidation she had had no involvement with either Reliance or Dayroll except to the extent that Reliance NSW and Dayroll NSW became trustees of certain trusts and to the extent that she was a beneficiary of some trusts. She gave an explanation that she was reliant upon others, principally her cousin Mr David Cassiniti and her brother Mr Sam Cassiniti to discharge the obligation to produce the books and records under the orders and, from what she had been told, she believed that they had been produced on 6 August 2008. 35 With respect to her failure to provide affidavits confirming delivery of the books and records ("the affidavits of compliance") she swore, relevantly, as follows: "3 On 4 August 2008 I was informed by my solicitor Jim Kekatos that I was required to file an affidavit stating that all the books and records had been delivered to the court in both matters. 4. I do not recall whether Mr Kekatos told me when the affidavit had to be filed. 13. I relied upon my solicitor to prepare the affidavit and expected that he would see to me having it executed at the appropriate time. I have spoken to him several times since 6 August 2008. He has mentioned that an affidavit had to be filed. He did not mention any date. I have never been involved in any court proceedings. The failure to file the affidavit was not a deliberate decision. 17. I have never been in trouble with the law. 18. I am embarrassed that I have not had my affidavit filed by me setting out that the books and records of Reliance and Dayroll have been delivered to the Court. 19. I apologise to the Court. 20. There is no excuse for the failure. It ought to have been done." 36 The affidavit of explanation (which was sworn two days after the matter had been before me on 15 September 2008) fell significantly short of explaining the default in delivering the affidavits of compliance. Amongst others, it said nothing of Ms Morvillo's knowledge or otherwise of the order which was made by consent on 26 August 2008; it said nothing of her knowledge or otherwise of the direction of 1 September 2008 that any application to extend the time for compliance was to be filed and served that day together with any affidavit in support; it said nothing of her knowledge of or any instructions (or lack thereof) with respect to the failure to make such an application; it said nothing of the circumstances under which junior counsel appeared on the morning of 15 September 2008 without instructions in a context where there was default; it said nothing of any communication between Ms Morvillo and any of her brother, her cousin, counsel or Mr Kekatos concerning any of the events which had occurred before me on 26 August, 1 September and 15 September 2008 which included my having made it clear to counsel on 1 September 2008 that the default was a continuing one and my suggestion on that day that Ms Morvillo be present on 15 September 2008. 37 What the affidavit of explanation did make clear was that Mr Kekatos (who Ms Morvillo described as "my solicitor") had failed to prepare the affidavit of compliance despite her expectation that he would do so, and that he had not mentioned the deadline which the Court had ordered for its delivery. It made no mention of counsel having taken any step to ensure that she was made aware of what had occurred before me, that she was made aware of the significance of her default or that the default was remedied. 38 On 22 September 2008, because I considered it appropriate to afford Ms Morvillo an opportunity to provide a further affidavit of explanation, I did not take any formal steps with respect to her apparent contempt, save that I had read to her the form of the charge that was under consideration by me. 39 Based on what was said and not said in the affidavit of explanation sworn 17 September 2008, I formed the view that this was a case where it might be appropriate to make a costs order against the legal practitioners in that it seemed to me that, at the lowest, there had been serious neglect on their part. 40 I accordingly gave each of Mr Kekatos and Mr Allen an opportunity to show cause why the costs of the other parties incurred as a consequence of the non-compliance with orders numbered 3A of 4 August 2008 and the orders of 26 August 2008 should not be borne by them. I directed that they provide written submissions by no later than 25 September 2008: see Practice Note SC Gen 5 (referred to below); Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300.

41 I stood the proceedings over to 29 September 2008. 42 On 22 September 2008 Ms Morvillo provided a further affidavit of explanation. It is appropriate to set it out in full: " AFFIDAVIT On the 22nd day of September 2008, I, Nancy Morvillo of 23 Wren Street, Condell Park in the state of New South Wales, teacher, say on oath:-

1. I am the Director of Reliance Financial Services NSW Pty Limited ACN 131 8899 766 and the Applicant in these proceedings.
2. On the 22nd September, 2008 I appeared in the Supreme Court pursuant to an undertaking by my counsel to appear before His Honour Justice Hammerschlag.
3. I am deeply upset and mortified that this situation has escalated to this serious stage. I was aware of the requirement to file an affidavit however I now appreciate the seriousness of the non-compliance.
4. I relied upon my solicitor to keep me informed and to ensure that all orders were complied with. I was not made aware of the directions made on the 26th of August 2008. I was not made aware of the orders made on 1 September 2008. I am informed by Mr. Kekatos that Ms Dolenec who appeared on 15 September 2008 was not informed by him of the failure to comply with orders. I am informed by Mr. Kekatos that she was instructed to appear to get a date for hearing and was instructed as she acts for me in another matter.
5. Once I was informed on the 15th September and I realised the urgency and gravity of the non-compliance, I went to great lengths whilst working as a Senior Marker of the Music HSC Course for the Board of Studies in the New England region, to ensure the affidavit sworn on the 17th September, 2008 was prepared and filed.
6. My sincerest apology for the delay and inconvenience caused. I did not mean any disrespect to the Court.
7. I believe that all books and records of Reliance Financial Services Pty Ltd (in liquidation) and Dayroll Pty Ltd (in liquidation) have been produced to the Court in accordance with the orders made on the 4th August 2008.
8. I am informed by Mr. Kekatos that he agrees to pay costs caused by the failure to comply with the court orders. I will not be indemnifying him.
9. I implore you to consider my position and my past history as a person with no previous court experience. As a teacher for the past 25 years, I have been a role model for students and believe myself to be a person who is responsible, honest and of good character." 43 On 25 September 2008, under cover of a letter from Proctor & Associates, I received a document from each of Mr Allen and Mr Kekatos in respect of my direction for submissions as to why they should not be ordered to pay the costs of the various defendants appurtenant to the default. 44 The submissions from Mr Kekatos were as follows: "1. I do not wish to make any submissions." 45 The submissions from Mr Allen were as follows: "1. I have chosen not to make any submissions." 46 The matter came before me on 29 September 2008. Ms Morvillo as well as the companies were represented by Mr D B McGovern SC leading Mr Allen. 47 Apart from the two affidavits of Ms Morvillo earlier referred to, an affidavit by Mr Kekatos sworn 15 September 2008 was filed and read, as were affidavits of Mr Sam Cassaniti and Mr David Cassaniti sworn 29 September 2008. 48 It is not necessary to set out any of the affidavits of the Messrs Cassaniti. 49 It is, however, appropriate to set out in full the affidavit of Mr Kekatos: " AFFIDAVIT On the 15th day of September 2008, I, Jim Kekatos, Solicitor of Level 1, 20 Hunter Street Parramatta in the State of New South Wales, say on oath:- 1. I am the solicitor with carriage of this matter. 2. Nancy Morvillo is the director of the Applicants Reliance Financial Services NSW Pty Limited and Dayroll NSW Pty Limited ("the Applicants"). 3. Ms Morvillo is a high school teacher. I have made enquiries as to Ms Morvillo's availability to appear before the Court at 2pm today. I am instructed that Ms Morvillo is in Tamworth today. For the last two weeks she has been travelling around NSW in order to hear HSC music exams. 4. An order was previously made for Ms Morvillo to file an affidavit verifying compliance by the Reliance Financial Services NSW Pty Ltd and Dayroll NSW Pty Ltd with production to the Court of the books and records of the First Respondent Reliance Financial Services Pty Ltd (In Liq) and Dayroll NSW [sic] Pty Ltd (In Liq). 5. On 1 September 2008 orders were sought by consent to have time to comply with the order extended. His Honour Justice Hammerschlag declined to make the order. Instead, as I understand, his Honour made an order that if the Reliance Financial Services NSW Pty Ltd and Dayroll NSW Pty Ltd wished to obtain an extension of the order, that an application be filed and served by 4pm that day for an extension of time. 6. I attended Court on 1 September 2008 with Mr Cassaniti, however I was not present in Court when the matter was dealt with because I was dealing with another matter in the list. 7. I recall outside court I had a conversation with Mr. Allen. He handed me a copy of the orders made. 8. It was my understanding after the conversation that a notice of motion to extend time was not required to be put on, but could be. 9. I was unable to seek an extension of time in the time permitted. I was concerned about whether putting on a motion was the correct course. I was concerned that what could be said in a supporting affidavit could be used against Ms Morvillo and that she had the right to remain silent. 10. I have proceeded on that basis of having Ms Morvillo execute an affidavit to confirm all books and records have been delivered up to the Court. 11. I have been unable to attend upon her in the last two weeks. From 1 September 2008 for the working week she was travelling around suburban schools sand [sic] from 8 September she was at Canterbury Race Course listening to recitals for the purpose of the HSC. During the evenings has been spending the evenings marking papers. 12. I did not go and see her as I have spend [sic] last week instructing in a 5 day matter before Brereton J and the week previous I was preparing for that hearing and preparing affidavits in the several other matters including these matters and the matter of 68 Bathurst Street Pty Ltd (In Liq). For the last 5 weeks I have been working seven days a week and during weekdays from 7am to 10 at night. 13. I should have seen to the swearing of the affidavit. I should have seen this as a priority and I give [sic] it the propriety [sic] it deserved. 14. I was unable to delegate. I am employed solicitor of Proctor & Associates. Mr. Proctor is the principal and does criminal law work. No other solicitors are employed by the firm." CONTEMPT 50 I am satisfied that the default on the part of the companies and their sole director Ms Morvillo to comply with the orders was caused by the conduct of the legal advisers, and that the default was not contumacious. 51 The default has been purged and Ms Morvillo has made an unqualified apology. 52 I am satisfied that Ms Morvillo is now acutely conscious of the serious consequences which might flow from a failure to abide orders of the Court. 53 Save with respect to the issue of costs dealt with below, I am satisfied that no further steps need be taken with respect to the default. That subject may now be regarded as closed. COSTS AND THE LEGAL PRACTITIONERS The law 54 Section 56 of the Civil Procedure Act 2005 (NSW) provides as follows: " 56 Overriding purpose

(1) The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. (2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule. (3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court. (4) A solicitor or barrister must not, by his or her conduct, cause his or her client to be put in breach of the duty identified in subsection (3). (5) The court may take into account any failure to comply with subsection (3) or (4) in exercising a discretion with respect to costs." 55 Section 57 of the Civil Procedure Act provides as follows:

(1) For the purpose of furthering the overriding purpose referred to in section 56 (1), proceedings in any court are to be managed having regard to the following objects: (a) the just determination of the proceedings, (b) the efficient disposal of the business of the court, (c) the efficient use of available judicial and administrative resources, (d) the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties. (2) This Act and any rules of court are to be so construed and applied, and the practice and procedure of the courts are to be so regulated, as best to ensure the attainment of the objects referred to in subsection (1)." 56 Section 99 of the Civil Procedure Act provides as follows: " 99 Liability of legal practitioner for unnecessary costs

(1) This section applies if it appears to the court that costs have been incurred: (a) by the serious neglect, serious incompetence or serious misconduct of a legal practitioner, or (b) improperly, or without reasonable cause, in circumstances for which a legal practitioner is responsible. (2) After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following: (a) it may, by order, disallow the whole or any part of the costs in the proceedings: (i) in the case of a barrister, as between the barrister and the instructing solicitor, or as between the barrister and the client, as the case requires, or (ii) in the case of a solicitor, as between the solicitor and the client, (b) it may, by order, direct the legal practitioner: (i) in the case of a barrister, to pay to the instructing solicitor or client, or both, the whole or any part of any costs that the instructing solicitor or client, or both, have been ordered to pay to any other person, whether or not the solicitor or client has paid those costs, or (ii) in the case of a solicitor, to pay to the client the whole or any part of any costs that the client has been ordered to pay to any other person, whether or not the client has paid those costs, (c) it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party. (3) Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Part 3.2 of the Legal Profession Act 2004 ) for inquiry and report. (4) The court may direct that notice of any proceedings or order under this section with respect to a legal practitioner be given: (a) in the case of a barrister, to the instructing solicitor or client, or both, as the court may direct, or (b) in the case of a solicitor, to the client. (5) The court may give ancillary directions to give full effect to an order under this section, including directions to a legal practitioner to provide a bill of costs in assessable form: (a) to the court, or (b) to a party to the proceedings, or (c) in the case of a barrister, to the instructing solicitor or client, or both, or (d) in the case of a solicitor, to the client. (6) A party's legal practitioner is not entitled to demand, recover or accept: (a) in the case of a barrister, from the instructing solicitor or client, or (b) in the case of a solicitor, from the client, any part of the amount for which the legal practitioner is directed by the court to indemnify any party pursuant to an order referred to in subsection (2) (c). (7) In this section, client includes former client." 57 Supreme Court Practice Note SC Gen 5 which commenced on 17 August 2005 has as its stated purpose ensuring compliance with directions and the Rules of Court. It contains the following provisions: " Cost sanctions 5. The requirement that parties and practitioners comply with directions and rules will be confirmed by the use of costs sanctions in appropriate cases, including costs orders against practitioners personally and costs ordered on a payable forthwith basis. Obligations of practitioners 6. Practitioners are reminded of their duty to the Court to ensure the efficient and expeditious conduct of proceedings. Practitioners must have regard to "the speedy and efficient administration of justice" ( Giannarelli v Wraith) . 7. Practitioners should be familiar with the UCPR requirements to: · facilitate the just, quick and cheap disposal of proceedings; · identify the issues genuinely in dispute; · be satisfied that there is a reasonable basis for alleging, denying or not admitting facts in pleadings. 8. The Court relies on practitioners, either directly or by giving appropriate advice to a client, to observe listing procedures, rules and Court directions, to ensure readiness for trial, to provide reasonable estimates of the length of hearings, to present written submissions on time and to give the earliest practicable notice of an adjournment application. Failure in any of these respects may be taken into account in exercising the jurisdiction to order costs against practitioners personally. Procedural considerations 11. The procedure to be followed where the Court is minded to make a costs order against a practitioner personally will be: · A practitioner will be given an opportunity to show cause why costs should not be ordered against him or her; · With the consent of the practitioner, the Court may take the show cause submission orally at the conclusion of any trial, application or other appearance before the Court; · The Court may adjourn the matter to another day or date to be fixed, and may direct the practitioner to provide written submissions to the Court within a period specified by the Court; · The Court may further direct that the matter proceed by written submission and by reference primarily to the materials that were before the Court during the proceedings to which the costs order relates; · If it will assist the Court, the other parties to the proceedings may be directed or invited to make submissions in relation to the question of costs or any ancillary matter; · If a practitioner informs the Court that he has requested his or her client to waive legal professional privilege in a respect which the practitioner asserts is relevant to the Court's consideration of the costs order, the Court will invite the client to make submissions on the matter and to indicate whether the client wishes an order to be made against the practitioner; · Upon a determination by the Court that a practitioner shall be personally liable for the costs of a party to the proceedings or any part thereof and such costs are ordered to be payable forthwith, the Court may Order that a bill of costs relevant to the costs order be filed with the Court and served on the party liable to pay within such time as the Court orders and that such a bill of costs be in the form prescribed pursuant to section 193 of the Legal Profession Act; and · The Judge or Associate Judge may determine and order the amount of costs payable under the costs order." 58 Section 4(1) of the Legal Profession Act 2004 (NSW) defines "client" to include "a person to whom or for whom legal services are provided". 59 Section 703 of the Legal Profession Act provides that the Law Society Council may make rules for or with respect to practice as a solicitor. Section 702 of that Act provides that the Bar Council may make rules with respect to practice as a barrister. 60 On 24 August 1995 the Law Society Council of New South Wales made Professional Conduct and Practice Rules. Rules 1 - 16 concern relations between legal practitioners and clients and include the following: Statement of Principle for Rules 1 - 16: "Practitioners should serve their clients competently and diligently. They should be acutely aware of the fiduciary nature of the relationship with their clients, and always deal with their clients fairly, free of the influence of any interest which may conflict with a client's best interests. Practitioners should maintain the confidentiality of their clients' affairs, but give their clients the benefit of all information relevant to their clients' affairs of which they have knowledge. Practitioners should not, in the service of their clients, engage in, or assist, conduct that is calculated to defeat the ends of justice or is otherwise in breach of the law." Rule 1.1: "A practitioner must act honestly, fairly, and with competence and diligence in the service of a client, and should accept instructions, and a retainer to act for a client, only when the practitioner can reasonably expect to serve the client in that manner and attend to the work required with reasonable promptness." Rule 10.1.1: "A practitioner must not, in any dealings with a client … allow the interests of the practitioner or an associate of the practitioner to conflict with those of the client …" 61 The New South Wales Bar Council made the New South Wales Barristers Rules, most recently amended on 30 May 2008. Those rules include the following: Preamble: "2. As legal practitioners, barristers must maintain high standards of professional conduct. 3. The role of barristers as specialist advocates in the administration of justice requires them to act honestly, fairly, skillfully, diligently and bravely. 4. Barristers owe duties to the courts, to other bodies and persons before whom they appear, to their clients, and to their barrister and solicitor colleagues." Duty to client:

"16. A barrister must seek to advance and protect the client's interests to the best of the barrister's skill and diligence, uninfluenced by the barrister's personal view of the client or the client's activities, and notwithstanding any threatened unpopularity or criticism of the barrister or any other person, and always in accordance with the law including these Rules.

17. A barrister must seek to assist the client to understand the issues in the case and the client's possible rights and obligations, if the barrister is instructed to give advice on any such matter, sufficiently to permit the client to give proper instructions, particularly in connexion with any compromise of the case." 62 The statement in the Professional Conduct and Practice Rules that a solicitor must not allow the interests of the practitioner to conflict with those of the client is a reflection of the duty which is imposed upon a solicitor by reason of the fiduciary relationship which a solicitor has with the client. The duty arises out of the trust and confidence which the client places in the solicitor: see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7. 63 In Tyrell v Bank of London (1862) 10 HL Cas 26 at 44; 11 ER 934 at 941 Lord Westbury LC said:

"there is no relation known to society, of the duties of which it is more incumbent upon a court of justice strictly to require a faithful and honourable observance, than the relation between solicitor and client" 64 A solicitor has a "grievous responsibility" to avoid a conflict between his personal interests and his duty to his client which is "why the law insists upon full candour and appropriately complete disclosure to the client before an apparent conflict of interest and duty on the part of a solicitor will be excused": O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 208. 65 A solicitor also owes to his client a duty to reveal everything which the solicitor knows which will be of assistance to the client in relation to matters within the solicitor's retainer: O'Reilly v Law Society of New South Wales at 213. 66 Section 56(4) of the Civil Procedure Act imposes upon legal practitioners a duty (in addition to their other duties to the Court and to their clients) not to cause their client to be put in breach of the duty identified in subsection (3) to assist the Court to further the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings. 67 Section 56(5) of the Civil Procedure Act permits the Court, in exercising its s 99 discretion as to costs, to take into account any failure to comply with s 56(3) or (4): see Kendirjian v Ayoub [2008] NSWCA 194 at [208]-[209]; Kendirjian v Ayoub (No 2) [2008] NSWCA 255 at [11] and following. 68 Paragraph 6 of Practice Note SC Gen 5 reminds practitioners of their duty to the Court to ensure the efficient and expeditious conduct of proceedings. Paragraph 5 makes it clear that costs sanctions may be imposed when directions are not complied with. 69 Under s 99(1)(a) of the Civil Procedure Act, the jurisdiction to order a legal practitioner to pay costs is enlivened if costs have been incurred by serious neglect, serious incompetence or serious misconduct on the part of that legal practitioner. 70 The power in s 99 read with s 56 of that Act is to be exercised in accordance with the particular terms of the sections: Newmont Yandal Operations Pty Ltd v The J Aron Corporation [2007] NSWCA 195 at [116]; Dennis v Australian Broadcasting Corporation [2008] NSWCA 37 at [29]; Whyked Pty Ltd v Yahoo!7 Pty Ltd [2008] NSWSC 477 at [12] and following. 71 Nevertheless, what is meant by "neglect" and "misconduct" on the part of legal practitioners has been considered by the Courts in this country and in England and guidance is to be derived from such authorities. 72 Undoubtedly "serious neglect" within the meaning of s 99(1) would include a substantial omission on the part of a legal practitioner which no member of the profession who was reasonably well-informed and competent would have omitted to do: see Wentworth v Rogers [1999] NSWCA 403; Ideal Waterproofing Pty Ltd v Buildcorp Australia Pty Ltd [2006] NSWSC 155; Ridehalgh v Horsefield [1994] Ch 205 at 223-233. 73 Undoubtedly, "serious misconduct" within the meaning of s 99(1) includes a substantial breach by a practitioner of the Professional Conduct and Practice Rules and a substantial breach by a practitioner of his or her duty to the Court or of his or her fiduciary duties to the client.

74 In Myers v Elman [1940] AC 282 at 318-319 Lord Wright said of the term "professional misconduct": "It would perhaps be more accurate to describe it as conduct which involves a failure on the part of a solicitor to fulfil his duty to the court and to realise his duty to aid in promoting, in his own sphere, the cause of justice." MR KEKATOS 75 Although Reliance NSW and Dayroll NSW are the parties in the proceedings Ms Morvillo is the sole director of both those companies. In both her affidavits (filed by Proctor & Associates and undoubtedly prepared by Mr Kekatos - having regard to the facts that he was unable to delegate and Mr Proctor does only criminal work) Ms Morvillo refers to Mr Kekatos as "my solicitor". In her affidavit of 22 September 2008 she states that she (as opposed to the companies) will not be indemnifying Mr Kekatos. 76 The consent orders of 4 August 2008 and 26 August 2008 committed each of those companies "by its director Nancy Morvillo to provide affidavits". 77 The orders required Ms Morvillo and no other to be the deponent. The companies were dependent on Ms Morvillo to provide the affidavits which they were required to provide, and Ms Morvillo in turn was reliant upon Mr Kekatos to prepare them. 78 By Part 40 rr 40.6(1) and (2) of the Uniform Civil Procedure Rules 2005 (NSW) a judgment or order of the Court may be enforced, if the person bound by it is a corporation, by committal of any officer of the corporation. 79 Mr Kekatos owed professional and fiduciary duties not only to the companies but to Ms Morvillo herself with respect to the requirement on her to provide the affidavit. She was a person for whom legal services were being provided and she was in the position of a client. Even if she was not personally bound by the orders (as I think she was) as the sole director of the companies the orders binding them could be enforced by her committal. However, she personally was not bound by the duty under s 56(3) of the Act which applies only to parties to proceedings. But she no doubt had a duty, as a director, to the companies to ensure that they did not breach their duty under that section. 80 The agreement of Mr Kekatos referred to in paragraph 8 of Ms Morvillo's affidavit of 22 September 2008 to pay costs caused by the failure to comply with Court orders and the statement that she will not be indemnifying him were clarified by Mr McGovern as meaning that Mr Kekatos has agreed to pay costs which Ms Morvillo and the companies are ordered to pay. 81 In addition Mr Kekatos has declined the opportunity given to him in accordance with Practice Note SC Gen 5 to make submissions. 82 These factors indicate clear acceptance by him that the circumstances are such as properly to justify a personal costs order against him. 83 Although this acceptance might on its own be sufficient basis to make such an order, it is nevertheless necessary, given the special jurisdiction involved, to consider whether his conduct in its own right merits the making of such an order and, if so, its terms. 84 It was not put in issue by him that even though he is an Associate, and not a principal legal practitioner, that the jurisdiction under s 99 extends to him personally rather than only to his principal. 85 Mr McGovern, in properly assisting the Court, drew my attention to Knaggs v J A Westaway & Sons Pty Ltd (1996) 40 NSWLR 476 which concerned s 148E(1) of the District Court Act 1973 (NSW) which gave to that Court power to make orders against a solicitor. That section was in the following terms:

"(1) The Court may, at any stage of an action, make one or more of the following orders in respect of a solicitor whose serious neglect, serious incompetence or serious misconduct delays, or contributes to delaying, the action: (a) disallow the whole or any part of the costs between the solicitor and his or her client; (b) direct the solicitor to repay to his or her client the whole or any part of the costs which the client has been ordered to pay to any other party; (c) direct the solicitor to indemnify any party other than his or her client against the whole or any part of the costs payable by the party indemnified." 86 The Court of Appeal considered that that provision did not confer power to award costs against an employed solicitor because such a solicitor does not have a client. The Court considered that it applied only to a solicitor who is a principal, in relation to "his or her client". 87 As Mr McGovern pointed out, s 99(2) of the Civil Procedure Act does not refer to "his or her client" but rather to "the client". He suggested, correctly in my view, that this difference in terminology indicates that the jurisdiction extends to the making of an order against an employed solicitor. 88 In contrast, s 56(4) of the Civil Procedure Act still uses the term "his or her client". If for that reason the provision does not apply to an employed solicitor, then s 56(5) does not enable the Court to take into account any failure by an employed solicitor to comply with subsection (4) in exercising a discretion with respect to costs. 89 Knaggs v J A Westaway & Sons Pty Ltd was decided on different legislation and there is a clear change in the terminology in s 99, undoubtedly for a reason. An employed solicitor owes the same duties to the Court and to any client of his or her principal in relation to work done for a client of the firm. 90 In my view s 99(1) applies not only to principal practitioners but also to solicitors who happen to be employees. 91 It would be illogical and inimical to the furtherance of the overriding purpose if an employed solicitor was susceptible to the s 99 jurisdiction but s 56(5) did not apply to his or her conduct. 92 That 56(5) is intended to apply to employed solicitors is supported, in my view, by s 57(2) of the Civil Procedure Act which requires the Court to construe and apply the provisions of that Act, including s 99, so as best to ensure the attainment of the objects of case management, as set out in s 57(1). Under s 57(1) the Court is to manage proceedings having regard to the objects of case management set out in that subsection "[f]or the purpose of furthering the overriding purpose referred to in s 56(1)". 93 However, because I have concluded for the reasons which follow, that costs have been incurred by the serious neglect and serious misconduct of Mr Kekatos as contemplated by s 99 leaving out of account any failure by him to comply with s 56(4), it is not necessary to determine in the present case whether s 56(5) applies to an employed solicitor. I also did not have the benefit of any assistance on the point. 94 Mr Kekatos was, in my view, guilty of neglect in the following respects each of which was, in its own right let alone cumulatively, serious and amounted to a serious breach of professional duty to the companies and Ms Morvillo: a the failure to inform Ms Morvillo of the terms of the orders of 26 August 2008; b the failure to inform Ms Morvillo of the terms of the orders of 1 September 2008 and his consequent failure to obtain instructions to seek an extension supported by affidavit as provided by those orders; c the failure to inform Ms Morvillo that the Court had made it clear that the default was continuing and of the Court's suggestion that she be present on 15 September 2008; d the failure to inform Ms Dolonec of counsel, who was briefed to and did appear on the morning of 15 September 2008, that there had been default; e the failure to serve the clients and attend to the work which was required to protect their interests because, amongst others, he was engaged in other work; f the failure to prepare the affidavits of compliance within the Court-imposed deadlines; and g the failure to ensure that the first affidavit of explanation sufficiently explained the default. 95 Mr Kekatos had a positive duty in the interests of the companies and Ms Morvillo to do those things which he failed to do. No reasonably well-informed and competent solicitor would have omitted to do those things. The omissions exposed the companies and Ms Morvillo personally to potentially serious consequences. 96 However, and more significantly, as his affidavit of 15 September 2008 reveals, Mr Kekatos' conduct went beyond neglect. 97 In the knowledge that he had failed to tell Ms Morvillo of the Court-imposed deadline and had failed to ensure that it was met, he says that he was concerned about whether putting on a motion for an extension was the correct thing because what could be said in a supporting affidavit could be used against Ms Morvillo and that she had the right to remain silent. 98 The significant difficulty for him is that by his own neglect, Mr Kekatos placed himself in a position where his own personal interests conflicted with that of his clients. 99 An honest explanation on affidavit would have exonerated the companies and Ms Morvillo from the default but would (as it ultimately has done) have revealed his own neglect. 100 Mr Kekatos' duty to act honestly, fairly and with competence and diligence in the service of the clients required him to disclose this to them and to take instructions with them being fully informed. Not only did he not do that but rather, he determined not to seek an extension when there were good grounds available to them for getting one on the basis of his own neglect. 101 His conduct was not honest, fair, competent or diligent and amounted to preferring his own personal interests over those of the clients. This, in my view, amounted to serious misconduct.

102 By Mr Kekatos' serious neglect and serious misconduct costs were needlessly incurred, not only by his clients but by the liquidator and the other parties who were represented on each of 26 August 2008, 1 September 2008, 15 September 2008, 22 September 2008 and 29 September 2008. 103 By reason of Mr Kekatos' agreement with Ms Morvillo (and presumably the companies), it is not necessary to make any order with respect to the payment of their costs. 104 I have concluded that the Court should exercise its discretion under s 99(1) of the Civil Procedure Act to order Mr Kekatos to pay the costs of and incidental to the appearances of those of the defendants who appeared on each of 26 August 2008, 1 September 2008, 15 September 2008, 22 September 2008 and 29 September 2008 on an indemnity basis, the costs to be assessable forthwith and payable immediately upon assessment.

105 I should add that compliance with the relevant orders would undoubtedly have facilitated the stated overriding purpose of the Civil Procedure Act. Conversely the default by the companies in complying with them was undoubtedly in breach of the duty imposed upon parties to proceedings to comply with directions and orders of the Court as required by s 56(3) of the Civil Procedure Act. 106 In the context of the relief sought in the Reliance proceedings and the Dayroll proceedings, the production of the books and records of Reliance and Dayroll and the verification that they had been produced were both important matters. 107 If Mr Kekatos was bound by the duty in s 56(4) of the Civil Procedure Act not by his conduct to cause any of the companies as parties to be put in breach of the duty identified in subsection (3), he breached that duty by causing them to be put in such breach. MR ALLEN 108 Mr Allen has, notwithstanding the opportunity given, like Mr Kekatos declined to make submissions on the question of costs. This is a clear acknowledgement by him that a personal costs order is warranted. As with Mr Kekatos I consider that it is nevertheless necessary to consider whether his conduct merits such an order. 109 Ms Morvillo makes no reference to Mr Allen in either of her affidavits. 110 The only reference by Mr Kekatos to Mr Allen is that in paragraphs 7 and 8 in his affidavit where Mr Kekatos refers to a conversation outside Court on 1 September 2008 (when Mr Allen handed him a copy of the orders made) and to an understanding which he says was derived by him after that conversation that a notice of motion "to extend time was not required to be put on, but could be". 111 The affidavit says nothing about whether Mr Allen informed Mr Kekatos that I had made it clear that the default was a continuing one and suggested that Ms Morvillo be present on 15 September 2008, each of which was a clear indication that I regarded the default as serious and that absent an extension it was not being excused. 112 Ms Morvillo was clearly not informed of those matters. Mr Allen was in Court on 1 September 2008 when the orders and statements referred to were made. Mr Kekatos was not. 113 Mr Allen had a duty to assist the clients to understand their obligations, and to protect their interests. This entailed at least taking steps to ensure that Ms Morvillo knew of them and to ensure that orders of the Court were complied with. 114 There is no suggestion and no evidence that he took any such steps. 115 Having regard to: a the absence of evidence that he took any such steps; b that the sole repositories of that evidence are Mr Allen and Mr Kekatos; c the fact that the absence of that evidence cannot be ascribed to the taking of legal professional privilege; d the fact that after conferring with Mr Allen, Mr Kekatos determined not to seek any extension for compliance and did not prepare the necessary affidavit; and e to the fact that Mr Allen has chosen to make no submissions,

I have concluded that Mr Allen could not and did not comply with his duties to assist the companies or Ms Morvillo to understand their obligations, to protect their interests or to ensure that orders of the Court were complied with. 116 His failure amounted to serious neglect and was one of the causes for the continuing breach by the companies (and Ms Morvillo) of the orders of 4 August and 26 August 2008. It caused them to be in breach of their duty under s 56(3) of the Civil Procedure Act, and was a breach by Mr Allen of his duty under s 56(4) of that Act. 117 According to Ms Morvillo she "was informed on the 15th September" and realised the urgency and gravity of the non-compliance. 118 Had appropriate steps in her interests been taken earlier it is probable that the default would have been rectified by 15 September 2008, and the additional appearances on 22 and 29 September 2008 would not have been required. 119 In the circumstances I consider that Mr Allen should be ordered to pay the costs of the defendants of and incidental to their appearances on 22 and 29 September 2008, on an indemnity basis. 120 The costs are to be assessable forthwith and payable immediately upon assessment. CONCLUSION 121 The orders of the Court are accordingly as follows: a Mr Jim Kekatos is ordered to pay on an indemnity basis the costs of each of the defendants of and incidental to their appearances on 26 August 2008, 1 September 2008, 15 September 2008, 22 September 2008 and 29 September 2008. b Mr D A Allen is ordered to pay the costs of each of the defendants of and incidental to their appearances on 22 September 2008 and 29 September 2008. c The costs referred to are to be assessed on an indemnity basis, to be assessable forthwith and to be paid immediately upon assessment. **********

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