Lewis v Nortex Pty Ltd

CATCHWORDS : PRACTICE AND PROCEDURE - DERIVATIVE ACTION - Where there is a prima facie good cause of action the plaintiff will not be guilty of abuse of process merely because of hostility towards the defendant. - ANSHUN ESTOPPEL - Whether issue now sought to be raised ought to have been raised in earlier part of proceedings. - CROSS CLAIM - STATUTE OF LIMITATIONS - Whether leave to cross claim should be granted where cross claim, if brought in new proceedings, would be statute barred - whether concealed fraud.

LEGISLATION CITED : Corporations Act 2001 (Cth) - s.237 Limitation Act 1969 (NSW)

• Hunter v Chief Constable of the West Midland Police [1982] AC 529 - Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143 CASES CITED : - Reichel v Magrath (1889) 14 App Cas 665 - Stephenson v Garnett [1898] 1 QB 677 at 680 - Swansson v R.A. Pratt Properties Pty Ltd (2002) 42 ACSR 313

3081/97 Peter Lawrence Lewis - Plaintiff Lamru Pty Ltd - Applicant Kation Pty Ltd - Respondent Brian Raymond Silvia - Liquidator

1750/02 Lamru Pty Limited - Plaintiff PARTIES : Kation Pty Limited - First Defendant Peter Lawrence Lewis - Second Defendant Mark Lewis - Third Defendant Nortex Pty Ltd (In Liq) - Fourth Defendant

3354/02 Kation Pty Ltd - Plaintiff Lamru Pty Ltd - First Defendant Russell William Lamb - Second Defendant

N.A. Cotman SC - P.L. Lewis, Kation Pty Ltd COUNSEL : S.J. Motbey - R.W. Lamb, Lamru Pty Ltd V.R.W. Gray - Liquidator, Nortex Pty Ltd M.P. Cleary - Mr M. Lewis

Kemp Strang - P.L. Lewis, Kation Pty Ltd SOLICITORS : Lyons & Lyons - R.W. Lamb, Lamru Pty Ltd Abbott Tout - Liquidator, Nortex Pty Ltd Corrs Chambers Westgarth - Mr M. Lewis

Whether certain claims in Amended Cross Claim should proceed

1 One of the applications which I have to deal with today is whether or not I should permit certain claims in an Amended Cross Claim filed on behalf of Kation Pty Limited and Mr Lewis in proceedings 1750 of 2002 to proceed. Those claims were put to one side by Hamilton J as separate from the main proceedings, if I may call them that, to be considered later. Kation and Mr Lewis now seek to proceed with those claims. 2 The real issue is whether leave to bring the derivative action which those claims involve should be granted pursuant to s.237 of the Corporations Act 2001 (Cth). Mr Cotman SC, who appears with Mr Kidd for the Lewis interests, wishes to consider further whether he will press one of the claims. Accordingly, I will deal at this stage only with the claim which Mr Cotman wishes to press, viz. that which is pleaded in paragraphs 43 to 45 of the Amended Cross Claim. That is a claim sought to be brought in the name of Nortex alleging that Mr Lamb, as a director of Nortex, misappropriated property of Nortex to a value exceeding some $84,000. 3 Mr Motbey, who appears for the Lamb interests, does not dispute that a cause of action is properly shown in the Cross Claim. He does not dispute that the cause of action, if successful, would benefit Nortex. That is obvious because, if successful, the claim would result in the payment of money to Nortex. Mr Motbey's sole point is that leave to bring a derivative action in the name of Nortex should not be given to Mr Lewis or to Kation when it has been found by Hamilton J that Mr Lewis has been guilty of fraudulent misappropriation of the property of Nortex. Mr Motbey says that it would be quite inappropriate to have, as the agent of the company seeking restoration of the company's property, a person who has himself been found guilty of stealing from the company. 4 There is, I think, a veneer of attraction in what Mr Motbey says. However, if one looks beneath the veneer, one sees the reality driving these proceedings. These two parties and their respective interests have been locked in bitter litigation for many years. It is quite clear from the files in Court that they have spent vast sums of money in pursuing their claims against each other, both here and in New Zealand. It is readily apparent that the litigation is fuelled on both sides by a great deal of animosity. I have little doubt that animosity is driving Mr Lewis' wish to prosecute the cross claim against Mr Lamb in the name of Nortex. 5 However, it is not the law that a plaintiff is prevented from bringing a cause of action against another by the sole consideration that he or she is motivated by ill will against the defendant. A prima facie good cause of action does not become an abuse of process merely because the plaintiff harbours ill will against the defendant: the action, if prima facie a good one, will only be an abuse of process if it is prosecuted for an ulterior purpose, i.e., to achieve an end for which it is not designed: see e.g. Swansson v R.A. Pratt Properties Pty Ltd (2002) 42 ACSR 313, para 41. 6 Mr Motbey does not submit that it would be an abuse of process if the Lamb interests were to prosecute an action in the name of Nortex which, if successful, would result in proceeds being paid to Nortex for the benefit of its creditors. He does not suggest that the action would not be prosecuted diligently by the Lamb interests. Accordingly, there being no dispute that a proper cause of action is pleaded against Mr Lewis and that the cause of action would benefit Nortex if it succeeded, I will grant leave for the claim in paragraphs 43 to 45 of the Amended Cross Claim in proceedings 1750 of 2002 to proceed. Whether Cross Claim in proceedings 3354 of 2002 should proceed

7 Lamru and Mr Lamb wish to propound a Cross Claim against Kation in proceedings 3354 of 2002. The Cross Claim is set forth in a document which has been provided to Kation's solicitors. Essentially, the claim is for repayment of "principal" under an agreement between the parties called "the differential interest agreement". 8 Kation says that that Cross Claim should not be allowed to proceed because the cause of action therein pleaded is unarguably hopeless. The basis for that contention is that the Cross Claim depends upon the construction of the differential interest agreement: in the previous part of these proceedings determined by Hamilton J, Kation says, the whole of the content of that agreement and its meaning has been judicially determined. Accordingly, Kation says, there is a res judicata against the construction upon which the Cross Claim now founds. 9 In the alternative, says Kation, the contention of Lamru as to the construction of the agreement was an integral part of the dispute between the parties which was previously determined by Hamilton J. According to what is now commonly known as the Anshun principle, Kation submits, Lamru and Mr Lamb should reasonably have been expected to advance this issue for determination in that part of the proceedings previously determined and they should not now be permitted to ventilate the question in a new claim. 10 Mr Cotman relies upon paragraphs 61 and following of the judgment of Hamilton J in Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143. I do not think that, on either basis submitted, it has been demonstrated that the Cross Claim is unarguably hopeless. It seems to me from a reading of his Honour' judgment that his Honour was not at all concerned with the question which is now sought to be put in issue in the present Cross Claim. His Honour was concerned with the issues which he identifies as issues 2 and 3 in his judgment, namely, whether the differential interest convention is effective, and whether the add-back convention is effective. 11 The first question is dealt with by his Honour in paragraph 61 and following. In paragraph 63, his Honour says there is no doubt that these agreements existed and were acted upon. His Honour then identifies an issue which arose consequent upon the judgment of the Chief Judge in Equity. The Lewis interests took the view that the judgment had the effect of negating the conventions in the sense that it ruled that they were inconsistent with the trust deed and that their implementation involved a breach or breaches of trust. Hamilton J then says in paragraph 64: "The question for determination is whether this view is correct. The question turns on the true interpretation of the trust deed and the correct view of the effect of the 2001 judgment."

His Honour then proceeds to decide that issue. 12 It will be seen that the issue postulated before his Honour did not address the true construction of the agreement insofar as the obligations of the parties thereto to pay or repay principal was concerned. The issue was whether the agreement was consistent with the trust deed. 13 I do not see anywhere in the passages of judgment of Hamilton J to which I have been referred a determination by his Honour of the full ambit of the parties' respective obligations under the agreement as to payment of interest or payment of principal. 14 It is not, of course, the law that parties to an agreement, having fallen into dispute and having brought the matter to Court for resolution, are forever afterwards precluded from bringing to Court any new dispute relating to that agreement. It may be that problems in the interpretation or application of an agreement arise at different times in different circumstances and pose different questions for resolution. What is seen to be the entire scope of dispute between the parties at one stage may sometime later prove to be only a partial exploration of the problems lurking for resolution within the agreement and not detected until some fresh factual circumstance arises. 15 It seems to me that it is, at the very least, arguable that this is what has occurred in the present case. Before Hamilton J, the parties debated one set of problems emerging from the differential interest agreement. It has now been realised that there may be another problem requiring resolution by means of the Cross Claim sought to be advanced by Lamru. 16 For those reasons, I do not think that there has been a res judicata as to the question arising on the Cross Claim. Further, I do not think that it was unarguably incumbent upon the Lamb interests to bring this Cross Claim forward for resolution by his Honour as the part of this proceedings previously determined so as now to result in its preclusion by application of the Anshun estoppel principle. 17 For those reasons, the Cross Claim in proceeding 3354 of 2002 will be allowed to proceed. 18 I grant leave to file in Court a Defence and Cross Claim in proceedings 3354 of 2002. 19 The stay which has previously applied in those proceedings is now, by consent, lifted. Leave to Nortex Pty Ltd to bring Second Cross Claim

20 In proceedings 1750 of 2002, Nortex Pty Limited (in liquidation), through its liquidator, seeks leave to bring a Second Cross Claim against Mr Peter Lewis. Nortex is the Fourth Defendant in those proceedings. The proposed Second Cross Claim seeks to recover from Mr Lewis an amount being the value of stock said to have been misappropriated by Mr Lewis from the assets of a trust of which Nortex was trustee. 21 In a prior judgment in these proceedings, Hamilton J has found that Mr Lewis did in fact misappropriate the subject stock. That finding was in the context of a claim brought by a beneficiary of the trust, Lamru, against Mr Lewis personally. The liquidator of Nortex was a party to the proceedings on other issues, but was not a party to this particular claim by Lamru against Mr Lewis. The circumstances in which the liquidator did not join as a party on this claim have been explained in affidavit evidence tendered by the liquidator in this application. 22 The liquidator says that he came into the matter as a third party having no independent knowledge of what transpired between Mr Lewis, Mr Lamb, their interests and the trust's assets back in the 1990s when the relevant events occurred. He says that it became apparent to him from his investigations that assets of the trust were missing. He inquired from Mr Lewis as to whether Mr Lewis had misappropriated those assets. 23 Mr Lewis strongly denied having misappropriated those assets and said that if any assets of the trust were missing, then it was Mr Lamb who had taken them. 24 The liquidator, having no independent means of ascertaining the truth, felt that he could not verify a pleading alleging fraudulent misappropriation against Mr Lewis. He remained in that position, so he says, despite the fact that Mr Lamb and his interests had prosecuted such a claim in these proceedings, and it was not until the judgments of Hamilton J that the true facts as to Mr Lewis's misappropriation were found. 25 The liquidator now seeks leave to cross claim in these proceedings against Mr Lewis for an order that Mr Lewis restore to the trust fund the whole of the value of the stock misappropriated. 26 Mr Lewis opposes this application on a number of grounds to which I will come shortly. 27 The liquidator says that the Court has jurisdiction to grant leave to issue a Cross Claim even at this stage of proceedings pursuant to the Uniform Civil Procedure Rules, Rule 9.1(1). That rule provides that: "A party … may make a cross claim within the time limited for the party to file a defence or within such further time as the court may allow." 28 It will be seen from the last words of the rule that the court has a wide discretion to exercise - a discretion that must be exercised having regard to the particular facts of each case and also with a view to promoting the quick, just and efficient resolution of all matters in dispute between the parties. 29 Proceedings 1750 of 2002 have been conducted in a number of stages by direction of Hamilton J in order that the issues to be resolved may be resolved in some orderly fashion. That is why the issue raised by Lamru as to misappropriation of stock by Nortex has resulted in factual findings by his Honour and certain relief has been ordered while the proceedings still remain on foot. 30 As the proceedings have not been finally disposed of for all purposes, in my opinion the Court still has jurisdiction to grant leave to file a Cross Claim under UCPR 9.1 if it considers it in the interests of justice to do so and in the interests of promoting quick, just and efficient resolution of all issues between the parties. 31 A primary objection taken by Mr Cotman is that by seeking leave to file a Cross Claim the liquidator of Nortex is trying to sidestep an issue which would arise if a claim were to be made by the liquidator against Mr Lewis in a fresh proceeding. That issue is a bar which may be raised by the Limitation Act 1969 (NSW) since the relevant wrongdoing is said to have occurred more than six years ago. Mr Cotman says that the liquidator ought not to be allowed to use a Cross Claim to avoid having to satisfy the requirements which he would otherwise have to satisfy were he to commence fresh proceedings against Mr Lewis. 32 Mr Gray of Counsel, in his submissions for the liquidator, brings to the fore the very issue that Mr Cotman raises, rather than seeking to evade it. He says that the Court would, in the exercise of its discretion whether to grant leave to file the Cross Claim, consider the impact of that leave in the context of a Limitation Act defence. Mr Gray frankly concedes that the Court would have to be satisfied that there was a solid ground for a reply by the liquidator that the Limitation Act defence would not be available because Mr Lewis' fraud was concealed from the liquidator until well after the time bar expired. 33 In support of this submission, Mr Gray relies upon affidavit evidence filed on behalf of the liquidator to the effect that, after he was appointed, he confronted Mr Lewis with an accusation that Mr Lewis had misappropriated the stock, only to be met with vehement denials. Indeed, so the liquidator says, Mr Lewis went further and repeatedly asserted that if any of the stock of the trust was missing, then it was Mr Lamb who had taken it. The liquidator, in this evidence, asserts that this was the position maintained by Mr Lewis up until the commencement of the trial in April 2002. 34 Mr Cotman opposed the tendering of such evidence from the liquidator; however, when I asked Mr Cotman whether, on his instructions, Mr Lewis would put on an affidavit asserting that he had admitted to the liquidator taking the stock, Mr Cotman told me that no such affidavit would be put on. 35 The facts, therefore, are that at all times before and during the trial and up to judgment, Mr Lewis' strongly stated position was that he was not guilty of misappropriating the subject stock. He did not choose to give evidence in the trial in his own behalf. Mr Cotman says that when that position became known, the liquidator should have realised that the allegations of fraud against Mr Lewis were well founded and he should have then chosen to bring forward a claim on behalf of the trust against Mr Lewis for restoration to the trust fund. Mr Cotman says that, having chosen not to bring forward such a claim at a time when Mr Lewis indicated that he would not give evidence, the liquidator is bound by the consequences of his act, has elected not to prosecute such a claim, is irrevocably bound by such an election, and has now missed his chance absolutely of prosecuting such a claim. 36 I am unable to accept these submissions, for the following reasons. 37 I am of the view that, in the exercise of the discretion afforded by UCPR 9.1(1), the Court, in the particular circumstances of this case, should take account of those considerations which would be relevant if this were an application by the liquidator for leave to bring a new proceeding outside the limitation period. In my view, the evidence adduced by the liquidator establishes that, at all times up to the commencement of the trial in April 2002, the liquidator was justified in concluding that, in the face of Mr Lewis' repeated denials of wrongdoing, he had insufficient evidence to warrant verifying a pleading of fraud against Mr Lewis. 38 I am satisfied that, in the sense required by the Limitation Act, the fraud of Mr Lewis, which has been found to have been committed by Hamilton J, was concealed by Mr Lewis from the liquidator, certainly up to the commencement of the trial in April 2002. 39 As to the conduct of the trial after that date, I am by no means satisfied that the position was materially altered by the indication from Mr Lewis through his Counsel that he would not give evidence. That, indeed, is a separate point from the question whether or not there was a concealed fraud, and I will come to it in a moment. 40 It is sufficient for the purposes of the limitations point to find that, up until April 2002, the fraud of Mr Lewis was concealed by him from the liquidator so that, in my opinion, a trial Court could find that the limitation period did not commence to run against the liquidator at least until April 2002. 41 There is a solid argument to the effect that for such time as Mr Lewis, through his Counsel, continued to deny any fraud - that is, all throughout the conduct of the proceedings - Mr Lewis was also endeavouring to conceal his fraud from the liquidator but, as I have said, I do not think that that is a decisive consideration for present purposes. 42 I come now to Mr Cotman's point that the liquidator has, in effect, elected against pursuing the claim which he now seeks to bring by the conduct of the proceedings up to date. I do not think that this submission is made out. 43 What has happened is that Lamru, as a beneficiary of the trust, brought a claim for restoration of the trust fund as a whole, not having prima facie on its pleading the status to do so. Hamilton J pointed out in his judgment - see [2005] NSWSC 482 - that Lamru could have pleaded that it was bringing the claim for the benefit of the trust fund in the circumstance where the trustee failed or refused to bring such a claim in its own name. Because Lamru had not pleaded or conducted its case in that way, his Honour was of the view that the relief sought by Lamru for the benefit of the whole of the trust fund ought not to be granted. This was in the context of a submission made by the liquidator of Nortex in support of the relief sought by Lamru for the benefit of the trust fund. However, it is clear, I think, from his Honour's judgment at paragraphs 12 to 17 that when he said that it was too late for such a claim for relief to be advanced his Honour was referring to the claim which could properly have been made by Lamru as beneficiary and not to a claim which might have been made by Nortex as trustee. 44 I do not think that anything in the judgment of his Honour in [2005] NSWSC 482 was intended by his Honour to preclude the liquidator himself from bringing the claim based on the finding of fraud as against Mr Lewis. It would, of course, be a matter for the liquidator to justify to a Court why such leave should now be given. His Honour did not embark upon that exercise; that is the exercise upon which I am now engaged. Suffice it to say that I do not think that his Honour's judgment is intended to preclude the liquidator from seeking leave to bring the Cross Claim against Mr Lewis as he now endeavours to do. 45 I do not accept Mr Cotman's submission that the liquidator has somehow made an irrevocable election during the course of the trial before Hamilton J not to pursue this claim. In order to found an assertion of irrevocable election Mr Lewis would have to satisfy the Court that the liquidator was in possession of all facts necessary to found the claim which he could have brought, and that the liquidator elected against making that claim with knowledge of those facts. All that Mr Cotman has pointed to is the fact that during the course of the proceedings Mr Lewis made it known through his Counsel that he would not give evidence. 46 There was no concession by Mr Lewis at any time before judgment that he had in fact been guilty of misappropriation; his case was conducted on the basis that he was not guilty of that accusation. The liquidator was, therefore, justified in thinking that he was on no surer ground in verifying an allegation of fraud against Mr Lewis during the course of the hearing than he was when he was first contemplating that cause of action before the trial commenced. 47 It seems to me that this application ought to be judged in the light of the following considerations. It has been found as a fact by Hamilton J that Mr Lewis fraudulently misappropriated assets of the trust. That fact must be accepted by me as the truth, there having been no reversal of his Honour's findings in that regard by the Court of Appeal. The liquidator now seeks recovery from Mr Lewis of the value of the assets misappropriated for the benefit of the trust as a whole. That is an action which the liquidator, as liquidator of the trustee of the trust, would be entitled to bring: there is no suggestion otherwise from Mr Cotman. 48 I do not think that the liquidator's earlier abstention from bringing forward a claim against Mr Lewis for the benefit of the trust as a whole precludes him from bringing such a claim now that the truth has been revealed and Mr Lewis' earlier denials of wrongdoing have been found to be false. 49 Mr Cotman suggested that the liquidator for the purpose of establishing the facts in the Second Cross Claim could not rely on the factual findings of Hamilton J as to Mr Lewis's misappropriation because there could be no issue estoppel or res judicata on those findings as between the liquidator and Mr Lewis. That was because the liquidator and Mr Lewis were not parties to that particular claim in the proceedings. 50 However, there is a solid argument, at the very least, that in support of the Second Cross Claim the liquidator could rely upon the well established principle that a party cannot, in one proceeding, challenge findings on exactly the same issue made by a Court in prior proceedings. The principle has been expressed in cases such as Hunter v Chief Constable of the West Midland Police [1982] AC 529; Stephenson v Garnett [1898] 1 QB 677 at 680; and Reichel v Magrath (1889) 14 App Cas 665 at 668. 51 True it is that the liquidator was not a party with Mr Lewis in the claim based upon misappropriation of stock. However, there was a finding of fact made by his Honour in relation to that claim. Mr Lewis was a party in the proceedings to which the liquidator also was a party in respect of other claims. It could well be argued, in my opinion, that in those circumstances it would be unfair and unjust to permit Mr Lewis to deny and put in issue in the Second Cross Claim the factual findings made by his Honour as to misappropriation. 52 I have had regard to the other detailed submissions made by Mr Cotman in opposition to leave being granted. I do not think that I need to deal with them in any detail. The points which I have discussed are those which, in my opinion, are determinative of this application. For those reasons, the liquidator will be granted leave to bring the Second Cross Claim in the form proposed in the liquidator's Notice of Motion. ~ oOo ~

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