CORPORATIONS – CORPORATE FINANCE – SHARES – TRANSFER
– whether the plaintiff has become entitled to a transfer
of shares
initially held by the first and second defendant.
Source
Original judgment source is linked above.
Catchwords
CORPORATIONS – CORPORATE FINANCE – SHARES – TRANSFER– whether the plaintiff has become entitled to a transferof sharesinitially held by the first and second defendant.CasesArrow Nominees Inc v Blackledge [2000] EWCA Civ 200(2000) 2 BCLC 167,citedArmitage v Nurse (1999) Ch 241, citedBaines v State Bankof New South Wales (1985) 2 NSWLR 729, citedBirkett v James[1978] AC 297, citedJackson v Goldsmith [1950] HCA 22(1950) 81 CLR 446,citedKok Hoong v Luong Chuong Kweng Mines Ltd [1964] AC 993,citedKGK Constructions Pty Ltd v East Coast Earthmoving Pty Ltd[1985] 2 Qd R 13, citedLinprint Pty Ltd v Hexham Textiles Pty Ltd(1991) 23 NSWLR 508, followed
New Brunswick Railway Company v British and
French Trust Corporation [1939] AC 1, cited
Pople v Evans (1969) 2
Ch 255, cited
R v Middlesex Justices ex parte Bond [1933] 2 KB 1,
followed
Re South American and Mexican Co [1895] 1 Ch 37,
cited
Rogers v Legal Services Commission [1995] 64 SASR 572, followed,
cited
State Bank of New South Wales Ltd v Stenhouse Ltd (1997) Aust
Torts Reports 81-423, followed
The Sennar (No 2) (1985) 1 WLR 490,
cited
Walton v Gardiner (1992-1993) 177 CLR 378, followed
MM Stewart with SS Monks and PS McCafferty for the fourth defendant
[2]
[1] The plaintiff ('Mango Boulevard') owns half of the issued shares in the third defendant ('Kinsella') having acquired 25 shares from each of the first and second defendants ('defendants') in July 2003.
[3]
[2] Kinsella carries on the business of developing land at Mango Hill on the northern outskirts of Brisbane. It and defendants became parties to a Shareholders' Deed ('the deed') on 4 July 2003 by the terms of which the parties agreed upon the ownership of shares in Kinsella, their relationship inter se and the way in which Kinsella should carry on the development.
[4]
[3] By the terms of the deed Mango Boulevard could appoint two directors to Kinsella and the defendants could appoint a director each. All shareholders agreed that the number of directors should be limited to four.
[5]
[4] The deed provided that in certain circumstances Mango Boulevard would have the right to acquire the defendant's shares in Kinsella at a price fixed by valuation. The plaintiff commenced this action alleging that those circumstances had arisen and that it was entitled to acquire the defendants' shares 'in accordance with clause 10 of the ... deed.'
[6]
[5] The defendants resisted the claim, and counter-claimed, asserting that it was they who had become entitled to acquire Mango Boulevard's shares in Kinsella.
[7]
[6] The defendants' conduct of the proceeding was completely unsatisfactory. There were persistent failures to make proper disclosure. On 3 April 2007 the
[8]
Chief Justice ordered ('the guillotine order') each of the defendants to serve a list of documents, which were described with particularity, by 4.00 pm on 27 April 2007, and further ordered:
[9]
(a) the first defendant has complied with the orders ... and
[10]
(b) the second defendant has complied with the orders ...
[11]
then upon the solicitors for the plaintiff filing an affidavit deposing to the failure ...
[12]
(c) paragraphs 8, 10 and 22 to 285 of the amended defence and counter-claim filed on 29 March 2007 shall be stuck out; and
[13]
(d) there shall be judgment for the plaintiff against the first and second defendants on the counter-claim and an order that the first and second defendants pay the plaintiff's costs ...'
[14]
[7] On 28 June 2007 Wilson J heard an application brought by the defendants for an order extending the time allowed by the guillotine order by which the defendants were to make disclosure or, alternatively, to set aside or vary the order. The application was dismissed, her Honour noting the defendants' response to the guillotine order 'had been casual and their attempts at compliance desultory.'
[15]
[8] To understand the case it is necessary to refer to the deed. Clause 1 defined 'defaulting party' to mean a party to the deed who was 'in default of that party's obligations under this deed or a party who has committed an event of default pursuant to clause 11.1.'
[16]
'10.1 A shareholder will be in default under this deed if -
[17]
(d) It commits an act of bankruptcy, becomes bankrupt, or unable to pay its debts or suspends payment of its debts within the meaning of the Bankruptcy Act 1966.
[18]
(g) Execution, distress or other legal process is levied against any of the goods and assets of it and such process is not satisfied within 30 days ...
[19]
10.2 If a party is in default of its obligations under this deed as described in subclause 10.1 ('defaulting party') then another party may give:
[20]
(a) A notice in writing setting out the default ('default notice') to the defaulting party; and
[21]
(b) A copy of the default notice to the company's accountants together with an instruction to determine within 30 days ...
[22]
(i) the value of the shares held by the defaulting party at the end of the last preceding financial year under the principles set out in clause 11; and
[23]
(ii) the damages sustained by the other shareholders ('non-defaulting parties') ... resulting from the default by the defaulting party ...
[24]
10.3 On serving a default notice on the defaulting party the non-defaulting party has, in addition and without prejudice to the non-defaulting party's other rights at law or in equity, an option ... to acquire the defaulting party's shares at a price per share determined by the company's accountants under paragraph 10.2(b)(i).'
[25]
[9] The plaintiff's pleaded case against the defendants was that both of them were unable to pay their debts in February 2006 and by notices in writing dated
[26]
22 February 2006 it gave notice to each specifying their default, and on
[27]
24 February 2006 gave copies of the default notices to Kinsella's accountants together with instructions to value the defendants' shares in accordance with clause 10.2(b).
[28]
[10] The first defendant held his shares in Kinsella as trustee for the Spencer Family Trust, a discretionary trust with several classes of beneficiaries, the members of which were very numerous. Mr Spencer was adjudicated bankrupt by the
[29]
Federal Magistrates Court on 20 August 2007. The second defendant had suffered the same misfortune four days earlier, on 20 August 2007. Subsequent to his bankruptcy the first defendant retired as trustee of the Spencer Family Trust and was succeeded by the fourth defendant ('Mio Art').
[30]
[11] The defendants had resisted the plaintiff's claim on the ground inter alia that they were not insolvent in February 2006. It was their failure to make proper disclosure of documents relevant to their ability to pay their debts which led to the making of the guillotine order. As a consequence of that order the defendants are precluded from controverting the plaintiff's case on insolvency or from prosecuting their counter-claim. The second defendant has shown little inclination to continue the fight. In any event her shares passed to her trustees in bankruptcy who likewise have shown no eagerness to re-open hostilities. It is otherwise with the trustee of the shares formerly held by the first defendant. Mio Art filed an application on
[31]
4 February 2008 seeking orders that it be substituted as first defendant in place of Mr Spencer and an order 'that to the extent it may be found necessary an order varying the order of the Chief Justice made 3 April 2007.'
[32]
[12] The plaintiff did not object to the addition of Mio Art as defendant: as trustee of the shares it had an interest in resisting the plaintiff's claim for their acquisition. The plaintiff did, however, object to the substitution. It wishes Mr Spencer to remain a party so that he will be bound by any order made in the action. That course was not opposed and I made an order on 3 March 2008 that Mio Art Pty Ltd
[33]
ACN 121 010 875 be joined as the fourth defendant. Mio Art did not persist with its application for the second order and I dismissed that part of its application. Consequent upon the joinder Mio Art was given leave to read and file an amended defence and counter-claim. The plaintiff then applied, without prior notice, but without objection, for an order that paragraphs 3(a), (b), (c), (d), 4(b), (c), 5(b), 6(b), 8, 9, 10, 11(b) and 12 to 25 of the new pleading be struck out pursuant to
[34]
Uniform Civil Procedures Rules 171(1) and that there be judgment for the plaintiff against the fourth defendant pursuant to UCPR 293.
[35]
[13] The plaintiff's grounds are, broadly speaking, that the fourth defendant's amended defence and counter-claim are deficient on their face and disclose no reasonable defence or cause of action and that it is precluded from agitating the claim afresh by reason of the guillotine order - res judicata or, alternatively, that the prosecution of the amended defence and counter-claim would be an abuse of process.
[36]
[14] Before dealing with the arguments it is necessary to review the contents of the amended defence and counter-claim filed by leave by Mio Art and compare it with the earlier counter-claim on which judgment was given upon the defendants' failure to make proper disclosure. Mio Art's pleading
[37]
Admits paragraphs 1, 2, 3, 4 and 5 of the statement of claim but adds that the first defendant, Spencer, held his shares in Kinsella as trustee and that Mio Art replaced him as trustee on or about 24 August 2007.
[38]
(b) Not unreasonably delay any action, approval ... or decision ... required of the party;
[39]
(c) Make approvals or decisions ... in good faith and in the best interests of the company and the conduct of the Business ...
[40]
(d) Be just and faithful in the party's activities and dealings with the other parties ... and ... give ... a true account of all those transactions when ... an account is reasonably required.
[41]
(b) Mango Boulevard and (the defendants) shall unanimously agree on the number of directors ... and Mango Boulevard and (the defendants) respectively shall be entitled to appoint an equal number of directors ...
[42]
(e) A director nominated by Mango Boulevard will be chairman and ... has ... a casting vote at any meeting ...
[43]
4.6 Mango Boulevard shall be entitled to mortgage its shares ... . The (defendants) shall ... not be entitled to mortgage their shares ... with Mango Boulevard's consent, such consent not to be unreasonably withheld ...
[44]
8.1 None of the shareholders is to lend money to or at the direction of the company without the prior written consent of all other shareholders ... on terms approved by the other shareholders.
[45]
10.1 A shareholder will be in default under this deed if:
[46]
(b) It fails to remedy any breach of its obligations ... within 14 days after written demand ... by another shareholder;
[47]
(e) Any change occurs in its shareholders or its directors;'
[48]
to allege that by the combined operation of clauses 4.1(b) and (e) Mango Boulevard controlled the business of Kinsella.
[49]
admits that the first defendant was unable to pay his debts as at 22 February 2006 when Mango Boulevard delivered notices of default but asserts that his outstanding debts at the time were those set out in annexure A to the pleading, and amounted to $5,896,432.
[50]
alleges that the 'Spencer Family Trust' was solvent at all times.
[51]
• repeats the allegations with respect to the second defendant.
[52]
• alleges that Mr Russell Thompson was appointed a director of Mango Boulevard on 30 July 2004 without notice of the appointment being given to the defendants who first learned of it on 24 March 2006.
[53]
• alleges the defendants gave a notice of default alleging breach of clause 10.1(e) of the deed.
[54]
• alleges that the defendants had no funds of their own from which to pay their admitted debts and that the only means available to them to pay those debts was to borrow funds secured against the defendants' shares in Kinsella.
[55]
• alleges that the defendants sought Mango Boulevard's consent to the mortgage of their shares by letters dated 12 January 2006 and 17 February 2006, and that (i) Mango Boulevard refused its consent, which (ii) had it been given, would have allowed the defendants to borrow sufficient money to pay the debts identified in the annexure.
[56]
• alleges that Mango Boulevard knew or ought to have known of the matters set out in the preceding four allegations.
[57]
• claims that the value of the defendants' shares in February 2006 was substantially greater than the price payable by reference to a valuation conducted as at 30 June 2005.
[58]
• alleges that Mango Boulevard knew that, and for that reason, and in order to prevent the defendants from rectifying their breach so as to acquire the shares at an under-value.
[59]
• alleges that Mango Boulevard's refusal to consent was unreasonable and in breach of clauses 3.2(c) and (d) and 4.6 of the deed.
[60]
[15] The consequences said to flow from the allegations were that:
[61]
(a) Clause 10 of the deed did not entitle Mango Boulevard to deliver notices of default because it was itself in default.
[62]
(b) Mango Boulevard's refusal to consent to the defendants' mortgaging their shares brought about their default, i.e. insolvency.
[63]
(c) So that the delivery by Mango Boulevard of the notices of default constituted breaches of clauses 3.2(c) and (d) of the deed and was unconscientious.
[64]
[16] By way of relief Mio Art claims a declaration that it is entitled to be registered as the owner of the first defendant's 25 shares; an order that Kinsella register the transfer of those shares; and an injunction restraining the plaintiff and Kinsella from acting in reliance upon the notices of default.
[65]
[17] The plaintiff does not resist the orders sought with respect to the recognition of
[66]
Mio Art as the owner of the shares or registration.
[67]
[18] The counter-claim on which judgment has been given for the plaintiff was lengthy and advanced many points and contentions. Importantly at paragraphs 33 to 35 it pleaded Mr Thompson's appointment as director giving rise to an alleged breach of clause 10.2 of the deed. It also raised the issue of the plaintiff's alleged refusal to consent to the defendants mortgaging their shares and claimed that the refusal was unreasonable and in breach of the deed. The issue as to whether the plaintiff itself was in default under clauses 3.2(c) and (d) of the deed was raised at some length as was the assertion that the plaintiff was in default under clause 4.6.
[68]
[19] A critical question raised in the defendants' defence and counter-claim of
[69]
29 March 2007 was the defendants' insolvency. They denied, in paragraphs 8 and 10 of the defence, that they were unable to pay their debts as at 22 February 2006 and denied that they were in default of the deed. Paragraphs 8 and 10 were struck out as a consequence of the defendants' failure to comply with the guillotine order. It was the defendants' failure to make disclosure of documents relevant to their financial position which led to the making of that order. The question is obviously fundamental to the respective claims. The very basis of the plaintiff's claim is that the defendants were unable to pay their debts. The resolution of that issue would determine the plaintiff's entitlement to deliver the notices of default and its right to acquire the defendants' shares. The defendants have subsidiary lines of defence but critical to the plaintiff's claim is the question of insolvency.
[70]
[20] Mio Art's recent pleading seeks to diminish the importance of the question by admitting a limited insolvency and attempting to deflect the importance of that fact by asserting that the insolvency arose only by reason of the plaintiff's unreasonable refusal to consent to the mortgage of the shares to raise the necessary funds to become solvent.
[71]
[21] One suspects the pleading takes it present form in an attempt to reduce the scope of disclosure of documents relevant to the defendants' capacity to pay their debts as at February 2006. If this was so it would make the defendants' prior failures to make disclosure less relevant.
[72]
[22] The analysis undertaken by the plaintiff's counsel shows the situation with respect to disclosure to be unchanged.
[73]
[23] The defendants' admission that they owed almost $6,000,000 which they could not pay, but could have paid if their shares had been mortgaged to provide security for a loan, makes the quantum of their debts at the relevant date an issue. Documents showing an indebtedness of $6,000,000 are not the only ones which are directly relevant to the allegation. Any documents showing that their indebtedness was greater than that amount, as the plaintiff has alleged, would be directly relevant and discoverable. So also the allegation that it was the plaintiff's failure to consent to the hypothecation of the shares which led to the insolvency. All documents directly relevant to the question of whether a loan of $6,000,000 would have allowed the defendants to discharge all their debts should be disclosed.
[74]
[24] It is perhaps pertinent to note that on his subsequent bankruptcy in August 2007,
[75]
Mr Spencer admitted to debts of more than $40,000,000.
[76]
[25] The analysis suggests that the case which Mio Art now wishes to run was essentially the case set out, at greater length and with additional adornment, in the defendants' defence and counter-claim.
[77]
[26] Mio Art's counsel undertook their own analysis. They identify the differences between the defendants' pleading and Mio Art's to be the following:
[78]
(a) The defendants' pleading at paragraphs 33 to 45 alleged that Mr Thompson's appointment was a breach of the deed as a consequence of which the defendants issued a notice of default and undertook the necessary steps to acquire the plaintiff's shares.
[79]
(b) In Mio Art's pleading the case that the first defendant acquired the plaintiff's shares is omitted. What remains is the allegation that the plaintiff was in default and so acted in bad faith when, in that state, it gave a notice of default to the defendants.
[80]
(a) The defendants' pleading alleged 'a whole series of correspondence from 12 January to 14 November 06' which evidenced the defendants' request for the plaintiff's consent to the mortgaging of shares.
[81]
(b) Mio Art's pleading relies on two letters only, 12 January and 17 February 2006. The latter was not pleaded earlier.
[82]
(a) The defendants pleaded that the refusal caused the first defendant to be unable to pay his debts and was unreasonable, in breach of clause 4.6 of the deed, and a breach of fiduciary duty.
[83]
(b) Mio Art's case is 'narrower'. It admits insolvency limited to 22 February 2006 and with respect to particularised debts. The new pleading alleges that the plaintiff was in default of the deed by reason of its refusal which was unconscientious and deprived Mango Boulevard from the right to deliver the notice of default.
[84]
(a) The defendants' pleading alleged that the attempt by the plaintiff to acquire the first defendant's share was a breach of contract, clause 3.2 of the deed, and breach of fiduciary duty associated with improperly delaying the development and misusing confidential information.
[85]
(b) The pleading by Mio Art does not contain any claim for relief based upon breaches of contract or fiduciary duty. Rather, the same breaches of contract and fiduciary duty are relied upon as defences and grounds for alleging that the plaintiff could not lawfully issue notices of default.
[86]
[27] In my opinion both analyses demonstrate that the claim which Mio Art wishes to adumbrate is the same as that which the defendants were prevented from litigating by reason of the guillotine order. The essentials have not changed. Both cases raise for decision:
[87]
Whether Mr Thompson's appointment put the plaintiff in default under the deed.
[88]
Whether any such default deprived the plaintiff of the right to issue a notice of default to the defendants in the event that they were themselves in default under the deed.
[89]
The extent of the defendants' indebtedness when the plaintiff delivered the notices of default to them.
[90]
Whether the plaintiff refused to consent to a mortgage of the defendants' shares -
[91]
Whether the refusal deprived the defendants of the ability to pay their debts.
[92]
[28] The plaintiff submits that Mio Art may not advance those parts of its claim which appear in paragraphs 3, 4, 9, 10 to 25 of its pleading, which is the whole of its case, on the ground that the issues raised in those paragraphs have been decided against the first defendant by the judgment entered pursuant to the order of 3 April 2008. Mio Art is, of course, the first defendant's privy. The judgment is said to have extinguished the defences and causes of action which have become res judicata. Alternatively the plaintiff argues that the prosecution of Mio Art's defence and counter-claim would amount to an abuse of process.
[93]
'... Where an action has been brought and judgment has been entered in that action, no other proceedings can thereafter be maintained on the same cause of action.'
[30] The judgment of 3 April 2007 was self-executing. Upon the defendants' failure to serve their lists of documents by the specified time and on the filing of the plaintiff's affidavit deposing to the failure, paragraphs 8 and 10 of the defence were struck out and there was judgment for the plaintiff against the first and second defendants on their counter-claim. No separate order giving effect to that judgment was taken out, or passed and entered. Nothing, I think, turns on that. The judgment in question was, I think, one entered in default of pleading, the counter-claim having been struck out.
[96]
[31] A judicial decision must be 'on the merits' before it can give rise to a res judicata. See Spencer, Bower, Turner & Handley Res Judicata 3rd ed para 173. It is by no means easy to ascertain what is, and what is not, a decision 'on the merits'.
[97]
[32] In The Sennar (No 2)(1985) 1 WLR 490 Lord Brandon explained (499):
[98]
'Looking at the matter negatively a decision on procedure alone is not a decision on the merits. Looking at the matter positively a decision on the merits is a decision which establishes certain facts as proved or not in dispute; states what other relevant principles of law applicable to such facts; expresses a conclusion with regard to the effect of applying those principles to the facts or situation concerned.'
[99]
'What (judgment on the merits) means in the context of judgments delivered by courts of justice is that the court has held that it has jurisdiction to adjudicate upon an issue ...; and that its judgment on that cause of action is one that cannot be varied, reopened or set aside by the court that delivered it ... although it may be subject to appeal ...'
[100]
[33] Default judgments may give rise to a plea of res judicata but, according to the judgment of the Privy Council in New Brunswick Railway Company v British and French Trust Corporation[1939] AC 1 at 21:
[101]
'... An estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment ...'
[102]
The principle was reinforced, again by the Privy Council in Kok Hoong v Luong Chuong Kweng Mines Ltd[1964] AC 993 at 1012:
[103]
'... Default judgments, though capable of giving rise to estoppels, must all be scrutinised with extreme particularity for the purpose of ascertaining the bare essence of what they must necessarily have decided, and ... for what must "necessarily and with complete precision" have been thereby determined.'
[104]
[34] In KGK Constructions Pty Ltd v East Coast Earthmoving Pty Ltd[1985] 2 Qd R 13 at 16 McPherson J said:
[105]
'A difficulty in which a defendant may find himself placed if he fails to plead to the plaintiff's statement of claim is that, unless denied specifically or by necessary implication, every allegation in the statement of claim is taken to be admitted ... . Hence, a defendant who fails to deliver a defence, or suffers it to be struck out, is taken to have admitted the allegations of fact in the statement of claim ... . The default judgment that follows is capable of giving rise to an estoppel per rem judicatem ... . Something more is therefore involved that a simple failure to deliver a defence in time. Especially is this so where ... the order is in a "self executing" form and provides non-compliance ... is to have the effect of placing the defendant "in the same position as if he had not defended".'
[106]
[35] Those remarks, and the opinion of the Privy Council, were apposite to the order striking out paragraphs 8 and 10 of the defence in which the defendants had denied the allegation of insolvency. But Mio Art submits they are not applicable to the counter-claim in which the defendants were in the position of plaintiffs whose statement of claim was struck out for non-compliance with the rules of court as to matters of procedure. A plaintiff whose action is dismissed for want of prosecution, on failure to comply with the rules of procedure, are not precluded by the principles of res judicata from commencing a fresh action, if they are within time. See
[107]
Pople v Evans(1969) 2 Ch 255; Birkett v James[1978] AC 297. A dismissal of an action for failure to comply with an order for discovery is not a decision on the merits and does not give rise to res judicata. In Baines v State Bank of New South Wales(1985) 2 NSWLR 729 an action was dismissed as the result of a self-executing order, because of the plaintiff's failure to file a list of documents by a specified date. Powell J held that the judgment did not give rise to res judicata or issue estoppel because there had been no hearing on the merits and the plaintiffs remained free to commence fresh proceedings.
[108]
'That case (New Brunswick Rail) and the Kok Hoong case ... showed the concern of the courts to limit the operation of res judicata to issues which can be fairly regarded or treated as having been disposed of by the order relied on their merits, for example, by trial, admission or compromise. It seems to me that the non-technical and substantial nature of res judicata "founded on the considerations of justice and good sense" has no place for mere dismissal for want of prosecution ...'.
[109]
[37] One theory advanced to explain why default judgments do give rise to res judicata is that they are presumed to be consent judgments: the defaulting party indicating by his absence that he consents to judgment against him. See Kok Hoong at 1010 and in Re South American and Mexican Co[1895] 1 Ch 37 at 45. But the artificiality of the presumption was recognised at Kok Hoong of the same page.
[110]
[38] It should also be noted that the judgment in question does not satisfy the descriptions given by Lord Brandon and Lord Diplock in The Sennar (No 2). The judgment was 'a decision on procedure alone' and was one that could be varied, reopened or set aside, as the application to Wilson J demonstrates. It would thus appear not to be a decision 'on the merits'. However in Linprint Pty Ltd v Hexham Textiles Pty Ltd(1991) 23 NSWLR 508 Kirby P did not regard these features as preventing a judgment entered on default of appearance giving rise to res judicata. In that case the defendant appeared at trial by counsel whose instructions were limited to seeking an adjournment. When that was refused counsel and client left the court and judgment was given for the plaintiff on the defendant's counter-claim. A later action on the same claim was held to be precluded by the judgment. Kirby P held that to allow the second claim to proceed would be vexatious and said (520):
[111]
'If ... the respondent did not have a trial "on the merits" this was solely by virtue of its own conduct. It instructed its counsel to withdraw. ... No endeavour was made ... to prove the ... case. It was simply abandoned. The respondent walked away from it.'
[112]
[39] This analysis suggests that the res judicata was predicated upon the defendant having consented, by its conduct, to the judgment. The case therefore falls into the class in which the judgment represents the parties' compromise of their suit.
[113]
'But where the judgment is on its face final, the mere fact that a party has a privilege to apply to have that judgment set aside cannot convert it to a contingent or provisional judgment ... incapable of giving rise to res judicata. Common experience teaches that only a small proportion of such judgments are set aside ... . Most such judgments stand and are given their full effect. It would be a curious consequence ... that, to safeguard the small number of cases where such a judgment is later set aside, all such judgments were deprived of the protection of finality which the law of res judicata is designed to achieve. ... The mere fact that a judgment entered for default of appearance of a party may be set if that party moves the court giving judgment to do so, is not a reason, in the meantime, for regarding the judgment so entered as anything but final for the purpose of the law of res judicata.'
[114]
[41] It is interesting to note that The Restatement of the Law (2nd), Judgments 19 includes the observation:
[115]
'The prototype case continues to be one in which the merits of the claim are in fact adjudicated against the plaintiff after trial of the substantive issues. Increasingly, however, by statute, rule, or court decision, judgments not passing directly on the substance of the claim have come to operate as a bar. ... The rule that a defendant's judgment acts as a bar to a second action ... is based largely on the ground that fairness to the defendant, and sound judicial administration, require that at some point litigation over the particular controversy come to an end. These considerations may impose such a requirement even though the substantive issues have not been tried, especially if the plaintiff has failed to avail himself of opportunities to pursue his remedies in the first proceeding, or has deliberately flouted orders of the court.'
[116]
[42] The question whether, in this case, the judgment gives rise to res judicata is a difficult one. There is no clear statement that I have found which would indicate with precision when a default judgment will give rise to the plea. In my opinion, on balance, the judgment in question does have the effect the plaintiff contends for. It was a judgment, not an order dismissing the counter-claim for want of prosecution or because it disclosed no cause of action, or because the court had no jurisdiction to entertain it, as was the case in Rogers v Legal Services Commission[1995] 64 SASR 572 and R v Middlesex Justices ex parte Bond[1933] 2 KB 1, respectively. The fact that it was a judgment entered in default of pleading which could be set aside does not deprive it of the capacity to give rise to a res judicata. I accept the authority of Linprint on this point. It is true that the res judicata will not extend beyond what the judgment necessarily determined but, as I have indicated, the defendants' counter-claim and Mio Art's claim are one and the same, so that the latter is precluded by the judgment.
[117]
[43] I have reached this conclusion with some hesitation and for that reason prefer not to base my judgment upon it because I am satisfied that the plaintiff has made good its alternative submission that Mio Art's proceeding is an abuse of process.
[118]
[44] The relevant principle was expressed in these terms by Mason CJ, Deane and Dawson JJ in Walton v Gardiner (1992-1993) 177 CLR 378 at 392-3:
[119]
'The inherent jurisdiction of a superior court to stay its proceedings on grounds of abuse of process extends to all those categories of cases in which the processes and procedures of the court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness. Thus, it has long been established that regardless of the propriety of the purpose of the person responsible for the institution and maintenance, proceedings will constitute an abuse of process if they can be clearly seen to be foredoomed to fail ... . Again, proceedings within the jurisdiction of a court will be unjustifiably oppressive and vexatious of an objecting defendant, and will constitute an abuse of process, if that court is, in all the circumstances of the particular case, a clearly inappropriate forum to entertain them. Yet again, proceedings before a court should be stayed as an abuse of process if, notwithstanding that the circumstances did not give rise to an estoppel, their continuance would be unjustifiably vexatious and oppressive for the reason that it is sought to litigate anew a case which has already been disposed of by earlier proceedings. The jurisdiction ... in such a case was correctly described by Lord Diplock in Hunter v Chief Constable of the West Midlands Police ... as "the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party ... or would otherwise bring the administration of justice into disrepute among right thinking people."
'Inherent in every court of justice is the power to prevent its procedures being abused ... . Although the categories of abuse of procedure remain open, abuses of procedure usually fall into one of three categories: (1) The court's procedures are invoked for an illegitimate purpose; (2) The use of the court's procedures is unjustifiably oppressive to one of the parties; or (3) The use of the court's procedures would bring the administration of justice into disrepute. Many, perhaps the majority of, cases of abuse of process arise from the institution of proceedings. But any procedural step in the course of proceedings that have been properly instituted is capable of being an abuse of the court's process.'
[122]
'... there are two aspects to abuse of process: first, the aspect of vexation, oppression and unfairness to the other party to the litigation and, secondly, the fact that the matter complained of would bring the administration of justice into disrepute.'
[123]
[46] The parties agreed that the relevant guidelines for the application of the principles were correctly and conveniently summarised by Giles J in State Bank of New South Wales Ltd v Stenhouse Ltd(1997) Aust Torts Reports 81-423. His Honour said (64,089):
[124]
'It is apparent from this brief review of the decisions that where the proceedings are, or an aspect of proceedings is, an abuse of process because a party seeks to relitigate an issue already decided depends very much on the particular circumstances. The guiding considerations are oppression and unfairness to the other party ... and concern for the integrity of the system of administration of justice, and amongst the matters to which regard may be had are:-
[125]
(a) The importance of the issue in and to the earlier proceedings, including whether it is an evidentiary issue or an ultimate issue;
[126]
(b) The opportunity available and taken to fully litigate the issue;
[127]
(c) The terms and finality of the finding as to the issue;
[128]
(d) The identity between the relevant issues in the two proceedings;
[129]
(e) Any plea of fresh evidence, including the nature and significance of the evidence ...
[130]
(f) The extent of the oppression and unfairness to the other party if the issue is re-litigated and the impact of the re-litigation upon the principle of finality of judicial determination and public confidence in the administration of justice; and
[131]
(g) An overall balancing of justice to the alleged abuser against the matters supportive of abuse of process.'
[132]
[47] It will be observed that his Honour's formulation had as its background a case in which there had been an earlier trial. This case is concerned with a judgment entered without trial consequent upon the defendants' disregard of their obligations to the Court and to their opponents thereby making a fair trial of the action impossible.
[133]
[48] In the end, as Giles J recognised, a stay or dismissal of proceedings because they are an abuse of process depends upon striking the right balance between the reluctance to preclude a party from litigating a case which has arguable prospects and protecting an opponent from unfairness by reason of the re-litigation and whether, to put the matter differently, the second action would be oppressive and/or assault the integrity of the system of administration of justice.
[134]
[49] I am satisfied that to allow Mio Art's action to proceed would amount to unacceptable unfairness to the plaintiff such as to amount to oppression and, as well, to question the integrity of the administration of justice.
[135]
[50] I reach that conclusion because of the fundamental importance to the litigation of the disclosure of documents relevant to the defendants' insolvency at or about the time the plaintiff delivered its notices of default in February 2006. This was the key to the plaintiff's claims against the defendants. Initially the defendants denied insolvency: now they (or Mio Art) confesses insolvency but seeks to avoid its consequences. In both cases the extent to which the defendants had incurred debts and their capacity of pay those debts was a critical question. It is a question which must of necessity have produced an abundance of documentary evidence.
[136]
[51] The tale of the defendants' failure to comply with their obligations to make disclosure is set out in the affidavit of Melinda Smith filed 28 February 2008. I give only the briefest of summaries.
[137]
[52] On 2 June 2006 the defendants were ordered to make disclosure by 14 July 2006. On 6 July the date was extended to 28 July 2006. They did not serve a list until
[138]
15 September 2006. The list was inadequate and details of the inadequacy were identified by Ms Smith in her affidavits of 9 October 2006, 21 November 2006,
[139]
13 February 2007, 19 February 2007, 21 March 2007, 2 April 2007, 30 April 2007, 30 May 2007, 14 June 2007 and 15 June 2007. On 12 occasions between 1 August 2006 and 5 February 2007 the plaintiff's solicitors complained to the defendants' solicitors about their inadequate disclosure. The inadequacy was the subject of three separate orders; 21 November 2006, 20 March 2007 and 3 April 2007. In her affidavit of 29 May 2007 Ms Smith identified in detail the respects in which the defendants had not complied with the order of the Chief Justice of 3 April 2007.
[140]
[53] The defendants did make further disclosure but this, too, was inadequate as was pointed out by Ms Smith in her affidavits of 13 and 14 June 2007.
[141]
[54] In her reasons for judgment given on 4 October 2007 Wilson J described the defendants' attempts at complying with the order of 3 April 2007 as 'piecemeal' and compliance was still incomplete as at 28 June 2007, the date of the defendants' application to be relieved from the consequences of the guillotine order. Her Honour analysed the defendants' purported compliance and found, with respect to the categories of disclosure ordered by the Chief Justice, that the defendants' response to the order was 'quite inadequate' and the reasons advanced for
[142]
non-compliance were 'untenable'. Her Honour remarked:
[143]
'It was conceded at the hearing that disclosure was still incomplete. A broad examination of the categories in which the plaintiff asserts that disclosure is still not complete and of the first and second defendants' responses to the plaintiff's complaints leads me to the view that the ... defendants' response to the self-executing order has been casual and their attempts at compliance desultory. ... If the self-executing order was set aside, the issue of their solvency would again be a live one on the claim. It would also be relevant to the counter-claim ... . The first and second defendants' response to the disclosure obligations so far provides no basis for confidence that they would meet those obligations fully if the self-executing order were set aside or varied. The plaintiff would be prejudiced in the litigation by incomplete disclosure.'
[144]
[55] Nothing has changed. The defendants have still not provided a full list of the documents which would comply with the orders for disclosure already made. No affidavit was proffered from either of the defendants indicating a willingness or ability to give such disclosure in the near future, or at all.
[145]
[56] Ms Smith undertook an analysis of annexure A and examined the debts identified in it by reference to the defendants' documents which have been disclosed. Even with respect to the limited debts admitted by the defendants documents which of necessity should exist, given the nature of the debts, have not been disclosed. The 12 admitted debts are all judgment debts. As well Ms Smith compared the quantum of those debts with the documents filed in the court proceedings identified in the annexure. These show that the aggregate value of the debts exceed $16,000,000. The annexure puts the value of the judgment at less than $6,000,000. The significance of this to the allegation that a loan of about $6,000,000 would have discharged the defendants' liability is obvious, and underlines the importance of full disclosure, and the unfairness of requiring the plaintiff to meet Mio Art's claim without it.
[146]
[57] Mio Art might argue, though I did not understand to do so, that its obligation to give disclosure may be limited to the documents in its possession or control. It would thus have no obligation to disclose documents relevant to Mr Spencer's insolvency or Ms Perovich's (assuming as its pleading suggests that it is prosecuting the action for her).
[147]
[58] It was said on behalf of Mio Art that the defendants' respective trustees in bankruptcy would have obtained from them all the documents relevant to their assets and liabilities so that the documents could be obtained by way of non-party disclosure if not by disclosure from the parties themselves. This is a supposition which, while theoretically correct, may be factually wrong. If the trustees in bankruptcy had been given every document which the defendants should have produced on disclosure one would have expected an affidavit from the defendants or the trustees deposing to that fact, if not supplying copies of the documents by way of belated disclosure. No such evidence was proffered and there is no ground for confidence that the documents had been made available to the trustees. Had they been delivered the defendants would have been keen to say so.
[148]
[59] The object of the rules as to disclosure is to secure the fair trial of actions. If that object is ultimately secured by late (even very late) production of documents an action may proceed to trial. But where a litigant's conduct puts the fairness of the trial in doubt, or where it is such as to make the proceedings unsatisfactory, the court is entitled, and perhaps obliged, to stop the unfairness. See Arrow Nominees Inc v Blackledge[2000] EWCA Civ 200; (2000) 2 BCLC 167 per Chadwick LJ at 193-4:
[149]
'... The object of the rules as to discovery is to secure the fair trial of the action in accordance with the due process of the court; and that, accordingly, a party is not to be deprived of his right to a proper trial as a penalty for disobedience of those rules, even if such disobedience amounts to contempt for or defiance of the court, if that object is ultimately secured, by (for example) the late production of the document ... . But where a litigant's conduct puts the fairness of the trial in jeopardy, where it is such that any judgment in favour of the litigant would have to be regarded as unsafe, or where it amounts to such an abuse of the process of the court as to render further proceedings unsatisfactory and to prevent the court from doing justice the court is ... bound to refuse to allow that litigant to take further part in the proceeding ... . The reason ... is that it is no part of the court's function to proceed the trial if to do so would give rise to a substantial risk of injustice. ... A litigant who has demonstrated that he is determined to pursue proceedings with the object of preventing a fair trial has forfeited his right to take part in a trial.'
[150]
[60] The plaintiff submitted that the present case fell into the third category of example given by Mason CJ, Deane and Dawson JJ in Walton, which I have quoted: an attempt to re-litigate a matter already decided. I am not persuaded that the case is in that category. It is true that Mio Art wishes to reverse the effect of the judgment obtained pursuant to the guillotine order, but the issues raised by the pleadings between the plaintiff and the defendants were never tried. It is, I think, doubtful, whether Mio Art's attempted litigation of the issues would be an abuse of process, despite the judgment, if it had belatedly made full disclosure and the trial could be conducted fairly.
[151]
[61] What is significant in this case is that the guillotine order was made because of the recognition that without proper disclosure there could not be a fair trial of the action. Despite the passage of a further year the defendants have not remedied their failure and have not provided any basis for thinking they will ever do so. The action which Mio Art wishes to prosecute cannot be tried fairly and the issue, critical to the outcome, of insolvency cannot be resolved satisfactorily because of the lack of documentation. In the circumstances the prosecution of the action would be an abuse of process.
[152]
[62] The two aspects relevant to abuse of process are present. There is an element of vexation, oppression and unfairness to Mango Boulevard in Mio Art's prosecution of its defence and counter-claim in circumstances where the defendants had adamantly refused to produce documents relevant to their case and where their assertions cannot be effectively scrutinised without their documents. To allow the action to proceed in those circumstances would reflect badly on the administration of justice. The guillotine order was thought to be necessary to protect
[153]
Mango Boulevard against unfairness. Judgment was entered to achieve that end. If Mio Art's action proceeds that protection will be set at nought and the Court's judgment seen to be worthless and its powers of protection negligible.
[154]
[63] Ordinarily an abuse of process is rectified by an order staying further prosecution of the abusive proceeding. The plaintiff makes specific objections to the new pleading. It submits that upon examination the amended defence and counter-claim do not disclose a reasonable defence or cause of action. It seeks, pursuant to UCPR 171, an order striking the pleading out and a consequential order for judgment. For reasons which will appear I accept that the pleading is deficient and should be struck out. A consequence of striking out the pleading will be that there is no proceeding to stay.
[155]
[64] It is a curious feature of Mio Art's pleading that it advances a case on behalf of the second defendant, Ms Perovich, as well as itself as privy and successor to the first defendant. Ms Perovich's shares in Kinsella will have passed to her trustees in bankruptcy who have made no application of their own to deliver a fresh pleading. Nor have they attempted to resuscitate the second defendant's counter-claim on which judgment has been entered against her. No basis that I could understand appears in the Mio Art pleading to justify any claim made with respect to the second defendant's shares in Kinsella.
[156]
[65] The first objection is that the words 'in his personal capacity' which appear in paragraph 3(a) are irrelevant. Following the same point the allegation in paragraph 3(c) that 'the Spencer Family Trust ... was able to pay its debts' is said to contain the 'legal solecism' that a trust has its own existence, or is a legal person. The point which the pleading is attempting to make, infelicitously, is that Mr Spencer's debts were incurred in his personal capacity and not as trustee, so that he had no right of indemnity against the trust assets in respect of his debts. This leads to the serious objection to paragraph 11(b) which pleads that the 'only security available ... to enable (the defendants) to borrow funds was the 25 shares ... (the first defendant) held ...'. The point is that because (as is common ground) Mr Spencer held his shares in trust for the Spencer Family Trust he could not have lawfully mortgaged them to raise money to discharge his own debts. It is pleaded that
[157]
Mango Boulevard knew that Mr Spencer held the shares in trust and that his only means of paying his debts was to raise money on the mortgage of the shares.
[158]
[66] Mio Art's pleading therefore depends upon the proposition that the plaintiff should have facilitated a breach of trust by Mr Spencer in this application of trust money to discharge his personal indebtedness.
[159]
[67] The objection is well taken. Mio Art's case that Mango Boulevard acted unreasonably or in breach of fiduciary duty in not facilitating the first defendant's breach of trust by giving its consent to a mortgage of the Trust property is untenable, and should not be allowed to go forward.
[160]
[68] Mio Art's counsel had an answer of sorts. It is that Mr Richard Spencer was one of the beneficiaries of the Spencer Family Trust. He and his wife were the trustees. Clause 5 permitted the trustees in their absolute discretion to:
[161]
Pay or apply the whole or any part of the capital of the trust fund to any one or more of the beneficiaries
[162]
Lend any sum or sums to any beneficiary with or without security and upon such terms as to repayment and with or without interest as they shall think fit
[163]
Pay or apply to or for the benefit of any beneficiary the whole or any parts of the capital or income
[164]
Allow any beneficiary to use any property forming part of the Trust fund on such terms as the trustees shall think fit.
[165]
Mr Stewart SC submitted that these terms of the trust deed authorised Mr Spencer to mortgage the shares in Kinsella, part of the Trust's estate, for his personal benefit and authorised their mortgage to raise funds to satisfy his personal debts.
[166]
[69] The point is arguable, but not on the present pleading. The authors of Jacob's Law of Trust in Australia 7th ed (J D Heydon and M J Leeming) wrote (para 1620):
[167]
'It has been held that there is an irreducible core of obligations owed by the trustees to beneficiaries and enforceable by the beneficiaries which is fundamental to the concept of a Trust. If these do not exist, or if the beneficiaries have no rights to enforce them, there is no Trust. The minimum duty is the duty to perform the Trusts "honestly and in good faith" for the benefit of the beneficiaries; it does not include the trustees' duties of skill, care and diligence. It follows that a Trust instrument cannot exonerate a trustee from the consequences of fraud in the sense of conduct carried out either in the knowledge that it is contrary to the interests of the beneficiaries or with reckless indifference to whether it is contrary to their interests. Hence, trustees who rely on the presence of a trustee exemption clause to justify what they propose to do would lose the protection of that clause since they would be acting fraudulently in the sense of recklessness.'
[168]
The authority is Armitage v Nurse(1999) Ch 241, especially at 251, 253 per
[169]
[70] On the pleading as it stands, the course of conduct which Mio Art alleges the plaintiff frustrated, the mortgage of the shares, would have been a breach of trust. If, somehow the use of trust property by Mr Spencer to meet his own debts, and the application of trust money at the trustee's discretion for his own purposes as though it were his own, did not extinguish the 'irreducible core of obligations' owed by a trustee, the pleading should have explained how it did not. If clause 5 permitted
[170]
Mr Spencer to take that trust asset for himself without being in breach of trust it must be by reason of facts and circumstances known to Mr Spencer which allowed the essence of the trust to be preserved notwithstanding the trustee's appropriation of trust assets. UCPR 149(1)(c) and/or UCPR 157(a) require the identification of those facts and circumstances in the pleading. Without them it is deficient. It is, though, a deficiency which could be cured by amendment or further particulars.
[171]
[71] The other point taken by the plaintiff is that the letters relied upon by Mio Art as constituting a request to Mango Boulevard to consent to the mortgage are not capable of fulfilling that description.
[172]
[72] The letter of 12 January 2006 from the defendants' solicitors to the plaintiff's solicitor referred to clause 4.6 of the deed and went on:
[173]
'... Our clients are currently negotiating a finance package upon the security of their interests in Kinsella ... . Our clients believe that it is likely that their interim financier will request a share mortgage over the ... shares they hold in Kinsella ... . ... We are instructed to inform you it is likely that our client will shortly make a formal application for consent to a share mortgage in terms of clause 4.6 of the ... deed. ... Please indicate whether there are any particular areas of concern that should be addressed.'
[174]
[73] The letter of 17 February 2006 again went from the defendants' solicitors to the plaintiff's solicitors. In the meantime it appears that the plaintiff had raised some 'areas of concern ... to be addressed'. The letter of 17 February 2006 sought to address them. It concluded:
[175]
'The proper basis for your client to exercise its reasonable discretion regarding the consent or otherwise to a share mortgage is limited to consideration of the mortgage terms and the potential adverse effect upon your client. So long as the terms of the mortgage do not require your client to surrender any part of the right secured to it by the constitution and the Shareholders' Deed, it is difficult to see any reasonable basis upon which consent could be refused.
[176]
A draft share mortgage is attached, for consideration and comment. This draft has been prepared by us on the basis of what we understand has been agreed, especially with reference to the treatment of 'events of default' in clause 6. It has not yet been approved by the proposed lender's solicitors.
[177]
[74] Neither letter contained a request to Mango Boulevard for its consent to the mortgage of the shares. Neither is capable of such a construction. The plea in paragraph 12 of Mio Art's defence and counter-claim is untenable. It cannot be made out by reference to the documents said to support it.
[178]
[75] In theory this deficiency could be overcome by amendment to allege a request by different correspondence, but it can hardly be supposed that Mio Art's counsel have not identified the best documents to support its case. The defendants' pleading, it would be recalled, referred to several other letters, but none of those is now relied upon as a request for consent to the mortgage. Those which were put forward, which must, as I say, be regarded as Mio Art's best chance of pleading a request, do not do so. There is, therefore, no reason to think that an amendment could overcome the problem.
[179]
[76] The removal of the allegations that the defendants, or Mio Art, requested
[180]
Mango Boulevard to give its consent to the mortgage of the shares, and that the refusal was unreasonable and a breach of fiduciary duty, takes away the cornerstone of Mio Art's case. It admits that the first defendant was insolvent and, therefore, that there had been an event of default under the deed giving Mango Boulevard an option to acquire the shares. The defence to this claim was that the insolvency came about only because of the unreasonable refusal to consent to a course of action which would have remedied the event of default. If there was no request, and no unreasonable refusal, one is left only with the insolvency, the existence of which entitled Mango Boulevard to the relief it claims, subject to the defence that
[181]
Mr Thompson's appointment put the plaintiff in breach of the deed.
[182]
[77] The appropriate relief in the circumstances is to order that the defence and
[183]
counter-claim filed by leave on 3 March 2008 be struck out. There should be no leave to re-plead because the proceedings are an abuse of process. There is no point in exempting the defence from Thompson's from the order. It is res judicata. Mango Boulevard is entitled to judgment pursuant to UCPR 293 for these reasons and because Mio Art cannot make out its case that it asked for consent to the mortgaging of the shares.
[184]
[78] There remains an application by the plaintiff for leave to proceed against the first and second defendants pursuant to UCPR 72, despite their bankruptcy and for the joinder of Paul Desmond Sweeney and Terry Grant van der Velde as trustees of the property of the first defendant, and of the second defendant as fifth and sixth defendants respectively. It is appropriate to make an order giving leave. It is sought only for the purpose of ensuring that those defendants are bound by any judgment in the action. The further prosecution of the proceedings against them will not affect the creditors of their bankruptcies. Ms Perovich's shares have passed to her trustees in bankruptcy who will be entitled, depending upon the outcome of the action, to the shares or a price fixed in accordance with the valuation should the plaintiff's rights to acquire those shares be upheld.
[185]
[79] The first defendant's shares were held in trust and did not pass to his trustees in bankruptcy. If Mr Spencer had a right to indemnity against the trust assets in respect of any of his debts that right will have passed to the trustees and will not be affected by the grant of leave.
[186]
[80] I therefore give the plaintiff, Mango Boulevard Pty Ltd, leave to proceed under the UCPR against the first and second defendants.