McMahon v Deutsche Australia Limited [2001] FCA 1116 | Case summary

REASONS FOR JUDGMENT 1 By the subject proceedings propounded by the Applicants against the Respondents, a very substantial claim has been made for unliquidated damages said to have been sustained by the Applicants in a commercial context. The main causes of action propounded are for negligence, for conduct in contravention of ss 51AA and 52 of the Trade Practices Act 1974 (Cth) and for breach of contract. A Cross-Claim has been mounted by the Respondents against the Applicants for similar categories of causes of action. The proceedings were commenced in 1998, and are set down for hearing on 15 October 2001 for approximately eight weeks. 2 Numerous interlocutory proceedings have taken place, and the pleadings have been completed. In the course of one of the more recent interlocutory proceedings, it was stated to the Court by the Applicants' Solicitor that the Applicants would be seeking funding from an external source in order to undertake the pending Court hearing. Understandably, the Respondents interpreted that any such funding would be structured by way of assignment on the part of the Third, Fourth and Fifth Applicants' Administrators of the subject causes of action (see re Moage Ltd (1997) 77 FCR 81 at 104). In the result, the Respondents have made an application to the Court, by Notion of Motion filed on 18 July 2001, for orders inter alia as to security for costs. 3 The amount presently sought by the Respondents for security for costs is the sum of $1,027,860.90. Such amount has been carefully itemised by the Respondents' Solicitors, and relates only to work expected to be undertaken from mid July 2001 until the estimated time of conclusion of the hearing of the proceedings. My brief perusal of the detail has indicated to me that the assessment has been competently assembled on a solicitor and client basis. Nevertheless, had I been minded to grant the present application for security, I would have done so upon the footing that the assessment be made the subject of estimation upon a party and party basis by a senior officer of the Court, in accordance with the Court's usual practice in relation to security for costs orders, and for payment by an instalment regime geared to the future progress of the litigation, and in particular, the duration of the trial. 4 Material recently obtained by the Respondents from the Australian Securities & Investment Commission ("ASIC") concerning the Third Applicant B & D McMahon Investments Pty Limited ("Investments") disclosed the following: (i) The First and Second Applicants ("Mr McMahon" and "Mrs McMahon") remain as sole directors and shareholders of Investments; (ii) Messrs John Sheahan and Ian Russell Lock had been appointed Deed Administrators of Investments on 10 April 2001, such reference to "Deed" being to the Deed of Company Arrangement relating to Investments referred to in [7-8] below. 5 Similar material recently obtained by the Respondents from ASIC concerning the Fourth Applicant Walmur Properties Pty Limited ("Walmur") and the Fifth Applicant ("Argyle") disclosed the following: (i) Mr McMahon and his mother Esmeralda McMahon (Mrs McMahon Senior) remain as sole directors and shareholders of Walmur and Argyle; (ii) Messrs Sheahan and Lock had been appointed as Deed Administrators to Walmur and Argyle at the same time as Investments, such reference to "Deed" being to the Deeds of Company Arrangement relating respectively to Walmur are Argyle referred to in [7-8] below. 6 On 19 April 2001, meetings of creditors of each of Investments, Walmur and Argyle took place concurrently, at which Mr Sheahan acted as Chairman, and at which Patrick Coope attended as Mr Sheahan's assistant. The Chairman recorded that the four Deutsche Respondents had each lodged claims against Investments, Walmur and Argyle for $3,341,270.10 by their respective Cross-Claims, and in addition, the Fifth Respondent Benchmark Securities Management Limited ("Benchmark") had lodged a claim of $30,000.00 against each of Investments, Walmur and Argyle. The Chairman further recorded that Mr Wingett, the present Solicitor on the record for the Applicants, had lodged a claim for $638,117.89 against each Company, and that Mr McMahon had lodged claims of $195,279.35 and $55,967.03 respectively against Walmur and Argyle. 7 Reports made by Mr Sheahan subsequently to such initial combined meetings of Investments, Walmur and Argyle disclosed the following: (i) Each of such corporate Applicants was considered to be insolvent; (ii) The only possible asset of each of the Corporate Applicants was considered to be their respective choses in action the subject of the present proceedings; and (iii) Recommendations were made that the corporate Applicants enter into Deeds of Company Arrangements ("DCAs"). 8 Such DCAs as subsequently entered into on 11 July 2001 provide for the following inter alia: (i) Mr McMahon and Mrs McMahon to contribute $10,000.00 to a fund to be established for the benefit of the creditors of Investments, Walmur and Argyle, such fund to comprise all of the property of the three companies as if pooled together, and to be available for distribution to the creditors of all three companies; (ii) Mr McMahon and Mrs McMahon to assign their interests as Applicants in the causes of action the subject of the present proceedings to Investments, Walmur and Argyle; (iii) Mr McMahon to re-transfer to Investments, Walmur and Argyle his shares in Benchmark which had been purportedly transferred to him by transfers dated 11 November 1998 (see Recital D to each DCA); (iv) The Administrators to pay into the fund to be established by them in their said capacity all monies which might be recovered in the present proceedings, and to apply the same, after payment of the Administrators' fees and expenses and subject to s 556 of the Corporations Law, in payment of the claims of creditors of Investments, Walmur and Argyle equally; (v) The control and management of Investments, Walmur and Argyle to remain with the Administrators of the DCAs; and (vi) Mr McMahon and Mrs McMahon to be released by Investments, Walmur and Argyle in respect of any claims arising out of their directorships of such companies. 9 Inquiries undertaken by the Respondents of public records concerning the financial status of the Applicants disclosed the following information: (i) Mrs McMahon possesses no interest in real estate; (ii) Mr McMahon and Mrs McMahon Senior own land at Ben Bullen in the State of New South Wales as joint tenants, such land having an area of about 125 acres; and (iii) Mr McMahon previously held 9000 fully paid shares in Chatsworth House Pty Limited, which company was formerly the owner of Unit 3 No 59 Wolseley Road Point Piper; the unit was sold at auction on 22 May 2001 for $1.635 million; based on ASIC records, it is unclear whether such shares are still held by him; 10 On 6 August 2001, being the day of hearing of the present application for security for costs, Mr and Mrs McMahon produced to the Court affidavits as to their respective means, after a short adjournment had been granted at the Applicants' request to enable the affidavits to be completed. Such affidavit material disclosed the following: (i) On 23 June 2001, Mr McMahon completed the sale of his said 9000 shares in Chatsworth House Pty Limited, and his collateral right to reside in the said Point Piper home unit, for the sum of $1.635 million, which was applied as follows: Repayment of first mortgage $920,000.00 Repayment of second mortgage $477,000.00 Legal fees on sale $6,000.00 Agent's commission and advertising $44,000.00 $1,447,000.00 (ii) The surplus of $188,000 has been applied as follows: Rental bond, pre-paid rent and removal expenses $35,000.00 Legal fees $7,000.00 Barristers fees $81,000.00 Solicitors fees and costs $30,000.00 Contribution to Deed Administrators $10,000.00 Discharge of personal liabilities including credit cards $17,000.00 $186,000.00 The remaining $8,000 is held in his bank account. (iii) The sole remaining assets of Mr McMahon and Mrs McMahon and their respective values are as follows: Shares in CSR Ltd and NRMA Ltd having current values estimated at $13,000.00 A Jensen motor vehicle having a value estimated at $7,500.00 A boat having an insurable value of $36,000, which has been on the market for sale for two years at $40,000.00 Home contents insured for a replacement value of $188,000, and having a realisable value estimated at $20,000.00 Fine art insured for a replacement value of $20,000.00 (one-third is owned by Mrs McMahon Senior but kept in Mr McMahon's leased premises) Share of anticipated compensation payable by Joint Coal Board (presumably related to the land at Ben Bullen) $25,000.00 Mr McMahon also has the care of silverware insured for $20,000, which silverware is owned by his mother but is also kept in Mr McMahon's leased premises. 11 Additional financial information disclosed by Mr McMahon was as follows: (i) PriceWaterhouseCoopers has instituted proceedings against Mr McMahon for $146,840; the "review date" for such proceedings is 19 December 2001; (ii) The abovementioned home unit second mortgage repayment of $477,000 (see [10(i)]) above had been owed by Mr McMahon to Mrs McMahon Senior, and arose mainly from the circumstances first, that he acquired by assignment the debt of $225,000 owed to her by Walmur, and secondly, that he acquired by further assignment the debt of $82,853 owed to her by Argyle; however Mr McMahon stated that "No written mortgage over my shares in Chatsworth House has ever been produced or registered"; (iii) Mr McMahon owes his mother $169,512 for moneys lent over the past two years for personal expenses and the costs of the present proceedings; and (iv) There are no assets owned jointly between Mr McMahon and Mrs McMahon Senior. 12 Mrs McMahon has no assets or liabilities additional to those recorded above in relation to Mr McMahon, other than approximately $3,000.00 in a bank account, and jewellery insured for a replacement value of $88,850,99 but having a realisable value of $25,000.00. The majority proportion of such respective values relates to her engagement ring. Mrs McMahon is not in employment. Mrs McMahon Senior is a blind pensioner of 94 years of age, and Mr McMahon holds her power of attorney. Mr McMahon's father died intestate some years ago. 13 Mr Coope, in his capacity as one of the Joint Administrators of Investments, Walmur and Argyle, has reported by affidavit inter alia as follows: (i) On 10 July 2001, the second meeting of the creditors of each of Investments adjourned from 6 July 2001, Walmur and Argyle took place, attended by a representative of the four Deutsche Applicants and Benchmark (being Mr Noble Solicitor of Deacons), Mr Wingett (Solicitor for the Applicants), Mr McMahon (representing himself and the Accountant Mr Triglone), Mrs McMahon, Messrs Sheahan and Coope, and two observers. Mr Sheahan acted as Chairman, pursuant to Corporations Regulation 5.6.17; (ii) In relation to each of the meetings of the three companies, there had been tabled by the Joint Administrators the respective Deeds of Company Arrangement, and in relation thereto, Mr Sheahan had advised the meeting that it remained his opinion that entry into the proposed DCAs would be in the best interests of creditors, and their execution would be preferable to either placing each company in liquidation or ending the Joint Administration and returning control thereof to the directors; (iii) Also at each of the meetings, as foreshadowed in [4-5] above, Messrs Sheahan and Lock were appointed as Deed Administrators, and a Committee of Inspection consisting of Mr McMahon, Mrs McMahon and Wingett was established; Mr Noble voted against each of the foregoing resolutions, but he was outvoted by Mr and Mrs McMahon and Mr Wingett, Mr Noble's voting power being restricted in relation to each Company to $20,000.00 (for which the Deutsche Applicant and Benchmark had been admitted to vote), whereas Mr Wingett, Mr McMahon and Mrs McMahon were respectively attributed voting power equal to $557,616.39, $77,505.50 and $1,000.00 in relation to Investments, $557,616.39, $192,279.35 and $1,000.00 in relation to Walmur and $557,616.39, $55,967.03 and $1,000.00 in relation to Argyle; (iv) Apart from the choses in action against the four Deutsche Respondents and Benchmark, including those assigned from Mr and Mrs McMahon (see [8(ii)] above), the only assets of Investments, Walmur and Argyle appear to be 67,289 preference shares held by Investments in Benchmark, certain real estate held in the name of Walmur situate in the City of Lithgow and having a rateable value of $99,700.00, and certain plant and equipment held by Walmur having a written down value of $239,000.00. Mr McMahon claims that the Lithgow property is held by Walmur upon trust for Mrs McMahon Senior, but has not provided Mr Coope as yet with any documentary or other support for such assertions; and (v) Messrs Sheahan and Coope as Deed Administrators and Voluntary Administrators will be remunerated only for their professional time spent, and for the time spent by their employees, according to standard hourly charge out rates, subject to such fees being approved by the creditors of Investments, Walmur and Argyle, with the qualification that as from 10 July 2001, such standard charge will be subject to increase by one-third, to the extent that monthly fees exceed $7,500.00; thus there is no arrangement in place to the effect that fees will be payable by reference to any proportion of any amount recovered in the proceedings. 14 It may be deduced from the material which I have summarised already that the only cash funds of substance possessed by the McMahon family, directly or indirectly, comprise the amount of $477,000.00 referred to in [10(i)] and [11(ii)] above previously held by Mrs McMahon Senior, whereof $120,000.00 has been now paid out to Mr Wingett on account of his costs and disbursements accrued and unpaid in the conduct of the proceedings. The remaining $357,000.00 on hand (or in "round figures" the sum of $350,000) is proposed to be advanced by Mrs McMahon Senior to the Deed Administrators for meeting the estimated cost of the further conduct of the proceedings. 15 The Applicants have summarised their financial position in terms of any ready available liquidity on hand as follows: (i) There is no ability on their part to satisfy any order for security for costs in relation to the further conduct of the proceedings on the part of the Respondents, otherwise than by means of advances out of the said fund of $350,000.00 to be provided by Mrs McMahon Senior to the Applicants; (ii) The application for security has been belatedly made by the Respondents after about three years of litigation, in the course of which Mr McMahon and Walmur have outlaid already $1.3 million in favour of the Applicants' legal representatives; and (iii) In the event that an order for security for costs be made in favour of the Respondents, the proceedings would have to be stayed, because the Applicants would be unable to satisfy any such order if the Applicants were to be able to otherwise fund the continuance of the proceedings. 16 The Respondents have submitted in support of their application as follows: (i) The Applicants are potentially insolvent, in that they would not be able to afford to bear any adverse order for the costs of the proceedings which would follow, if the Applicants are unsuccessful in the ultimate outcome of the proceedings or of any significant segment thereof; (ii) The present application of the Respondents for security had not been brought earlier, because it was only when their Solicitor Mr Wingett informed the Court at the last directions hearing on 13 July 2001 to the effect that the Applicants had obtained third party litigation funding to enable the litigation to be pursued to a conclusion that the Respondents brought the present application; and (iii) By reason of the indication contained in Administrators' earlier report of 3 July 2001 that approaches had been made to a number of "third party litigation funders", the Respondents had justifiably assumed, from what had been so recently said to the Court by Mr Wingett, that the litigation funding which would be obtained by the Applicants was to be provided by third party sources, that is to say, from sources outside of the family such as specialist litigation funders such as insurance companies. 17 The foregoing submissions of the Respondents lend some support to the justification for their conduct in commencing the present application for security. Mr Coope's Affidavit provided on the day of the hearing thereof makes it clear however that no such third party funding from any external sources has been obtained, and Senior Counsel for the Applicants stated to the Court that an undertaking would be provided in writing by or on behalf of the Applicants to the effect that they will notify the Respondents forthwith, in the event that third party funding of the litigation is obtained from external sources. 18 In any event, the Applicants submitted that the present application for security for costs should fail for the following additional reasons: (i) Except in extraordinary circumstances such as the bringing of proceedings vexatiously, an applicant or applicants who is or are a natural person or persons, and who is or are impecunious or substantially so, will not be ordered to provide security for costs; Mr and Mrs McMahon are of course the natural persons here directly involved as Applicants; (ii) As to the corporate Applicants, each of them being also essentially impecunious, if they are dismissed from the proceedings by reason of inability to provide security for costs, the impermissible consequence would be to compel the natural person applicants (Mr and Mrs McMahon) to proceed to trial with an action that would not be properly constituted or at least insufficiently so, given that the relief sought is essentially to a joint character; (iii) There is no submission advanced by the Respondents, nor could there justifiably be so, to the effect that the Applicants' causes of action have been brought otherwise than for bona fide reasons advanced in the interests of the Applicants; in that regard, there is evidence before the Court as to the fact of legal advice having been obtained by the Applicants to the effect that they have reasonable prospects of success; (iv) There is no suggestion that Mr McMahon and Mrs McMahon have dissembled the existence of any assets belonging to either of them, or in any event neither was cross-examined to any such end; on the contrary, Mr McMahon has found himself compelled to sell his assets in order to provide the substantial funding which has already been applied in meeting the cost to the Applicants of the litigation to date; and (v) The hearing of the proceedings has been fixed to commence in the near future, and a substantial period of the Court's relatively scarce resources of hearing time has been set aside for such purpose; there has thus been, so the submission runs, an indefensible delay on the Respondents' part in bringing the present application, since the Respondents have had no sufficient basis for any justifiable belief that the Applicants could meet an adverse order in favour of the Respondents for the cost of the proceedings inclusive of the projected two months' trial. Authoritative support for propositions (i) and (ii) may be found in James v Australia and New Zealand Banking Group Ltd (1985) 9 FCR 442, and additionally for proposition (ii) in Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACSR 300 at 303 per Kirby P (as he then was), and for proposition (v) in Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71-72 per Lehane J. 19 It is my understanding that the Respondents readily accept that what has provoked the present application has been Mr Wingett's recent statement to the Court to the effect that third party litigation funding had been obtained by the Applicants (see [16(ii)] above). It is not suggested that Mr Wingett thereby misled the Court, and that seemingly what then appeared to him to have been a fait accompli did not transpire. Moreover it was submitted by the Respondents that until the detail of the McMahon family financial affairs was disclosed by the affidavits recently filed on their behalf in the context of the present Application, the Respondents' Solicitors had a reasonable basis for believing that the McMahon family assets were sufficient to meet an adverse costs order (see Mr Noble's testimony at transcript pages 34 and 35), but that such affidavits filed on behalf of the Applicants have now occasioned change to the Respondents' perceptions in such regard. In particular, so it is further submitted, by means of the recent series of non-arms length transactions which I have earlier summarised, Mr McMahon has brought about the transfer of substantial family cash resources to his mother, and the creation of the family's dependence upon her for the ongoing provision of funds for legal costs in the sum of $350,000.00 as referred to in [14] above, that is to say, the sum needed to finalise the litigation on the Applicants' part. 20 I am unable to understand how the Respondents could have been misled into thinking that Mr McMahon's home unit in Point Piper was unencumbered, because the title to that unit (as in the case of all other units in the relevant building) took the form merely of shares in the corporate freehold owner, and the existence of encumbrances on shares in the corporate freehold owner would not be information accessible to public scrutiny. I would infer that what crystallised the present application was Mr Wingett's statement to the Court on the last occasion as to third party funding, being a statement which, albeit as matters have transpired to have been inaccurate, conveyed an incorrect inference to the Respondents' legal advisers, and undoubtedly caused the present application to be made. As Senior Counsel for the Respondents fairly and frankly conceded during the hearing of motion, "…until we saw the affidavits we did not understand that the third party funder wasn't some sort of huge Danish insurer or whoever funds this sort of litigation…". In the absence of bringing an application for security such as the present, it would have been difficult for the Respondents to have established the existence of any "sinews of war" from whom security for costs might have been obtainable: see Montague Mining Pty Ltd v Gore (t'as Clayton Utz) [2001] FCA 791 at [55-56] per Wilcox J, and the reference there to Knight v F P Special Assets Ltd (1992) 174 CLR 178 at 188 per Mason CJ and Deane J. 21 My conclusion is that I should dismiss the Respondents' application for security, essentially for the reasons set out in the Applicants' submissions recorded in [18] above, subject however to the proffered undertaking referred to in [17] above being duly furnished to the Respondents in writing, as foreshadowed in the course of the Applicants' address. I think that it was highly prudent for the Applicants to have so proffered that undertaking, particularly because the scope of proposition (ii) in [18], to the extent suggested in Uptown, remains somewhat uncertain, and the Applicants did not elaborate upon the complexity of the issues involved in the proposition that dismissal of the corporate Applicants from the proceedings would have rendered the personal causes of action of the McMahons improperly constituted. I think that the Respondents' conduct in bringing the present application was not unreasonable in the context in which the same had been so initiated. Until the indication was given in Court to the effect that third party financing had been obtained by the Applicants, the Respondents did not have any sufficient basis for making the present application, and as is so often the case in the circumstances of applications for security, the Respondents founds themselves compelled to make out a case for security upon the basis of the totality of evidentiary material that would thereafter emerge from the Applicants, and to undergo the risk normally involved in bringing such an application, notwithstanding that the hearing date for the proceedings has been fixed for the near future, and a substantial amount of Court time has been allocated for that purpose. 22 Notwithstanding those observations, I am of the view that the Applicants and Respondents should each bear their own respective costs of the Respondents' unsuccessful application. The undertaking has now been provided in satisfactory form. The Respondents were justified in initiating the application, for the reasons I have already outlined, albeit that the same has been ultimately unsuccessful, in the light of Mr Wingett's earlier announcement to the Court, and further in the light of the prima facie approach taken by a Full Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 of 4 (per Sheppard, Morling and Neaves JJ) in relation to insolvent corporate respondents.

McMahon v Deutsche Australia Limited

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)