Mead v Watson as Liquidator for Hypec Electronics

Mead v Watson as Liquidator for Hypec Electronics - [2005] NSWCA 133 - NSWCA 2005 case summary — Zoe

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Thursday 28 April 2005 COLIN ANTHONY MEAD v DAVID PATRICK WATSON as Liquidator for HYPEC ELECTRONICS PTY LIMITED (IN LIQUIDATION) & Anor [2] This was an appeal against costs orders made by Campbell J arising out of proceedings (the substantive proceedings) in which the liquidator of Hypec Electronics Pty Limited (In liq) (Hypec) sought to recover certain properties (the four properties) from Mr and Mrs Mead on the basis that they were assets of Hypec. Mr Mead defended that claim on the basis, firstly, that the liquidator was estopped from claiming the properties as assets of Hypec (the estoppel defence) and, secondly, that the liquidator was precluded from recovering them under the principle in Ex parte James; In re Condon (1874) LR 9 Ch App 609 (the Ex Parte James defence). Both these defences were successful. On the issue of costs, Mr Mead submitted that, firstly, he should have his costs of the substantive proceedings paid on an indemnity basis and, secondly, that those costs should be paid by the liquidator personally. These submissions were based upon the contention by Mr Mead that the events out of which the estoppel and Ex parte James defences arose were fully within the liquidator's knowledge. In particular, Mr Mead contended that the liquidator was aware that Mr Mead had relied upon the former's representation that he would not claim the four properties as assets of Hypec. A critical point, Mr Mead submitted, was the fact that he had, to the knowledge of the liquidator, applied to the Family Court for an order releasing the four properties for the purpose of using them to finance his defence, on behalf of Hypec, in common law proceedings involving another company (the common law proceedings). The liquidator deposed in an affidavit sworn on 10 April 2002 (the 10 April affidavit) that he was unaware of this Family Court application by Mr Mead. However, this statement was ultimately proved, in cross-examination of the liquidator, to be incorrect. In determining costs, Campbell J ultimately rejected Mr Mead's submission that the liquidator should pay Mr Mead's costs personally and on an indemnity basis. The substantive proceedings had been constituted by "the liquidator's proceedings", which involved the liquidator's claim to recover the four properties, and "the winding up proceedings" which relevantly concerned an application filed by Mr Mead raising issues similar to those litigated in the liquidator's proceedings with respect to the four properties. His Honour relevantly ordered the costs of Mr Mead in the liquidator's proceedings, and the costs of both Mr Mead and the liquidator in the winding up proceedings, to be paid by Hypec. It was against these orders that Mr Mead appealed to the Court of Appeal. HELD by the Court:

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Thursday 28 April 2005 COLIN ANTHONY MEAD v DAVID PATRICK WATSON as Liquidator for HYPEC ELECTRONICS PTY LIMITED (IN LIQUIDATION) & Anor [2] Judgment 1 THE COURT: This application for leave to appeal arises out of what was described by the primary judge, Campbell J, as "an unusually complex set of applications for costs" concerning proceedings (the substantive proceedings) in which his Honour gave judgment on 3 November 2003: Hypec Electronics Pty Limited (in liq) v Mead (2003) 202 ALR 688 (the substantive judgment). An appeal to this Court as presently constituted was dismissed on 6 July 2004: [2004] NSWCA 221 (the appeal judgment). 2 At the time the appeal judgment was delivered, the primary judge had heard argument but had not determined the applications for costs in the substantive proceedings (the costs proceedings). This Court therefore determined that it would not deal with the question of the costs of the appeal until the primary judge had delivered his decision in the costs proceedings. The Court therefore reserved liberty to apply with respect to those costs. 3 On 13 August 2004 the primary judge published his reasons in the costs proceedings (the costs judgment) and made orders in accordance therewith. Relevantly, he rejected applications by Mr Mead that, firstly, he should have his costs of the substantive proceedings paid on an indemnity basis and, secondly, that those costs should be paid by the liquidator of Hypec Electronics Pty Limited (In liq) (Hypec) personally rather than out of Hypec's assets. 4 It will be recollected from the appeal judgment that the substantive proceedings were constituted by "the liquidator's proceedings" (being proceedings SC 1268/02) and the "winding up proceedings" (being proceedings SC 1933/01), both instituted in the Equity Division of the Court. It will further be appreciated that the contested hearing in the substantive proceedings related to a number of properties which were referred to in the various judgments as "the four properties". Speaking generally, the liquidator had sought to recover the four properties from Mr and Mrs Mead on the basis that they were, in truth, assets of Hypec having been acquired by Mr and Mrs Mead with Hypec's money and that they were, therefore, held by them upon trust for that company. Mr Mead defended that claim on the basis, firstly, that the liquidator was estopped from claiming the properties as assets of Hypec (the estoppel defence) and, secondly, that he was precluded from recovering them under the principle in Ex parte James; ' In re Condon (1874) LR 9 Ch App 609 (the Ex parte James defence). Both these defences succeeded. 5 In the costs proceedings the primary judge relevantly ordered the plaintiff in the liquidator's proceedings, Hypec, to pay the costs of the first defendant (Mr Mead) in those proceedings being his costs of and incidental to his claims to retain the four properties. Mr Mead's submission that those costs should be paid by the liquidator personally and then on an indemnity basis was, as we have said, rejected. 6 The winding up proceedings relevantly concerned an interlocutory application filed by Mr Mead on 13 December 2001. The application raised issues similar to those litigated in the liquidator's proceedings with respect to the four properties. In the costs proceedings the primary judge ordered that the costs of the applicant (Mr Mead) and of the liquidator (Mr Watson) of that application, to the extent to which it was heard together with the liquidator's proceedings, be paid from the assets of Hypec. As we have said, his Honour rejected a submission by Mr Mead that those costs be paid by Mr Watson personally on an indemnity basis. 7 It is against the orders made in the costs proceedings involving his Honour's rejection of Mr Mead's submission that he seeks leave to appeal. The appeal itself has been heard concurrently with that application.

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Principles upon which a liquidator may be ordered to pay personally costs which have been ordered against the company in liquidation 11 Again, the principles articulated by the primary judge with respect to this aspect of the matter were not in dispute. Relevantly, the primary judge's discussion commenced with a comparison of the entitlement to costs of a liquidator with that of a trustee in bankruptcy. At [97] of the costs judgment in the context of unsuccessful litigation by a trustee in bankruptcy who was ordered to pay the costs of the successful party, his Honour referred to the trustee's right to recover those costs from the bankrupt's estate in accordance with the general law entitling trustees to an indemnity from the trust estate for all costs, charges and expenses properly incurred. The decision upon which his Honour relied as setting out the relevant principles was that of the Full Federal Court (Northrop, Wilcox and Cooper JJ) in Adsett v Berlouis (1992) 37 FCR 201. 12 In that case, the Court in a joint judgment (at 211) approved the following passage from the judgment of Bowen LJ in In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562 (and cited by the primary judge in [97]): "A trustee can only be indemnified out of the pockets of his cestui que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse . Costs, charges and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestui que trust costs which his own solicitor had unreasonably and perversely incurred merely because he had acted as his solicitor told him." (emphasis added) 13 In [98] of the costs judgment, the primary judge cited the following passage from the joint judgment in Adsett at 211-12: "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe ; that is, whether the expenditure was reasonably, as well as honestly, incurred . … [W]e issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe , which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not 'properly incurred' . The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment." (emphasis added) 14 The primary judge concluded (at [104]) that, consistent with the principles which he had discussed, a court should make an order that the liquidator personally pay the costs which have been ordered against the company as a result of litigation instigated and carried through by the liquidator only when the liquidator's conduct of the litigation is improper in the Beddoe sense. Accordingly, the question to be answered in the present case was whether Mr Watson's conduct of the litigation on behalf of Hypec, which resulted in an order that Hypec pay Mr Mead's costs of the substantive proceedings insofar as they related to Hypec's claims to recover the four properties, was negligent or unreasonable. A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally. 15 His Honour thus concluded (at [116]) that the "power of the court to make an order against a liquidator is conditioned by the liquidator having acting in a way which does not involve a proper performance, in the Beddoe sense, of his duties to the creditors and contributories of the company." 16 Accordingly, although as his Honour observed (at [119]) the costs order to which Mr Mead was entitled against Hypec in connection with the estoppel defence and the Ex parte James defence represented the coming home of a risk which was inherent in the liquidator's decision that those defences be opposed, the question was whether that opposition was, in the circumstances, unreasonable, unnecessary or dishonest.

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That finding of his Honour is challenged. However, that challenge was confined to the conceded falsity of parts of an affidavit sworn by Mr Watson on 10 April 2002 (the 10 April affidavit) and read in the substantive proceedings. 19 Mr Mead submitted that he had, in his written submissions in the costs proceedings, submitted that Mr Watson's asserted lack of knowledge in the 10 April affidavit of Mr Mead's application to the Family Court to be heard in October 2001, and his further assertion in that affidavit that he was unaware that that application would be pursued by Mr Mead, which assertions, in cross examination, he conceded to be erroneous, could not have been deposed to by mistake but were, in fact, deliberately false to Mr Watson's knowledge at the time he swore the affidavit. 20 Mr Watson submitted that Mr Mead's written submissions in the costs proceedings did not allege that Mr Watson swore a false affidavit to his knowledge. Those submissions did suggest that Mr Watson could hardly have deposed to the matters that he ultimately agreed were incorrect, by mistake. However, they did not assert that he was aware that he was swearing a false affidavit at the time he did so. It was asserted that it was improper conduct for Mr Watson to have mounted his claim to the four properties upon an affidavit which was erroneous but that, in our opinion, is a different matter and one to which we return below at [103] and following. 21 Mr Watson had, in the costs proceedings, sworn an affidavit on 23 February 2004 (Mr Watson's costs affidavit) in which he deposed in [102] that when he swore his 10 April affidavit, he believed that it was accurate and correct. This assertion was not challenged in cross-examination. If it was to be contended in the costs proceedings that Mr Watson knew that his 10 April affidavit was false to his knowledge at the time of swearing, then his assertion in his costs affidavit - that he believed it was accurate and correct at the time of swearing - needed to be directly challenged. In our opinion, the primary judge was correct in his finding that there was no attack on the honesty or bona fides of Mr Watson in running the litigation. Why Mr Watson opposed Mr Mead's estoppel and Ex parte James defences and was he justified in doing so? 22 His Honour considered (at [134]) a submission that, whereas in the usual case the relevant events, the subject of the litigation, have occurred before the liquidator is appointed so that it is often appropriate for him to put allegations to the test through the litigation process, in the present case the events out of which the estoppel and Ex parte James defences arose, were entirely ones relating to Mr Watson's own conduct in the course of his administration. Accordingly, it was submitted that the relevant facts had at all times been fully within Mr Watson's knowledge. 23 His Honour accepted (at [135]) that Mr Mead had made Mr Watson aware of his contention that there was an estoppel in respect of the four properties and the basis thereof by at least 14 December 2001. His case was also contained in affidavits by himself and Mr Dominello (his solicitor) sworn on 29 and 24 January 2002 respectively and served shortly thereafter. Further, his Honour noted that it was never put to Mr Mead or Mr Dominello in cross-examination in the substantive proceedings that they knew that four properties "would" be claimed by the liquidator. 24 However, his Honour considered that it would be incorrect to assert that the totality of the facts relating to the estoppel defence was in the knowledge of the liquidator. One of the six elements of the defence was the assumption or expectation of Mr Mead which, his Honour concluded (at [136]), was not within Mr Watson's knowledge.

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25 Those six elements are set out in the passage from the judgment of Brennan J in Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 at 428-9 extracted in [44] of the appeal judgment. The first element was that Mr Mead assumed or expected that a particular legal relationship then existed between himself and the liquidator or expected that a particular legal relationship would exist between them. The second was that the liquidator had induced Mr Mead to adopt that assumption or expectation. There seems to us to be some inconsistency between a finding that Mr Mead had the necessary assumption or expectation but that this was not within Mr Watson's knowledge, and his Honour's finding in the substantive proceedings that it was Mr Watson's conduct which had induced Mr Mead to adopt that assumption or expectation. 26 His Honour also considered (at [137]) that whether Mr Mead had acted or abstained from acting in reliance upon the assumption or expectation was also not a matter within the liquidator's knowledge. Reference was made (in [138]) to two occasions in July 2001 when Mr Connolly (Mr Watson's solicitor) said to Mr Fagan SC (senior counsel for Mr Mead) that the properties which Mr Mead was seeking to have released by the Family Court to fund his defence and cross-claim in common law proceedings between BL&GY International Co Limited (BL&GY) and Hypec were "probably" not his and, on another occasion, were "property of the company". His Honour then said: "The fact that the liquidator and his solicitor were showing to Mr Mead and his legal advisors some equivocation about their preferred position, that the monies had been lent, provided them with some basis for wondering whether Mr Mead had indeed relied on the representation he claims to have relied on - when they have been playing two different tunes to Mr Mead, was it right that he had heard only one of them?" 27 The relevance of this rhetorical question is that in the costs proceedings and before this Court, Mr Watson submitted that his opposition to the estoppel defence was justified or reasonable because Mr Mead was aware that he, Mr Watson, was continuing to investigate the affairs of Hypec for the purpose of identifying its assets and was further cognisant of the fact that there was a risk, if he proceeded to defend the common law proceedings, that the liquidator might claim a proprietary interest in the four properties in respect of which he was seeking access for the purpose of funding that defence. Accordingly, Mr Mead's reliance upon Mr Watson's representations was always a live issue if he and/or Mr Dominello were aware either that the liquidator reserved his rights to claim the properties as belonging to Hypec or that there was a risk that he might (as distinct from would) make such a claim. 28 It was further submitted that Mr Watson's strategy in the substantive proceedings was to meet the estoppel defence by seeking to establish that Mr Mead and/or Mr Dominello were aware of the ongoing investigations as to the assets of Hypec and aware that the liquidator was contending or may have wished to contend that those assets had been purchased with funds which belonged to the company, so that it could not be said that, knowing of these risks, Mr Mead and/or Mr Dominello genuinely proceeded on the basis, as Mr Mead alleged, that no claim might be made by the liquidator with respect to the four properties. It was in the foregoing context that Mr Watson and/or Mr Connolly may have wondered whether Mr Mead had, in his Honour's words, "indeed relied upon the representation that he claims to have relied on - when they had been playing two different tunes to Mr Mead"

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but he had only heard one of them. 29 Apart from the conversations between Mr Connolly and Mr Fagan SC referred to in [26] above, the only evidence of Mr Watson which might be said to have played a different tune was that deposed to in his affidavit of 13 August 2001 sworn in the proceedings before Einstein J, where he said that he had "an apprehension that the matrimonial property, which Mr Mead is said in Annexure B to be wishing to sell for the purpose of funding of the common law proceedings may, in whole or in part, comprise assets belonging to Hypec." 30 Notwithstanding that "apprehension", on 11 September 2001 Mr Watson wrote to Mr Ian Mitchell, the solicitor for the plaintiff in the common law proceedings (BL&GY) and Mrs Mead, referring to an undertaking of BL&GY to provide funds in the sum of $20,000 to the liquidator. The letter acknowledged that Mr Watson had read Einstein J's reasons for judgment and that it had been fundamental to his Honour's reasoning that he had accepted Mr Mead's evidence. He then wrote that the issues raised by Mr Mead (presumably in his defence to and cross-claim in the common law proceedings) needed to be addressed by BL&GY as well as by Mrs Mead "by the provision of proper documentation and evidence in proofs of debt for me". 31 The letter then expressed concern that the Court had before it the evidence of the petitioning creditor (that is, BL&GY) in order to establish that the expert's report relied upon by Mr Mead for the purpose of pursuing Hypec's cross-claim against BL&GY was based on incorrect assumptions or conjecture and hearsay inconsistent with, for example, bank statements which were objective records. It seems that Mr Watson was calling for evidence to be provided by BL&GY in opposition to Mr Mead's application to Sully J to have that company's default judgment against Hypec in the common law proceedings set aside. 32 However, it is the concluding paragraphs of that letter which are of particular relevance - they were in these terms: "In that regard even if the proceedings of Colin Mead for Hypec are successful, I will wish to obtain Judgment against both Lucy Mead and Colin Mead, and I will wish also to recover Judgment monies by the sale of real estate currently in the name of Lucy and Colin Mead. Given the statements made by Lucy Mead to Mr Connolly, possibly she will consent to Judgment against her in favour of Hypec and to the enforcement of those Judgments by way of execution against real estate." 33 In our opinion, the foregoing paragraphs reveal with some clarity that as at 11 September 2001 Mr Watson still considered that the funds of Hypec utilised by Mr and Mrs Mead to acquire the properties were unpaid loans in respect of which he would wish to obtain judgment and then enforce that judgment by executing against the properties. 34 We return at this point to the passage from the primary judge's judgment that we have extracted in [26] above. With respect, we have some difficulty in seeing the basis for the rhetorical question which his Honour asked and which is now the subject of challenge by Mr Mead. This is so for a number of reasons. Firstly, as appears from [94] of the substantive judgment, his Honour accepted the evidence of Mr Mead that at no time prior to 12 December 2001 did he understand that the liquidator intended to make any claim upon the four properties which would prevent him from applying to the Family Court to release them so that they could be sold and the proceeds used for the purpose of paying his legal costs in the common law proceedings. 35 Secondly, the conversation in question took place between Mr Connolly and Mr Fagan SC: apparently neither Mr Mead, his solicitor nor Mr Watson was present. There was no evidence from Mr Watson that as at July 2001 he was equivocating about his preferred position, namely, that Hypec had lent the money to Mr and Mrs Mead. In these circumstances, as between Mr Watson and Mr Mead only one tune was being played. 36 Thirdly, as the primary judge observed in [33] of the costs judgment " [t]he liquidator asserted , up to the time of his employer Mr Hodgson giving evidence before Matthews A-J in November 2001, that the legal effect of the company's money flowing to Mr and Mrs Mead and being used to acquire assets, was that Mr and Mrs Mead owed a large debt to the company, rather than that Mr and Mrs Mead held assets on trust for the company." (emphasis added)

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This finding of his Honour sits uneasily with the suggestion in the rhetorical question that Mr Watson was playing two different tunes - rather, he was only playing one. 37 The foregoing conclusion is supported by Mr Watson's affidavit sworn 27 July 2001 in the winding up proceedings in which, relevantly, he deposed as follows: "4. I have not yet finalised my investigations or report into the financial position of Hypec. However, at the date of swearing this affidavit I have identified funds in the sum of $4,907,725 which at this stage in my opinion were funds properly belonging to Hypec but which were used by the Directors of Hypec for their own personal use during the period 1989 to 1997. Annexed hereto and marked with the letter "B" is a schedule of the funds so identified. Notwithstanding this, further investigations are continuing. … 16. I am presently considering the legal avenues open to me as liquidator of Hypec to recover from the directors of Hypec: (a) The amount of $2,861,844 owed to Hypec in respect of the Directors Loan Account; and (b) The amount of $2,045,881 in additional Hypec funds which I have identified as being used by the Directors for their own use, together with any further monies (if any) so identified pending completion of my investigations. 17. My examination of the books and records of Hypec has not disclosed any minute or other record of any resolution authorising the Directors of Hypec to establish a Directors Loan Account or to draw the funds in the sum of $2,861,844 referred to in (a) above against such account. My examination of the books and records of Hypec also has not disclosed any minute or other record authorising the Directors of Hypec to utilise for their own purpose the additional Hypec funds in the sum of $2,045,881 referred to in paragraph (b) above." 38 The Schedule referred to in [4] of the affidavit is headed "Reconstruction of Directors Loan Account" and on page 4 shows a total of the reconstructed loan account in the sum of $4,907,725.64. This is the total of the two amounts referred to in [16(a)] and [16(b)] of Mr Watson's affidavit where he speaks only in terms of the recovery of monies and not property. 39 Entwined with the rhetorical question posed by his Honour in [138] of the costs judgment is the evidence of Mr Watson and Mr Connolly as to how they saw the estoppel defence after it was pleaded. 40 Mr Connolly, in [12] of his affidavit of 23 February 2004 read in the costs proceedings (Mr Connolly's costs affidavit), deposes that he was aware that Mr Mead's Family Court application had been stood over to 25 October 2001. He understood that Mr Mead's purpose in making the application was to obtain orders from that Court allowing him to dispose of real estate in his name to fund his lawyers. However, he said that he "treated that proposal as one that was wholly without merit." 41 In [15] of the affidavit, Mr Connolly noted that he had not diarised the date of the adjourned hearing of Mr Mead's application to the Family Court. He deposed that Mr Mead's application to Einstein J was, in part, based upon the fact that Mr Mead had no assets. He said: "That meant, to my mind, that he could not properly go to the Family Court and get access to properties he did not own. Further, there was no mention at all of the Family Court application again by Mr Mead's lawyers." 42 It should be noted that Einstein J on 21 August 2001 had granted Mr Mead leave to act on behalf of Hypec to defend the common law proceedings. On 17 September 2001 Mr Mead pursuant to that leave applied in the common law proceedings to Sully J to set aside the default judgment obtained by BL&GY, the plaintiff in those proceedings, with leave to file a defence and cross-claim. Mr Watson was aware of that application, as counsel representing him and Hypec had sought leave to appear before Sully J on 19 September 2001 to seek the deferral of the application. Sully J refused the adjournment and granted the orders sought by Mr Mead on 25 September 2001. 43 The position, therefore, was that Mr Watson was fully aware that Mr Mead, at considerable expense, was pursuing Hypec's defence in the common law proceedings to the claim of BL&GY and that he had given an indemnity, as noted by Einstein J in his orders of 21 August 2001, to the liquidator to indemnify him and Hypec in respect of any costs incurred in the common law proceedings. Mr Watson considered this indemnity to be worthless as Mr Mead had no assets except for his interest in the properties. Mr Connolly, although swearing that there was no mention at all of the Family Court application by Mr Mead's lawyers after 21 August 2001, nevertheless did not suggest in his costs affidavit that he had made any enquiry of Mr Mead's solicitor as to whether that application was being pursued. 44 Yet both he and Mr Watson were aware that Mr Mead was pursuing Hypec's defence of the common law proceedings and that he was incurring significant expense in so doing in circumstances where his only assets (to the extent that they were his assets) were the properties the subject of injunctive orders of the Family Court with respect to which there was an outstanding application to that Court by Mr Mead to have at least some of them released for the purposes of paying his legal costs. Neither Mr Watson nor Mr Connolly suggested in their respective costs affidavits that they believed Mr Mead's legal representatives (including Mr Fagan SC) were prepared to conduct Mr Mead's case in the common law proceedings pro bono or on a "no win, no pay" basis. As the primary judge observed in [97] of the substantive judgment, Mr Watson was represented in court every day of the hearing of the common law proceedings when "it would have been obvious to anyone who thought about it that Mr Mead was spending money at a significant daily rate in conducting those proceedings." 45 Further, Einstein J's judgment of 21 August 2001 (which Mr Watson had read) made it clear that the evidence was that Mr Mead could only proceed with the common law proceedings if his application to the Family Court for access to some of the matrimonial properties succeeded: see substantive judgment [73]. 46 In his costs affidavit Mr Watson makes no reference to any conversation between himself and Mr Connolly to the effect that the latter had, to his knowledge, made it clear to Mr Fagan SC that Mr Mead could not apply to the Family Court for release of properties which probably did not belong to him but to Hypec for the purpose of funding the common law proceedings. In that affidavit, Mr Watson deposed to the fact that as at 11 September 2001 he had no intention of recognising the default judgment as a proper proof of debt by BL&GY as a consequence whereof he considered that Mr Mead's application to set aside that judgment was "premature and possibly unnecessary". Notwithstanding his instructions to Mr Connolly to oppose the application by Mr Mead to set aside the default judgment, he became aware that that application had been granted. 47 From the foregoing circumstances, we have great difficulty in accepting the primary judge's finding that Mr Watson and Mr Connolly were showing to Mr Mead and his legal advisors some equivocation about their preferred position which provided Mr Watson with some basis for wondering whether Mr Mead had indeed relied on the subject representations. In our opinion, there was simply no evidence before the primary judge to support that suggestion which would, if otherwise established, have provided some basis for Mr Watson's decision to contest Mr Mead's estoppel and Ex parte James defences. 48 Mr Connolly deposed to his reaction to the pleading by Mr Mead of the estoppel defence in February 2002 in [23] and [24] of his costs affidavit, in the following terms: "When a Defence of Estoppel was pleaded by Colin Mead I examined that aspect of his Defence. I sought Counsel's advice and was advised that I should not accept the Defence of estoppel without the allegations that founded it being tested in the Court. This view was further supported by the advice of Mr T Hughes QC whom I had briefed in the Equity proceedings. I did not believe that Mr Dominello (Mr Mead's solicitor) and Mr Mead had the beliefs that they stated they did during the course of events in the latter part of 2001. Nor did I think that the Liquidator had induced those beliefs or that the Liquidator's failure to lodge caveats earlier had been a fact that had been relied upon by those persons in the prosecution of the cross-claim and the Defence of the debt claim by BL&GY.

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Further, I was of the view that the Liquidator would be abrogating his responsibilities to accept the untested allegations forming the basis of the estoppel because he would, in effect, be preferring a contributory over a creditor. I informed the Liquidator of my assessment of the merits of the estoppel claim." 49 In his costs affidavit, Mr Watson dealt with the estoppel defence in the following paragraph: "118. Mr Connolly advised me when the estoppel Defence was pleaded that, in his opinion, the Court would not accept the Defence for a variety of reasons that I should not accept the Defence. That advice never changed and received support from Counsel briefed in the matter, including Mr Hughes QC. This was communicated to Etheringtons by letter of 15 February 2002 … Given the events that occurred, I believed I had no choice but to maintain the proceedings for declaratory relief in relation to all the properties and have them adjudicated upon by the Court as to do otherwise may have prejudiced the company, its creditors and the contributors." 50 The estoppel defence is set out in [22]-[34] of Mr Mead's Defence dated 14 November 2002 to the Further Amended Statement of Claim. Paragraph 23 pleaded that on and after 5 July 2001 Mr Watson was aware of some five facts. Paragraph 25 pleaded that throughout the hearing on 17 August 2001 before Einstein J and thereafter, Mr Watson knew certain other facts. Paragraph 27 pleaded that Mr Watson was at all material times aware of a series of facts occurring between 7 September and 4 October 2001. Paragraphs 28 and 29 recited the proceedings before the Family Court in October 2001 and the decision of Cohen J in November. Paragraph 30 pleaded certain instructions given by Mr Mead to his solicitors to proceed with the conduct of the common law proceedings in the expectation and with the intention that the orders of the Cohen J would be implemented and the proceeds of sale of the four properties would be available to pay legal costs and expenses incurred in those proceedings. 51 Paragraph 31 pleaded the fact that the common law proceedings commenced and concluded and [32] alleged knowledge on the part of Mr Watson on and after 2 November 2001 that Mr Mead, having obtained orders from Cohen J with respect to the four properties, embarked upon preparation for the conduct of the trial of the common law proceedings with the expectation that he would have available the proceeds of sale of the four properties to pay his costs and expenses. Paragraph 33 then pleaded that Mr Watson gave no notice to Mr Mead that he intended to claim the four properties. Paragraph 34 pleaded that by failing to claim the four properties, and failing to do so until after the conclusion of the common law proceedings, Mr Watson encouraged and confirmed to Mr Mead his belief that the properties could be sold and the proceeds utilised to pay his costs and expenses of the common law proceedings. 52 It will be seen from the foregoing that so much of the pleading as we have summarised is concerned only with allegations as to Mr Watson's knowledge of a number of facts, many of which were a matter of record. However [36] alleged that Mr Mead relied upon the conduct of Mr Watson in not asserting any interest in respect of the properties and thereby encouraging him in his expectation that they could be sold and the proceeds applied in accordance with the Family Court's orders for the benefit of Mr Mead's conduct of the common law proceedings. Paragraph 37 also pleaded that as a consequence of that reliance, Mr Mead took a number of steps (of which he had earlier pleaded that Mr Watson had knowledge) involving the incurring of expense in the conduct of the common law proceedings. 53 It will thus be appreciated that the only issue in the estoppel defence in which Mr Mead's credit or state of mind might be an issue concerned his assertion that he relied upon the failure of Mr Watson prior to 12 December 2001 (when caveats were lodged) to make any claim upon the four properties that would have prevented him selling them for the purposes of paying his legal costs of the common law proceedings. 54 Both Mr Dominello and Mr Mead swore affidavits in the substantive proceedings that at no time prior to 12 December 2001 did they understand that the liquidator intended to make a claim that he had a proprietary right to the four properties although Mr Mead and Mr Dominello were aware of Mr Watson's "apprehension" at the time of the proceedings before Einstein J in August 2001: see [29] above and [91]-[93] of the substantive judgment where his Honour finds that Mr Mead was aware that Mr Watson retained that "apprehension" up until the conclusion of the common law proceedings. We return to this aspect of the matter below at [58] and [59]. 55 Further, in that same judgment the primary judge found firstly, that Mr Watson did not take the position before Einstein J or thereafter that he wanted to preserve the right to recover the properties in specie if his investigations showed that they were held on a resulting trust in favour of Hypec; secondly, that Mr Watson said nothing to Mr Mead or Mr Dominello that would bring into question in their minds that Mr Mead would have access to the four properties as a source of funding; and thirdly, that up until the conclusion of the common law proceedings, Mr Watson had only framed his claim against Mr Mead in terms of repayment of a director's loan account: see [97] of the substantive judgment. 56 In the foregoing circumstances, we cannot see how Mr Watson or Mr Connolly could have had any justifiable basis for wondering whether Mr Mead was proceeding with the common law proceedings and incurring significant expense with respect thereto without expecting to be able to obtain access through the Family Court to the four properties for the purpose of effecting their sale and using the proceeds for the purpose of defraying those expenses. At no time does Mr Connolly say that he wrote or spoke to Mr Dominello to the effect that he had informed Mr Fagan SC that it would be inappropriate for Mr Mead to approach the Family Court to seek access to the four properties for the purpose of defraying his expenses of the common law proceedings because those properties, as well as the balance of the properties claimed, belonged or even might belong, to Hypec. 57 In our opinion, at least by the time of the commencement of the hearing of the substantive proceedings on 16 September 2003 when Mr Mead conceded the liquidator's claims (except in respect of the four properties), there could have been no real issue as to Mr Mead's credit so far as his asserted reliance upon the conduct of Mr Watson in not claiming any proprietary interest in respect of the four properties so that Mr Mead could feel free to seek orders from the Family Court with respect to those properties to enable their sale to fund Hypec's defence in the common law proceedings. 58 In the substantive proceedings, there was some cross-examination of Mr Dominello relevant to the issue of reliance when it was put to him that he knew that the liquidator was asserting that many of the properties may well have been acquired with company funds and probably belonged to the company: see the cross-examination extracted at [92] of the substantive judgment. Two observations should be made with respect to this evidence. The first, as appears in [91] of the substantive judgment, is that Mr Dominello considered that Mr Watson's "apprehension" had been mentioned by Mr Watson "merely as a possibility by which [he] sought to raise doubt regarding the value of an indemnity from Mr Mead to the liquidator in respect of the liquidator's own costs."

[27]

This evidence was accepted by the primary judge and accords with [9] of Mr Watson's affidavit of 13 August 2001 read before Einstein J. 59 The second is that the cross examination of Mr Dominello extracted in [92] of the substantive judgment established no more than that he was aware that Mr Watson was investigating the question of whether all or any of the assets in the joint names of Mr and Mrs Mead properly belonged to Hypec. However, as his Honour noted, his understanding was that the claim which Mr Watson was making was for the repayment of money, not for the properties themselves. Furthermore, at no time in the cross-examination of Mr Dominello was it suggested to him that he was aware there was even a chance that the liquidator might claim the properties as arrears which belonged to Hypec. No doubt this was because Mr Watson had no material in his possession which could justify such a line of cross-examination. After all, there had been no correspondence or other communication with Mr Dominello after 13 August 2001 to suggest that Mr Watson's "apprehension" still existed. 60 Of equal if not greater relevance to the present issue is the cross-examination of Mr Mead in the substantive proceeding. That cross-examination extended over 19 pages of transcript (Black 82-101). Most of it did not touch on or concern the issue of reliance or otherwise relate to the estoppel defence with respect to the four properties. The only cross-examination that could be said to have touched on the defence occupied some two pages of transcript at Black 100-101. It commenced with the cross-examiner referring Mr Mead to [4] and [6] and Annexure B to Mr Watson's affidavit of 27 July 2001 (to which we have referred in [37] above). It constituted a reconstruction from Hypec's records of the directors' loan account and purported to assert a debit balance in the sum of $4,907,725. Mr Mead agreed that he understood from the affidavit (including Annexure B) that Mr Watson was asserting that the $4.9 million was "company funds apparently used by directors". The cross-examiner did not take this any further. 61 Mr Mead was then referred to Mr Watson's affidavit sworn on 13 August 2001 for the purpose of resisting his application to Einstein J for leave to defend the common law proceedings on behalf of Hypec. As we have observed in [43] above, in that affidavit Mr Watson expressed concern as to the effectiveness of any indemnity which Mr Mead could offer him against any adverse costs order in the event that Mr Mead took over Hypec's defence of the common law proceedings. In [8] of that affidavit, Mr Watson considered as unsatisfactory the indemnity previously offered by Mr Mead because of [5] of a letter from Mr Dominello to Mr Connolly of 12 July 2001 in which he referred to the interim property proceedings fixed for hearing in the Family Court on 23 and 24 July 2001 and to the injunction obtained by Mrs Mead to restrain the sale of the matrimonial property which Mr Mead wished to have varied to enable him to sell some of the properties to fund his representation in the common law proceedings. 62 Mr Mead was then asked to read [9] of Mr Watson's affidavit of 13 August 2001 in which he had deposed to his "apprehension" that the matrimonial property, which Mr Mead wished to sell for the purpose of funding the common law proceedings may, in whole or in part, comprise assets properly belonging to Hypec. He was then cross-examined as follows: "Q. And you understood that the liquidator at that time when you read this paragraph had an apprehension that the property that you were seeking in the Family Court to have released to you for sale may, in whole or in part, comprise assets properly belonging to the company? A. I was acting for the company. I was trying … Q. Again Mr Mead, I am asking you about your understanding of what the liquidator's belief was at the time? A. I don't know what the liquidator thought. I can read this but I am not inclined to agree with what he thinks. Q. What am I asking you to do is see what is written in this affidavit. A. Hmm. Q. Then tell us whether or not it is the case that when you read it, you understood the liquidator was apprehensive that the property in the Family Court that what you were seeking to have released was in whole or in part assets properly belonging to the company? A. That appears to be the liquidator's point of view. Q. That so far as you are aware remained in the liquidator's position as at the hearing before Justice Einstein, correct? A. Quite conceivably. Q. And right through, up to and including the hearing before Justice Matthews? A. The same applies. It is quite conceivable. Q. And through to the end of 2001? A. It would appear to be so." 63 The primary judge referred to that cross-examination in his substantive judgment at [93]. However, what is clear from the cross-examination is not what was put to Mr Mead but what was not put to him. In particular, it was not suggested to him that he knew that there was a risk that the liquidator would, on further investigation, claim the properties which were the subject of the application to the Family Court as property belonging to Hypec. Nor was it put to him that he knew that Mr Watson intended to claim those properties as belonging to the company as a consequence whereof he could not have relied upon any conduct of Mr Watson in not asserting any proprietary interest in respect of the properties including the four properties. It was not suggested to Mr Mead that he was not given any encouragement by Mr Watson whereby he was confirmed in his belief that the properties could be sold and their proceeds applied to the legal costs incurred with respect to the common law proceedings. It was not put to him that he was aware that he could not apply to the Family Court to have the four properties released for the purpose referred to without fear of any competing claim to those properties by the liquidator. 64 Finally, and importantly, it was not put to Mr Mead that he was, himself, aware or at least conscious in November 2001 of the fact that Mr Watson still harboured the "apprehension" he had first expressed in his affidavit the previous August. In fact, Mr Mead's answers to the last three questions recorded in [62] above clearly suggest that he had no such knowledge although "it would appear" or it was "quite conceivable" that Mr Watson's apprehension did continue until the end of 2001. 65 In our opinion, the cross-examiner properly limited his questioning and did not ask any of the questions that we have postulated in the preceding paragraphs simply because he had no factual basis upon which he could properly do so. Furthermore, it was never suggested to Mr Dominello or Mr Mead that either of them was aware, as a consequence of Mr Connolly's conversations with Mr Fagan SC in July 2001, that Mr Watson considered that the four properties or any of them belonged to Hypec. The simple fact was that, to Mr Watson's knowledge, the highest his "claim" to the properties was ever put prior to December 2001 was that he had an "apprehension" that the properties may, in whole or in part, comprise assets belonging to Hypec. No evidence in the form of correspondence or conversations between Mr Connolly and Mr Dominello and/or Mr Mead and Mr Watson points to any repeat or firming up of Mr Watson's "apprehension" prior to December 2001 when the caveats were lodged. Accordingly, as that "apprehension" in August 2001 did not take on any greater or more positive status between then and the time the common law proceedings were concluded, in our opinion the basis upon which Mr Mead's reliance upon the conduct of Mr Watson as pleaded in his estoppel defence could be legitimately challenged on the ground that there was a risk that the liquidator might claim a proprietary interest in the four properties, was slim to the point of non-existence. 66 In truth, the reason why there was no further communication between Mr Mead and his solicitor on the one hand and Mr Watson and his solicitor on the other hand, which might have advanced Mr Watson's "apprehension" to which he deposed in his affidavit of 13 August 2001, was because Mr Watson on the advice of Mr Connolly (as to which see [152] and [153] below) had decided to await the outcome of the hearing of the common law proceedings and, in particular, to see what was revealed in the evidence elicited in those proceedings. In a passage in the cross-examination of Mr Dominello in the substantive proceedings quoted by the primary judge in [92] of the substantive judgment (at Red 91 B-F), it was put to Mr Dominello that Mr Mead had told him that company funds had been used to acquire the properties. Mr Dominello responded by saying that he always laboured under the impression that they were loan sums and that it was not until caveats were placed against the titles to the properties that he realised that the liquidator was now asserting title to those properties. The following exchange then took place (Black 75T-76E): "Q. What did you understand by the words assets properly belonging to Hypec? A. They had made and were investigating and they were waiting to see what the evidence of Lucy Mead was before Justice Mathews. I don't know how they went in their investigations but that was something that were investigating. Q. You understood it was an ongoing process of investigation and waiting to see what Lucy Mead may say? A. I can't comment on how the liquidator conducted his investigation. Q. If you thought about it at the time, that would have been obvious to you that was what was going on with the liquidator? A. What was? Q. That the liquidator was continuing his investigations and was wanting to see what happened in the proceedings before Justice Matthews? A. You have to ask the liquidator but, yes, that is a fair assumption." (emphasis added) 67 The point we seek to make is that it was Mr Watson's counsel who put to Mr Dominello that the liquidator wanted to see what happened in the proceedings before Matthews A-J. Until that occurred he had no idea as to whether there was any basis upon which he might make a claim on behalf of Hypec to a proprietary interest in the properties. 68 Finally, we refer to [100] of his costs affidavit where Mr Watson deposed that following the hearing before Einstein J, there was no mention to him by anyone of the Family Court proceedings that in July 2001 had been stood over to 25 October 2001 as a consequence whereof he had not entered that date in his diary when first informed of it. Importantly for present purposes, Mr Watson did not depose that because he apprehended that the monies which had been used by Mr and Mrs Mead for the purpose of acquiring the properties in respect of which the Family Court application was being made might be Hypec's monies, it made him wonder whether Mr Mead had in fact relied upon the representation pleaded in his estoppel defence to the liquidator's proceedings. 69 The foregoing analysis leads us to the conclusion that there was, indeed, only one tune that Mr Watson was singing to Mr Mead and Mr Dominello. He may, as was submitted by Mr Watson on the appeal, have been keeping his powder dry but he did not convey this to Mr Mead or Mr Dominello in any reasonably indirect, let alone direct, way. Even Mr Connolly recognised that he could not advise Mr Watson to make a claim on the properties until the common law proceedings were concluded: see [17]-[20] of his costs affidavit. In these circumstances, no proper basis existed which would support a challenge to Mr Mead's asserted reliance on Mr Watson's failure to make any such claim.

[32]

The following exchange then took place: "Q. Are you saying as far as other counsel, apart from Mr Hughes was concerned, it was simply a case of Mr Connolly telling you, 'well, we have the support of counsel'? A. No, I think Mr Connolly and Mr Hughes formed the view that the estoppel situation didn't apply. The situation was letters which had been presented before Sully J, a letter I think it was of 17 September, together with my affidavit I believe of 18 September, clearly indicated that there was no case for estoppel, having regard to the fact that the judgment debt - we tried to adjourn the matter or have the matter adjourned so we could do our full and complete investigation around the judgment debt. We believed the cross-claim was without merit, and having regard to that the estoppel issue would not be able to be applied." 78 The letter to Mr Dominello of 17 September 2001 to which Mr Watson referred in the above exchange is at Blue 2/496. Amongst other things, it asserted that he, Mr Watson, had not been served with any documentation in relation to the application by Mr Mead on behalf of Hypec to set aside the default judgment. He attached to the letter what he said was the current state of his investigation in relation to Mr Mead's claims, this being a reference to Mr Mead's defence on behalf of Hypec to the claim by BL&GY in the common law proceedings and Hypec's cross-claim against that company. The letter continued: "Contrary to Mr Mead's claims my current view is that monies were never remitted to BL&GY and instead the funds were used for other purchases and in particular the purchases of real estate by Mr and Mrs Mead. … I believe that it is very likely that the proposed cross-claim is without substance." 79 The affidavit of Mr Watson sworn 18 September 2001 is at Blue 2/498-501. The purpose of the affidavit was to support an application to Sully J for an adjournment of Mr Mead's application to set aside BL&GY's default judgment. Mr Watson deposed that he had examined Mr Mead's proposed cross-claim in the common law proceedings and the supporting evidence relied upon with respect thereto. He noted that on 17 September 2001 he had prepared a report that was served on the solicitors for the judgment creditor (BL&GY) and upon Mr Mead's solicitor. That report was directed at understanding the reconciliation process employed by Mr Mead in quantifying his cross-claim against BL&GY. The first part of the report related to BL&GY's judgment debt of $4.88 million plus interest. It was on the basis of that debt that BL&GY petitioned the Court for an order that Hypec be wound up. After going into some detail with respect to various invoices and payments made on BL&GY's account with Hypec, Mr Watson concluded that his "investigations are continuing to confirm the above matters and ultimately verify the claim made by BL against the company." 80 Paragraph 2 of the report related to the proposed cross-claim and to an investigation of amounts allegedly invoiced by BL&GY to Hypec in respect of which payments were made. Mr Mead's cross-claim was, apparently, based upon payments made by Hypec to BL&GY which, so he alleged, ought not to have been made. Mr Watson's investigations revealed that there were numerous cheques that had been coded as payments to BL&GY for purchases of computer equipment which were false. He concluded: "Having regard to these cheques I have identified to date through my investigations of the director's loan account that a number of these payments in fact relate to the director's personal use of company funds to purchase properties." 81 In other words, Mr Watson was saying that the monies were used by the directors for the purpose of purchasing properties and not for the purpose of making payments to BL&GY. After setting out a list of the cheques in question and noting that investigations were continuing into further payments which were coded to BL&GY in Hypec's cheque books but which were the director's personal expenses, Mr Watson concluded that until certain issues had been clarified, Mr Mead's cross-claim on behalf of Hypec against BL&GY had been potentially reduced from $4.321 million to $304,448. 82 Mr Watson then considered a document prepared by Mr Mead for the purpose of demonstrating the process by which Australian Custom Service's records had been matched by him to BL&GY invoices to establish over-payments to BL&GY by Hypec. Ultimately, Mr Watson concluded that after taking into consideration the findings in his report, the potential effect on the cross-claim, as per the figures he then set out, was that it was reduced to nil. Mr Watson was at that point resisting the setting aside of the default judgment and the incurring of expenditure by Mr Mead on behalf of Hypec in bringing a cross-claim against BL&GY which he considered had no substance. 83 It is apparently because of Mr Watson's conclusions set out above that he believed, on the advice of Mr Connolly and Mr Hughes QC, that there was no applicable estoppel. However, the connection between the material put before Sully J by Mr Watson for the purpose of seeking an adjournment of Mr Mead's application to set aside the default judgment on the one hand and the assertion in the exchange which we have recorded in [77] above that as a consequence "there was no case for estoppel" on the other, remains a mystery. 84 In re-examination in the costs proceedings (at Tpt p.13), Mr Watson was asked whether Mr Connolly said any more other than that he should resist the estoppel defence. Mr Watson responded as follows: "The gist of it was that it had no application, and not to worry about it because it was a situation that couldn't be applied. The estoppel issue wouldn't apply, especially having regard to the letter of 17 September and my affidavit of the 18th, which was placed before Sully J when we tried to adjourn the matter, or have the matter adjourned, so until we had actually considered in more detail the judgment debt and the cross claim." 85 When asked whether there were conversations with Mr Connolly on more than one occasion with respect to the estoppel defence, Mr Watson replied: "Your Honour, it would have been a situation, or it was situation whereby this was ongoing. We were finding more and more proof about fraudulent transactions, about the situation of the judgment debt. There would have been going on regular meetings with Mr Connolly about the need to be focused upon the matter, and I was assured from my legal advisor it was not going to be a consideration. It just would not apply, having regard to those findings that we were making. The fraud transactions, and about the judgment debt." 86 Again, it is difficult to see the link, if any, between these responses by Mr Watson on the one hand and the continued opposition to the estoppel defence so far as it related to the four properties on the other. Accordingly, in our opinion the evidence concerning the nature of the legal advice obtained by Mr Watson was either insufficient to support a conclusion that he was acting reasonably or properly in opposing the estoppel and Ex parte James defences or else irrelevant to that issue as it was based on immaterial considerations.

[33]

Did the reasons for judgment of Matthews A-J support Mr Watson's opposition to the estoppel and Ex parte James defences ? 87 We have already referred to [118] of Mr Watson's costs affidavit. In it, Mr Watson deposes that the legal advice he received never changed and that it received support from counsel briefed in the matter including Mr Hughes QC. He then said that this was communicated by Mr Connolly to Etheringtons (Mr Dominello's firm) by letter dated 15 February 2002 which was written the day after Matthews A-J delivered judgment in the common law proceedings. Paragraph 2 of that letter stated that "The decision of Matthews A-J delivered yesterday is a substantial indictment of your client and of Mrs Lucy Mead with the Court deciding that, rather than refer the matter to the DPP, it should be left to the discretion of the Liquidator." 88 Paragraph 4 of the letter stated that Mr Hughes QC and Mr Morahan were to be briefed to examine the findings in the transcript of evidence before her Honour to form a view as to the legal effect of her findings and in particular "whether they were issues of estoppel that will be pertinent to the equity proceedings". The letter noted that although the claim of BL&GY failed, so did Mr Mead's cross-claim on behalf of Hypec against that company. The letter went on to note concern that Mr Mead's evidence before Matthews A-J was "less than frank in regard to the endeavours made by the liquidator to interview him". 89 Finally, the letter asserted that there was "overwhelming evidence now that the liquidator is merely taking proceedings to recover property which your client has improperly vested in his name." 90 Some of the assertions in this letter sit uncomfortably with her Honour's findings. In [47] of her judgment, she considered that Mr Mead in his research had shown himself to be overzealous in his attempt to support Hypec's cross-claim against BL&GY although she was satisfied that he had made a "genuine attempt" to find the best possible match between BL&GY's invoices and certain custom data and that the results arrived at were likely to be predominantly accurate. In [146] her Honour found that Mrs Lucy Mead had lost all credibility. In a number of other paragraphs of her judgment, she criticised the truthfulness of Mrs Mead. Thus in [173], her Honour found that Mrs Mead was the author of the deception there referred to and, in [178], that Mrs Mead and her two sisters had shown themselves to be "entirely lacking in credibility and plausibility". 91 Importantly, in [136] her Honour found that Mr Mead knew little of Hypec's financial affairs and in [130] that it was Mrs Mead who acknowledged that many of the payments purported to have been made to BL&GY in fact represented cheques that had been used for private purposes, principally to purchase or improve properties in the name of herself and Mr Mead or to fund other aspects of their lifestyle. She identified a large number of cheques which she said had been misapplied by Mrs Mead in this manner and that in a number of cases she had altered the Hypec records by deleting the true payee. Her Honour found that Mrs Mead's stated reasons for doing this were "extraordinary". 92 Her Honour concluded (at [178]) that it was Lucy Mead who admitted falsifying Hypec's records so as to conceal the misapplication of company funds and that she and her sisters had similarly falsified BL&GY's records so as to support its false claim against Hypec. She found that Mrs Mead's motive for doing this was that Hypec would have no funds to meet BL&GY's judgment against it so that if that judgment was not set aside, recourse would be had against both Mr and Mrs Mead as directors which, if successful, would ensure that the properties in their joint names (which were the subject of the property dispute in the Family Court) would presumably have been sold in order to meet BL&GY's judgment. In this way, the total value of those properties would ultimately devolve upon Mrs Mead and her sisters (as shareholders of BL&GY) and Mr Mead would receive nothing. In this way, the Family Court property proceedings could be circumvented. 93 The only criticism made by her Honour of Mr Mead was, as we have noted above, that she considered him "overzealous" in the compilation of a schedule of payments which he said Hypec had made to BL&GY and which constituted overpayments. This was the subject of Hypec's cross-claim against BL&GY. The difficulty with that cross-claim was that that schedule assumed that the Hypec records, as written up by Lucy Mead, were accurate except where proved otherwise. As her Honour had concluded that no reliable assessment could be made of Hypec's records due to the defaults of Mrs Mead, it was not possible to establish that Hypec's payments to BL&GY exceeded the value of goods purchased from that company as a consequence whereof Hypec's cross-claim could not be substantiated. 94 Her Honour concluded her judgment in these terms (at [188]): "In conclusion I should say this. At one time I seriously considered recommending that the papers in this case be forwarded to the Director of Public Prosecutions, for a number of breaches of the criminal law have arguably been demonstrated during the course of these proceedings. During Lucy Mead's evidence in chief I warned her against giving answers which might incriminate her. However, she continued to give incriminating evidence about the falsification of entries in Hypec's books. On the other hand, Hypec's affairs are now in the charge of the liquidator, who has the power, if he deems it appropriate, to instigate proceedings against the company's previous directors. I think I should leave it to him to take such action, if any, as he considers appropriate in the circumstances." 95 It is clear from a reading of the judgment that nowhere does Matthews A-J criticise the credibility or bona fides of Mr Mead. Paragraph 188 is clearly directed solely against Mrs Mead. It was only she and her sisters who were found by her Honour to be lacking in credibility. It was only Mrs Mead who was found to have falsified Hypec's records and there was no suggestion in her Honour's judgment that Mr Mead had any knowledge thereof. In fact, her Honour found, as we have already noted, that Mr Mead knew little of Hypec's financial affairs. These findings were confirmed by the primary judge in [31] of the costs judgment. 96 Further, the judgment of Matthews A-J reveals that the Hypec funds that were used for the purpose of acquiring properties for the personal use of Mr and Mrs Mead, were generated by Mrs Mead who falsified (without any suggestion, let alone finding, that Mr Mead was aware of her conduct) the records in order to cover the real purpose of those payments. 97 In light of the foregoing, it is difficult if not impossible to understand Mr Watson's evidence that the findings of Matthews A-J in her judgment in the common law proceedings, which were the subject of Mr Connolly's letter of 15 February 2002, could provide any basis upon which advice could be given to Mr Watson initially to oppose and then to maintain opposition to the estoppel defence with respect to the four properties. It is true that in [113] of his costs affidavit, Mr Watson referred to the hearing before Matthews A-J and the fact that Mr Mead had given evidence that the properties had been acquired with Hypec's funds, there being no other source of funds available to him and Mrs Mead to fund those acquisitions. It was as a consequence of the foregoing that he instructed Mr Connolly to issue caveats over the properties. 98 In the substantive proceedings, certain pages of the transcript of Mr Mead's cross-examination in the common law proceedings by senior counsel for BL&GY and Mrs Mead were tendered. In the course of that cross-examination, Mr Mead conceded that the properties had been purchased with Hypec's money. Mr and Mrs Mead were not estranged at the time of these purchases. Accordingly, as Mr Mead said in his evidence, at that time he believed what his wife told him. That included statements by her that she had sold other properties in order to purchase new properties. However, he accepted that he did not "baulk at the proposition that [he] owed money to Hypec". The following exchange also took place (Blue 1/711): "Q. You have already given evidence that none of the properties that are in yours and Lucy's names are held in trust for Hypec. A. Yes, that's correct. Q. And you know that they have been paid for by Hypec or with Hypec's money don't you? A. That's correct. Q. And you acknowledge that it follows that you owe money to Hypec? A. According to the books. Q. You know that that follows as a matter of logic that if over $4million worth of property has been bought in yours and Lucy's name and paid for with company money, you owe money to the company? A. It would seem to be that way." 99 Later (at Blue 1/36) it was put to Mr Mead that the amount of his and his wife's indebtedness to Hypec was $4,907,725.64 - he responded that as he had not been able to investigate the records, he would have to disagree. However, he accepted that the records did indicate indebtedness of $2.8 million. The foregoing accords with the matters referred to in [37] above. 100 Our point is that firstly, in that part of the cross-examination in the common law proceedings that was tendered by Mr Watson in the substantive proceedings, it was only put to Mr Mead that he was indebted to Hypec on the basis of loan monies. However, he accepted that as it turned out, the monies used to acquire the properties were those of Hypec, a fact which apparently had been hidden from him by Mrs Mead. The evidence to which we have referred is consistent with the findings of Matthews A-J as recorded above. 101 Again, our point is that although this evidence may well have supported the institution of the liquidator's proceedings in order to claim back the properties on behalf of Hypec, it had nothing to do with the estoppel defence that had been raised by Mr Mead in February 2002. 102 In his costs affidavit, Mr Connolly referred to the fact that, after the proceedings before Matthews A-J had concluded, he had advised Mr Watson that he should now institute equity proceedings to recover the properties as well as place caveats on the title. However, Mr Connolly did not suggest in that affidavit that anything arose out of the evidence given before Matthews A-J and/or her Honour's judgment that would cast doubt upon the veracity of Mr Mead's estoppel defence. He makes no reference in his affidavit to [4] of his letter of 15 February 2002 to which we have referred in [88] above. Mr Connolly's only explanation with respect to the liquidator's opposition to the estoppel defence is found in [23] of his costs affidavit (set out in [48] above) which is in no way linked to what occurred in, or was discovered as a consequence of, the common law proceedings.

[34]

Mr Watson's incorrect affidavit of 10 April 2002 with respect to his knowledge of Mr Mead's Family Court application 103 The fact always was, as the primary judge recognised, that Mr Connolly and Mr Watson sat back with knowledge that Mr Mead would be pursuing his application in October 2001 before the Family Court for the release of the properties to enable their sale to fund Hypec's defence in the common law proceedings. Furthermore, Mr Mead proceeded with his conduct of those proceedings in circumstances where Mr Connolly and Mr Watson were clearly aware that he (Mr Mead) was incurring significant costs and expenses in circumstances where he had no funds to meet them. 104 In his 10 April affidavit, Mr Watson swore that he had not been served with copies of the Family Court pleadings and supporting affidavits and that he was unaware that Mr Mead would in fact pursue his application to the Family Court. Accordingly, he did not become aware of the orders made by Cohen J on 2 November 2001 until he was served with a copy of Mr Dominello's affidavit of 14 December 2001. 105 In the substantive judgment, the primary judge found (at [89]) that Mr Watson's evidence in the 10 April affidavit that he was not provided with documentation in the Family Court proceedings was incorrect as he had been provided with that material by 19 July 2001 and had been informed of the adjourned date of the application to the Family Court on 7 August 2001. Further, he had been provided with a copy of the application which was then current. His Honour then sets out the cross-examination of Mr Watson in these matters at [89] and [90] of the substantive judgment. In that cross-examination he made the following admissions. Firstly, he knew that Mr Mead was in fact going to proceed with his application in the Family Court at the time of or shortly after the proceedings before Einstein J. Secondly, he knew that that application had been stood over for hearing on 25 October 2001. Thirdly, nothing subsequently occurred to make him think that the application was not going ahead. Fourthly, he understood that Mr Mead could only proceed with running the litigation against BL&GY in his own name and on behalf of Hypec if he obtained funding by getting an order from the Family Court to sell the properties. 106 In the costs judgment the primary judge considered that the errors made by Mr Watson in his 10 April affidavit, as revealed by his cross-examination, did not lead to the conclusion that his conduct in opposing the estoppel defence was unreasonable. His reasons were as follows: "147. Mr Watson has given evidence in these costs proceedings that when he swore the affidavit in question he believed that it was accurate and correct, but he now accepts that 'the paragraphs were not put properly in context and were not completely correct'. The affidavit involved a mis-statement by the liquidator of his own state of mind, on a topic of central importance to the estoppel case. It is not at all satisfactory that the mis-statement occurred. However, I am not prepared to find that the errors in his affidavit arose as a consequence of anything other than the taking of insufficient care. 148. In evaluating the significance of the errors in the liquidator's affidavit, the question to be addressed is not whether the liquidator did something which he ought not to have done. The question is whether the errors in his affidavit show, or assist in showing, that his conduct in causing the company to oppose the estoppel allegations was unreasonable. In my view, the errors do not lead to that conclusion. To anyone with knowledge of the facts, those statements were clearly wrong. In cross-examination of the liquidator, Mr Fagan SC had no difficulty in taking the liquidator to various pieces of contemporaneous documentation which showed that the statements in the affidavit were wrong, and in obtaining prompt concessions that the statements in the affidavit were wrong. The errors do not lead to a conclusion that his conduct in opposing the estoppel defences was unreasonable." 107 Mr Mead submitted on the appeal that whether deliberate or careless, the falsity of the affidavit on a central issue in the case ought to have led the primary judge to the conclusion that Mr Watson's continued resistance to the estoppel defence, insofar as it related to the four properties, was unreasonable. 108 Mr Watson submitted that the thrust of Mr Mead's submissions was that an honest error itself constitutes objectively unreasonable conduct of the relevant kind. He contended that such a broad general proposition was unlikely to be correct. The circumstances were, as his Honour accepted in [148], that the errors in the affidavit were capable of ready demonstration and that, once demonstrated, were conceded without any apparent hesitation. Further, it was submitted that his Honour's analysis, properly understood, involved a finding that neither in prospect nor actuality, was the incorrect evidence in Mr Watson's affidavit causative of the continued opposition to the estoppel defence. In any event, the erroneous affidavit was but one evidentiary factor upon which Mr Watson could rely in defending the estoppel defence. Of greater significance was the legal advice received by Mr Watson from Mr Connolly as well as counsel and which justified him testing in court the beliefs of Messrs Mead and Dominello. Accordingly, the erroneous evidence of Mr Watson was not determinative of the reasonableness of his continued opposition to the defence. 109 It was common ground that the misstatement by Mr Watson of his state of mind in his 10 April affidavit was a matter of central importance to the estoppel defence. The affidavit directly denied knowledge by Mr Watson of facts which the defence alleged he was aware of, and which formed an essential allegation proof of which was required for the estoppel defence to be established. In particular, [97]-[101] and [103]-[104] of the affidavit which were found to be incorrect, directly contradicted the allegations contained in [23.2], [23.3], [23.5], and [25.1]-[25.4] inclusive of Mr Mead's defence dated 14 November 2002 (Red 17-19). 110 There is no doubt that Mr Watson maintained the position advanced in his 10 April affidavit as to his lack of knowledge of these facts until he was forced in cross-examination to concede its inaccuracy. No doubt, had his counsel or Mr Connolly been aware that those statements in his affidavit were incorrect, then a correcting affidavit would have been filed or evidence would have been led in chief to correct the errors. That this did not occur is odd to say the least, given his Honour's finding in [148] that the contemporaneous documentation showed the statements in the affidavit to be wrong. And yet Mr Connolly in his costs affidavit made no reference to Mr Watson's 10 April affidavit notwithstanding that he must have been aware of its contents, even if he did not, as he said in cross-examination, draft it. As we have said, his costs affidavit is silent as to how such a demonstrable error could have occurred without it being noticed at least at some point in time prior to the commencement of the hearing. It was overlooked by the solicitor, junior counsel and senior counsel. This called for an explanation but none was forthcoming. 111 We have already set out the primary judge's findings with respect to the question of legal advice and, in particular, his acceptance of Mr Connolly's evidence deposed to in [23] and [24] of his costs affidavit. Nevertheless, his Honour accepted that in many respects the evidence about the advice given by Mr Hughes QC, Mr Morahan of junior counsel and Mr Connolly himself was "not fully satisfactory". However, his Honour relied upon the fact that there was "no dissenting voice in the advice" as a significant factor tending towards the conclusion that the costs of opposing the estoppel defence were reasonably incurred. 112 With respect, what the primary judge failed to consider was that the instructions which must have been given to counsel and, for that matter, to Mr Connolly by Mr Watson, and which were later reflected in the offending paragraphs of the 10 April affidavit, were constituted by denials by Mr Watson of his knowledge of a number of the essential facts pleaded in support of the estoppel defence. Given that his Honour was not favoured by Mr Connolly or, for that matter, Mr Watson with details as to the nature of the legal advice received (probably because it was privileged), it was open to him to find, and he ought to have found, that the advice to oppose the estoppel defence was, at least in part, based upon Mr Watson's denial of those facts. 113 As his Honour found that the errors in the 10 April affidavit arose as a consequence of the taking of insufficient care, it must follow that at least to the extent to which the continued opposition to the estoppel defence was based on those denials, it was unreasonable. Furthermore, his Honour's finding of lack of sufficient care in the preparation of the affidavit must, in our opinion, apply not only to Mr Watson but also to Mr Connolly and, in all probability, counsel briefed by him with the contemporaneous documentation which was later used in cross-examination to obtain Mr Watson's concessions that the statements in the affidavit were wrong. 114 In this context, it needs to be recollected that the principles adopted by the primary judge to establish that the conduct of litigation was improper, required no more than a finding that that conduct involved negligence or unreasonableness (per Bowen LJ in Beddoe) or "mere negligence" or "mistake" (per the Full Federal Court in Adsett). In the present case his Honour found negligence ("the taking of insufficient care"): with respect in our opinion it constituted a high level of negligence. Accordingly, it was unreasonable for Mr Watson to rely on his denials in his affidavit to justify the opposition to the estoppel defence. 115 Accordingly, we would reject Mr Watson's submission that the falsity of his affidavit evidence with respect to his state of knowledge in the respects referred to was not relevantly causative of the manner in which his continued opposition to the estoppel defence was conducted. 116 A further reason for that opposition relied upon by Mr Watson was his asserted entitlement to test in court the beliefs of Messrs Dominello and Mead as advised by Mr Connolly. Those beliefs could relate only to the issue of reliance. Although Mr Connolly, in [23] of his costs affidavit, deposed that he did not believe that Mr Dominello and Mr Mead held the beliefs that they stated they did during the course of events in the latter part of 2001, his Honour was not provided by Mr Connolly with the basis upon which he held that view. Immediately after his statement of disbelief, he deposed as follows: "Nor did I think that the liquidator had induced those beliefs or that the liquidator's failure to lodge caveats earlier had been a fact that had been relied upon by those persons in the prosecution of the common law proceedings." 117 It may well be that the reason why Mr Connolly did not think that Mr Watson had induced those beliefs was because Mr Connolly had been informed by Mr Watson that the latter had no knowledge of the matters alleged with respect to the Family Court application and which were the subject of his incorrect denials in his 10 April affidavit. His Honour was not favoured with any other reason. Although it is true that the onus lay upon Mr Mead to establish that the conduct of Mr Watson in opposing the estoppel defence was in the circumstances unreasonable, an evidentiary burden shifted to Mr Watson and Mr Connolly in relation to matters solely within their knowledge such as their state of mind and/or reasons for not believing that Mr Dominello (a reputable solicitor) and Mr Mead held the beliefs to which they had sworn in their affidavits. The fact that they did not discharge that evidentiary burden but contented themselves with making unsupported assertions, makes it easier to draw the inference that on the balance of probabilities they had no reasonable basis for disbelieving the sworn evidence of not only Mr Mead but also his solicitor (whose reputation was not in issue) that they in fact held the beliefs to which they had sworn.

[35]

The primary judge's reliance upon the judgment of Barrett J of 6 February 2002 118 Reference was made by the primary judge (at [140]) to the dismissal by Barrett J on 6 February 2002 of an application by Mr Mead in the liquidator's proceedings for the separate determination of the estoppel issue. According to his Honour an important factor in Barrett J's reasoning was that, with respect to both the trust strand of the case (being the allegation by the liquidator that the four properties were held upon trust by Mr and/or Mrs Mead for Hypec) and the estoppel strand, Mr Mead was a potential witness and that his credit would be relevant in respect of each strand. The primary judge said: "That decision is one that proceeds on the basis that there really is a question to be tried, to which Mr Mead's credit would be relevant, so far as the estoppel defence went. No reason has been shown why the liquidator ought to have taken a different view to that which Barrett J took." 119 In his judgment Barrett J (at [11]) said this: "The major point put against the application is that in both what I might call the trust strand and the estoppel strand, the first defendant [Mr Mead] will be a witness and, according to what has been said today on behalf of [the liquidator], his credit will be very likely attacked by [the liquidator] so as to become a matter of genuine contest." 120 Having referred to the authorities which establish that the ordinary predisposition of the court was against separation of parts of the proceedings unless the pursuit of one part to finality is going to bring the whole to an end, which was not the case at hand, and noting that the liquidator had clearly flagged the issue of Mr Mead's credit which would be relevant to both stages of the overall enquiry, Barrett J refused the application. 121 Mr Mead submitted that the primary judge assumed, erroneously, that Barrett J had concluded that there was a question to be tried with respect to Mr Mead's estoppel defence. Mr Watson responded by asserting, firstly, that the primary judge did not purport to assert that Barrett J had so concluded but secondly, and in any event, the very fact that an application was made for a separate trial implied a recognition by Mr Mead that there was in fact an arguable question to be tried. 122 Were it not for the last sentence of [140] of the costs judgment which we have extracted above, there would be substance in the liquidator's submission. His Honour seems to have concluded that Barrett J had taken the view that "there really is a question to be tried" and that there was no reason why Mr Watson ought not to have taken the same view. On the other hand, it is clear that Barrett J had not formed any such view but was applying well-known principles which militated against the determination of a separate issue in circumstances where the determination of that issue would not finalise the proceedings as a whole. Further, the liquidator had informed him that Mr Mead's credit would be in issue with respect to the trust claim and the estoppel defence, an assertion which in such an interlocutory application he was required to accept at face value. 123 The difficulty we have with the primary judge's reliance upon the decision of Barrett J is that at the time of the application before that judge (6 February 2002), the estoppel defence had only just been pleaded. In [3] of his judgment Barrett J referred to the fact that the defence or proposed defence of Mr Mead seeking to establish an estoppel against the liquidator had been produced to the court that day in a signed but unverified form. 124 In the foregoing circumstances, we am unable to agree with the primary judge that the judgment of Barrett J provides any comfort to Mr Watson in terms of what was reasonable for him to believe with respect to the veracity of the estoppel defence. In this respect, it should be noted that neither Mr Connolly nor Mr Watson in their costs affidavits referred to the decision of Barrett J so that there is no evidence that either of them was ever aware of it.

[36]

The width of the estoppel defence 125 The primary judge considered (at [141]) as relevant to the reasonableness of Mr Watson contesting the estoppel defence that until the commencement of the hearing, the defence was pleaded on a wider basis than the defence which was actually run at the hearing. The respect in which this is true was that the defence was not confined to the four properties until the commencement of the hearing. Accordingly, until that point in time, it was reasonable for Mr Watson to oppose the defence. This fact is reflected in the orders for costs made by the primary judge on 13 August 2004 in favour of the liquidator in respect of all properties other than the four properties and which is not the subject of challenge. Accordingly, it was submitted by Mr Mead that when it came to the costs of the liquidator's claim to the four properties, the fact that the estoppel defence included properties other than the four properties was "wholly irrelevant". This was particularly so as at no time did the liquidator prior to trial concede Mr Mead's defence with respect to those properties. 126 Mr Watson submitted that there having been an unexplained but peremptory disavowal of a long maintained defence except in respect of the four properties "simply invites suspicion". This was especially so, it was contended, where a common element of the abandoned defence as well as of that which was maintained was the assertion of a belief in a particular entitlement or state of affairs. We understand this to refer to the issue of reliance. It was submitted that in these circumstances, it was appropriate for Mr Watson to wish to test the credibility of Mr Mead by exploring questions of consistency and inconsistency based on the stance previously taken by him in the proceedings. 127 The answer to Mr Watson's submissions is that there was no cross-examination of Mr Mead in the substantive proceedings which purported to test the credibility of Mr Mead in the respect referred to. We have already dealt with the extent of the cross-examination of Mr Mead with respect to the estoppel defence in [60]. None of it touched on or concerned the present issue. Furthermore, the conclusion of the primary judge that Mr Watson acted reasonably in opposing those elements of the estoppel defence which Mr Mead ultimately chose not to press is, with respect, no answer to the continued opposition to the defence once those elements were abandoned. As we have observed, the only element of the estoppel defence that was abandoned was its applicability to the properties other than the four properties.

[37]

A further purported reason why Mr Watson's opposition was reasonable 128 It was submitted by Mr Watson that no proper basis existed for not accepting his evidence and that of Mr Connolly relating to their bona fides and reasonableness in opposing the estoppel defence as neither was cross-examined in the costs proceedings to suggest that they were lacking in honesty or that there was no substance in the somewhat elliptical reasons for that opposition which were the subject of their affidavits. It is true that there was no direct attack upon the honesty of either Mr Watson or Mr Connolly. The attack was of a more collateral nature. In any event, one can take the relevant material in their respective costs affidavits at face value, examine it and draw conclusions from it and other uncontested evidence as to whether their opposition to the estoppel defence was justified. This we have sought to do. 129 If the material relied upon by Mr Connolly and Mr Watson to justify their continued opposition to the estoppel defence did not bear out that fact, and in our opinion it did not, then one can understand why, forensically speaking, it would be neither appropriate nor wise to cross-examine those witnesses in circumstances where responses may be elicited which might provide a basis for that continued opposition which, when the written material is examined, does not exist. 130 Accordingly, in our opinion the evidence contained in the costs affidavits of Mr Watson and Mr Connolly as to the basis upon which they continued to oppose the estoppel defence, when examined, and subject to one matter only, reveals what we consider to be an inappropriate continuation of that opposition. The one exception is Mr Watson's 10 April affidavit which was ultimately conceded to be incorrect. On the basis of that affidavit and given that in cross-examination Mr Connolly said that Mr Hughes QC was involved in its preparation as well as Ms Riger of his firm and Mr Morahan, and that Mr Hughes QC was supplied with the affidavit for the purpose of giving advice, it becomes apparent that, in truth, the continued opposition to the estoppel defence was only justified on the basis of the denials in that affidavit. 131 Given that the primary judge found that the errors in that affidavit arose as a consequence of "the taking of insufficient care", that of itself, in our opinion, is sufficient to fall within the principles adumbrated by Bowen LJ in Beddoe cited by his Honour in [97] of the costs judgment as requiring a finding that the continued expenditure of funds in opposition to the estoppel defence was relevantly improper. 132 However, we would go further. Although Mr Watson deposed in [102] of his costs affidavit that at the time he swore his 10 April affidavit, he believed that it was accurate and correct, Mr Connolly made no reference to that affidavit or the errors it contained in his evidence in the costs proceedings. He simply ignored it. Although in cross-examination he stated that he was not involved in its preparation, there can be no doubt that he must have been aware of it and, in any event, junior counsel was involved in its preparation as well as a solicitor in Mr Connolly's office. 133 Given the primary judge's finding that senior counsel for Mr Mead "had no difficulty in taking the liquidator to various pieces of contemporaneous documentation which showed that the statements in the affidavit were wrong,"

[39]

The Ex parte James defence in the winding up proceedings 135 The only proceeding in which the Ex parte James defence was advanced was in the application by Mr Mead in the winding up proceedings. In those and the liquidator's proceedings Mr Mead pleaded the estoppel defence. The application in the winding up proceedings by Mr Mead had the liquidator as a respondent and was brought to decide, as a matter of administration, whether the liquidator ought to persist in the claim that he was making with respect to the four properties. After discussing the authorities where a liquidator is a defendant, the primary judge found that in that circumstance the costs ordered against a liquidator were to be paid from the fund he administered "save in exceptional circumstances". It was this general principle which his Honour said (at [158]) was borne out by the costs orders which had been made in cases which had invoked the principle in Ex parte James. 136 There was no challenge by Mr Mead to the principle which his Honour adopted. However, it was submitted firstly, that the position of the Mr Watson as respondent to the application made by Mr Mead in the winding up proceedings was purely formal and had been provoked by his having lodged caveats against the properties in December 2001. Secondly, in substance Mr Watson was the moving party or the instigator of the dispute as Ex parte James had only been raised, in effect, as a further defence to the claims of the liquidator in the liquidator's proceedings. Thirdly, it was submitted that as both the estoppel defence and the invocation of the principle in Ex parte James by Mr Mead related, in effect, to the same factual matrix with respect to the four properties, reliance had been placed on both by Mr Mead in order to resist Mr Watson's claim in the liquidator's proceedings. Consequently, Mr Watson was in truth a plaintiff rather than a defendant. It was submitted that this was sufficient to constitute "exceptional circumstances" within the meaning of the authorities to which the primary judge had referred. 137 Mr Watson submitted that where proceedings are taken against a liquidator in connection with the administration of a winding up, it is frequently the case that the liquidator, given the obligation to protect and administer the fund in the interest of all creditors and contributories, has no practical choice other than to contest proceedings instituted against him or the company in liquidation. For that reason there is a special reluctance to order costs personally against the liquidator or otherwise to deny him the right to claim those costs out of the assets of the company. In the present case, given the finding of the primary judge that Mr Watson had acted reasonably in opposing the estoppel defence, it must follow that having complied with the lowest standard which governs the award of costs against a liquidator/plaintiff, the higher standard required to be achieved before a liquidator is denied his costs out of the assets of the company could not be satisfied. 138 There is no doubt that if his Honour was correct in his finding that Mr Watson was not acting, in the relevant sense, improperly or unreasonably in opposing the estoppel defence in the liquidator's proceedings, then clearly he was justified in resisting the Ex parte James claim in the winding up proceedings. However, in our opinion, his Honour's conclusion with respect to Mr Watson's opposition to the estoppel defence was in error. That finding withdrew one of the planks that underpinned Mr Watson's submissions on this issue. 139 Furthermore, in our opinion the circumstances of the present case, involving as it did both Mr Mead's application in the winding up proceedings and his defence in the liquidator's proceedings (in each case based upon the same factual considerations), warranted a finding that there were exceptional circumstances which, as a consequence of the finding that Mr Watson acted unreasonably in continuing his opposition to the estoppel defence, justified a finding that he should personally pay the costs of the application in the winding up proceedings. 140 There can be no doubt that the primary judge's conclusion that the present was not an appropriate case to order Mr Watson to pay personally the costs of the Ex parte James defence was based upon his concurrent finding that it was not an appropriate case to order Mr Watson to pay personally the costs of the estoppel defence. Once the latter finding is reversed it must follow that his Honour's discretion miscarried with respect to the costs of the Ex parte James defence. So much was eventually conceded by senior counsel for Mr Watson (see Tpt of argument p.64 (7-10)). 141 Mr Mead's application in the winding up proceedings was filed on 13 December 2001 and sought relief based upon the principle in Ex parte James that, as a matter of administration, Mr Watson ought not to persist in his claim to the four properties. This was because firstly, the assets of Hypec had been increased by virtue of Mr Mead's successful defence on behalf of Hypec of the claim by BL&GY in the common law proceedings and secondly, that had been achieved only because of the release of the four properties to enable the costs of that successful defence to be paid. 142 At all material times Mr Watson opposed Mr Mead's application to Einstein J to represent Hypec in defending the common law proceedings and, further, opposed the application to Sully J to set aside the default judgment. It was submitted by Mr Watson before the primary judge in the substantive proceedings that the incurring by Mr Mead of the expense of defending the common law proceedings on behalf of Hypec was unnecessary because, although the liquidator would have needed to have taken action to set aside the default judgment which BL&GY had obtained, once that had occurred it would have been open to the liquidator to call for proof of debts and then to reject BL&GY's proof. This was rejected by the primary judge in [190] of the substantive judgment. His Honour found that there was no real likelihood of that course being followed. This was because Mr Watson's approach had, prior to the hearing of the common law proceedings, been to accept what Mrs Mead told him - that his investigations were being funded by Mrs Yang (Mrs Mead's sister) who, like Mrs Mead, was a director and shareholder of BL&GY. His Honour found that funding was not likely to be continued if Mr Watson took a stand contrary to the interests of BL&GY. In any event, there was no reason to think that if BL&GY's proof of debt had been rejected by Mr Watson, that company would not have pursued its claim in the common law proceedings as in fact occurred. 143 Correspondence between Mr Watson and Mr Mitchell, the solicitor for BL&GY, Mrs Mead and Ms Yang bears out his Honour's finding. Thus, by letter dated 9 August 2001 Mr Watson noted that "Your client [BL&GY and Ms Yang] is not prepared to fund unnecessary additional legal costs, therefore can you please confirm the quantum that she is prepared to fund so as to deal with the Colin Mead matter."

[40]

The latter was a reference to Mr Mead's application to Einstein J for leave to represent Hypec in the common law proceedings. 144 Mr Watson was represented by counsel before Einstein J at the hearing on 17 August 2001. She opposed the granting of the application. As we have already observed in another context, comments made by Einstein J during the course of that hearing made it clear firstly, that Mr Mead needed to pursue his application to the Family Court for release of the properties for the purpose of funding the common law proceedings and, secondly, that the liquidator was opposing Mr Mead's application before Einstein J on the basis that he had no funds to secure any indemnity in favour of the liquidator in respect of any costs order that might be made against him in the common law proceedings. 145 It is clear that at that point of time Mr Watson had a conflict of interest. He was seeking funds from the principal of BL&GY whose default judgment against Hypec Mr Mead was seeking to have set aside so he could defend the common law proceedings on Hypec's behalf. Yet Mr Watson would not agree to the setting aside of that judgment in circumstances where he was being funded by that company and/or one or more of its shareholders. 146 Mr Watson wrote to Mr Mitchell on 11 December 2001 referring to a meeting of creditors on 17 July 2001 wherein the latter personally undertook on behalf of BL&GY to provide funds to the liquidator in the sum of $20,000. According to that letter, Mrs Mead had made clear to Mr Watson that the basis of any cross-claim by Hypec against BL&GY was without foundation. 147 On 17 September 2001 Mr Watson wrote to Mr Dominello indicating that further investigations of the state of accounts between Hypec and BL&GY supported Mrs Mead's contentions so that had he been asked to determine whether Hypec should apply to set aside the default judgment, he "would firmly say no". 148 Accordingly, Mr Mead submitted that Mr Watson resisted the Ex parte James defence on the basis that there would be no benefit to Hypec if the common law proceedings continued as he, Mr Watson, would reject BL&GY's proof of debt. Mr Watson therefore continued to oppose that defence on the false premise that he would reject the proof of debt. 149 In his costs affidavit Mr Watson indicated that, as he had made plain in his letter to Mr Mitchell of 11 September 2001, he had no intention of recognising BL&GY's default judgment as a proper proof of debt. He considered that "in due course" with the discovery of bank statements and cheques, all would be revealed. His opinion, therefore, was that any application to set aside the default judgment against Hypec was premature and possibly unnecessary. Having sworn an affidavit on 18 September 2001 that was used before Sully J in Mr Mead's application to set aside the default judgment, counsel was instructed to appear on Mr Watson's behalf on 19 September 2001 to inform Sully J of his position. 150 The difficulty with Mr Watson's explanation, such as it is, is that he (or Mr Connolly) must have been aware that the common law proceedings had been set down for trial commencing on 5 November 2001. It was then 19 September 2001. There is a gap in Mr Watson's evidence between the time Sully J ordered the default judgment to be set aside (25 September 2001) and 5 November 2001 apart from the fact that Mr Watson deposed that in October he was requested to provide a report for use in the upcoming common law proceedings relating to his then current investigations. However, he declined to do so upon the basis that he wished to maintain an independent position as between the parties. Nevertheless, in early November 2001 he attended conferences with legal representatives of both parties. 151 It is reasonably apparent that between 25 September 2001 and 5 November 2001, Mr Watson's investigations had not proceeded to the point where he had formed the view that BL&GY's claim against Hypec in the common law proceedings should be resisted - although it may be that he had a degree of misgiving with respect to the possible success of the cross-claim. In our opinion, the appropriate inference is that after the default judgment was set aside by Sully J on 25 September 2001, Mr Watson realised that the common law proceedings would proceed to a hearing and that, during the course of those proceedings, all would be revealed. In particular, he must have known that Hypec's financial records would be subjected to detailed analysis and that Mrs Mead and her sisters would be the subject of vigorous cross-examination. He therefore decided to await the outcome of those proceedings which, as we have already indicated, provided Mr Watson with a sufficient basis upon which to accept Mr Connolly's advice to place caveats against the titles to the subject properties and to institute the liquidator's proceedings for their recovery. However, the fact remained that as a consequence of standing by and allowing Mr Mead to conduct Hypec's defence in the common law proceedings, the indebtedness of Hypec to BL&GY disappeared to the benefit of the company. That was solely as a consequence of the efforts of Mr Mead and his legal advisors. 152 The foregoing is confirmed by Mr Connolly in his costs affidavit where, in [16] and [17], he deposed to receiving from Mr Dominello on 11 October 2001 the timetable set by the court for the preparation of the hearing of the common law proceedings and acknowledging that shortly before those proceedings commenced he advised Mr Watson to "watch the evidence given before Matthews and I believe from that I'll be able to advise you concerning the instituting of proceedings to recover the real estate."

[42]

Indemnity costs 155 We have already set out the principles adopted by the primary judge upon which indemnity costs may be ordered. The findings we have made with respect to the conduct of Mr Watson in the litigation and, in particular, in his unreasonable opposition to the estoppel defence and the Ex parte James defence with respect to the four properties is, in our opinion, of significance in our consideration of whether the circumstances were such as to warrant an award of costs on an indemnity basis. 156 Various epithets have been used in the cases to justify an award of indemnity costs as appears in the passages from the authorities referred to by the primary judge in [40]-[45] of the costs judgment. Such expressions include "some special or unusual feature", "persisting in what should have been seen as a hopeless case", "the undue prolongation of a case by groundless contentions", "delinquency in the conduct of the proceedings", "delinquency approaching that considered to justify special order as to costs", "knowledge of the party against whom such an award is sought that, promptly advised, he or she should have known their claim would fail", "totally frivolous and thoroughly unjustified defences". Of course, these categories are not closed. 157 In our opinion, had Mr Watson been properly advised and, in particular, had his 10 April affidavit been correct and had he and Mr Connolly been more attentive to Mr Mead's application to the Family Court in October 2001, they would have realised that their continued opposition to the estoppel defence and the Ex parte James defence was next to hopeless. Moreover, they would have realised that Mr Mead had conducted the common law proceedings in circumstances where not only had he sought and obtained an order from the Family Court releasing the four properties to enable their sale in order to fund those proceedings, but also that he had made that application and continued his conduct of the common law proceedings in the belief that there was no intention by the liquidator to claim a proprietary interest in those properties. The fact is that Mr Connolly simply forgot about the Family Court application. Although he deposed in his costs affidavit that he treated that application as one wholly without merit, he never took the obvious step of checking with Mr Dominello as to whether the application was proceeding so he could be represented at the Family Court hearing to oppose the application. He remained mute and allowed it to go ahead by default. 158 Furthermore, at no time did Mr Connolly write to Mr Dominello making it clear that the liquidator reserved his position with respect to claiming the properties in specie. No caveat was placed upon the properties prior to December 2001 for the reasons that Mr Connolly deposed to in [19] and [20] of his costs affidavit. He simply did not have a sufficient basis upon which to do so. There was nothing wrong with that: the problem was that neither he nor Mr Watson indicated to Mr Dominello and/or Mr Mead that the latter was at risk with respect to the four properties for, if evidence was elicited during the common law proceedings that they had been purchased with Hypec's funds so that they were held in trust by Mr and Mrs Mead for the company, then a claim would be made for their recovery in specie. 159 In our respectful opinion the disregard by Mr Connolly, and his disparaging of the merits, of the Family Court application was entirely misplaced and bordered on the reckless. Regrettably, it affected his and Mr Watson's conduct of the litigation that was thereafter instituted for the recovery of the four properties. Further, the conduct of Mr Connolly and Mr Watson when taken as a whole justifies a special order for costs against Mr Watson. Accordingly, in our view Mr Mead has made out a case for an award of costs on an indemnity basis.

At a glance

Court

Decision date

Before

Source

Judgment (45 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)