BETWEEN : NEWMARKET COURT PTY LTD (ACN 074 968 844)

Practice and procedure - Application to set aside default judgment - Turns on own facts

Patten v Burke Publishing Co Ltd [1991] 2 All ER 821

1 MASTER SANDERSON: This is the second defendant's chamber summons seeking to set aside a default judgment entered against him on 24 August 2001. To understand the nature of the application it is necessary to say something about the plaintiff's claim against the second defendant and to provide a chronology of events.

2 On 2 May 2001 the plaintiffs issued proceedings against the defendants. Prior to the issue of these proceedings the plaintiffs' solicitors had written to the second defendant at his address in Albany. This letter was not returned.

3 An amended statement of claim filed 10 September 2001 pleads the incorporation of the first plaintiff and pleads that it was from 25 September 1996 the trustee of the Newmarket Unit Trust. It is pleaded that in late 1996 the trustee purchased land in Boyd Crescent, Hamilton Hill and in April 1997, contracted with a third party to construct 10 residential units on the land. These units were strata titled and sold progressively so that by April 2001 the plaintiff was the registered proprietor of the one remaining unit. It is pleaded that the first-named second plaintiff was appointed as a director of the first plaintiff on 24 January 1997 and has continued to hold office since the date of his appointment. It is pleaded that the second defendant was appointed as a director on that same day, but resigned as a director on 24 April 1997. On that same day the second-named second plaintiff was appointed a director of the first plaintiff.

4 It is pleaded that as at 31 August 1998 the first-named second plaintiff, the second defendant and the third defendant each owned one share in the first plaintiff. It is said that on 3 September 1999 the second plaintiffs met as the first plaintiff's directors and resolved to allot 100 shares to each of them. On 19 August it is said that the third defendant purported to transfer his share in the first plaintiff to the first defendant. This, it is said, is contrary to cl 28 of the Memorandum and Articles of Association of the first plaintiff - the Memorandum and Articles require that a member wishing to transfer his share may only do so after giving notice of intention to the first plaintiff which in turn leads to a first right of refusal by other members of the company. At this stage the first-named second plaintiff claims that he held 101 shares in the first plaintiff and the second-named plaintiff says that he held 100 shares. The second defendant held one share in the first plaintiff and the first defendant claimed that he held one share, which had been transferred to him by the third defendant. The second plaintiffs say that transfer was invalid and that the first defendant was not a shareholder in the first plaintiff.

5 On 27 August 1999 the first and second defendants purporting to act as shareholders of the first plaintiff convened a special general meeting of the first plaintiff. Two resolutions were to be considered at that meeting. The first was a resolution to remove the second plaintiffs as directors and the second resolution was to appoint the first and second defendants as directors. The second plaintiffs say that the resolutions were put and defeated. They say the meeting was then closed and they departed. It is then pleaded that the first and second defendants purported to pass both resolutions in the absence of the second plaintiffs and subsequent to the purported passing of the resolutions lodged a Notice of Change of Office Holders with the Australian Securities and Investments Commission.

6 It is alleged that in March/April 2001 the first and second defendants, purporting to act as directors of the first plaintiff, sold the remaining unit registered in the name of the first plaintiff. It is said that the net proceeds of the sale of this unit were $90,000 and these proceeds have been retained by the first and second defendants. The plaintiffs seek certain declarations as to who were the directors of the first plaintiff at the material time, they seek directions as to the validity of the allotment of the 100 shares to each of the first and second-named second plaintiffs, and they seek an order that the first and second defendants account to the plaintiffs for the proceeds of sale of the unit.

7 On the same day the writ was filed the plaintiffs' solicitors wrote to the second defendant advising that proceedings would be issued and asking whether the second defendant would nominate solicitors to accept service of those proceedings. The letter was not returned to the plaintiffs' solicitors but, equally, there was nothing to indicate it had been received by the second defendant. Also on the same day the plaintiffs obtained an interlocutory injunction which, inter alia, required the first and second defendants to pay into court the proceeds of the sale of the unit.

8 On 7, 11, 14 and 19 May personal service of the proceedings was attempted at the second defendant's Albany address. All four attempts were unsuccessful. On 21 May 2001 the first defendant swore an affidavit stating that he had asked the second defendant to sign a withdrawal form to commit withdrawal of the funds from the sale of the unit into Court as ordered by the Court. The first defendant does not detail the conversation that he had with the second defendant. However, it is difficult to imagine that when the first defendant asked the second defendant to sign the necessary authority there was not some discussion as to why the authority was necessary.

9 Personal service was attempted again on 25 and 30 May 2001. Service was attempted at the second defendant's Albany address and was, on each occasion, unsuccessful. On 1 June 2001 the proceeds of the sale of the unit were paid into Court. It would seem then that the second defendant had signed the necessary authority.

10 Frustrated by their inability to affect personal service on the second defendant, on 8 June 2001 the plaintiffs' solicitors wrote to Michael Whyte & Co, a firm of solicitors acting for the second defendant in other proceedings. On 10 June 2001 they also wrote to Mr Beau Hanbury, a solicitor who appears to have had some dealings with the second defendant. In both letters the plaintiffs' solicitors asked whether the recipient would accept service of proceedings on behalf of the second defendant. Both Michael Whyte & Co and Mr Hanbury replied that they would not accept service. Faced with these two refusals and their inability to effect personal service, the plaintiffs sought and obtained an order for substituted service from Master Bredmeyer on 27 June 2001. That order required that the writ of summons and the order of 3 May 2001, for payment into court, be sent by pre-paid post to Michael Whyte & Co and to Mr Hanbury. Neither of these two parties returned the documents to the plaintiffs. There is no dispute that the plaintiffs complied with the order for substituted service and that consequently service on the second defendant is regular.

11 No appearance was entered by the second defendant and on 25 July the plaintiffs filed a chamber summons seeking judgment against the second defendant. The matter came on in chambers and on 24 August I ordered judgment for the plaintiffs against the second defendant. Relevantly, the judgment is in the following terms:

"1. ...

2. The second defendant do pay the first plaintiff damages in the sum of $10,747.52, together with interest thereon at a rate of 6% per annum from 24 April 2001 to judgment in the sum of $215.53.

3. The Court declares as against the second defendant that the second plaintiffs have been since 24 April 1999 and remain the directors of the first plaintiff as at 2 May 2001.

4. The Court declares that the second defendant is not and never has been a director of the first plaintiff.

5. The second defendant be restrained from holding himself out to be a director of the first plaintiff and from lodging with the Australian Securities & Investments Commission any notice purporting to record his appointment as a director of the first plaintiff.

6. ..."

12 The plaintiffs then drafted a Bill of Costs and forwarded it to the second defendant via facsimile. Finally, the second defendant was stirred into action. On 25 September 2001 the present application was issued. The matter came on before Justice Roberts-Smith on 27 September. His Honour made the following orders:

"1. Until further order there be a stay of execution of the judgment entered on 24/8/2001 save in relation to taxation of costs listed for 28/9/2001.

2. Plaintiffs have leave to cross-examine the second defendant on his affidavit sworn 25/9/2001.

3. This application otherwise stand adjourned to a special appointment before a Master, to be expedited.

4. Costs of today be reserved."

13 At the commencement of the hearing of this application counsel for the second defendant tendered a further affidavit of the second defendant sworn 16 October 2001. Counsel for the plaintiffs did not object to the tendering of the affidavit itself but did object to certain parts of that affidavit. He also objected to certain parts of the second defendant's earlier affidavit. I dealt with the objections during the course of the hearing and struck out parts of both affidavits. Essentially I did so on the basis that the material was either irrelevant, conclusory or did not comply with the requirements of O 37 r 6. The second defendant was then cross-examined in relation to both of these affidavits.

14 Given the conclusion that I have reached in relation to this matter it is unnecessary for me to say too much about the cross-examination of the second defendant. Essentially counsel for the plaintiffs attacked the second defendant on his evidence that he had not been aware of these proceedings prior to summary judgment being entered against him. Under cross-examination the second defendant was evasive, his answers were inconsistent and I found him to be entirely lacking in credibility. In short, I did not find him a witness of truth. I would reject entirely his evidence to the effect that these proceedings did not come to his attention prior to the entry of default judgment. In the event, nothing turns on my findings as to the second defendant's credibility, save with respect to costs, an issue I will deal with below.

15 The second defendant sought to set aside the default judgment both on the basis that the judgment was irregular and if the judgment was regular, on the basis that he had a defence to the claim.

16 Dealing first with the submission that the judgment was irregular, it was said that the judgment itself was defective in three ways. First, it was said that the judgment included an assessment of damages when, under the provisions of O 13 r 7(1), the plaintiffs' claim being for unliquidated damages, there should have been judgment with an order that damages be assessed. In other words, it was said that the entry of judgment did not comply with the Rules.

17 The answer to this submission is, I think, to be found in O 13 r 8(1). It is clear this is the rule which applies to this case. That being so, the plaintiff was required to apply for judgment by notice of motion. That is what the plaintiffs in this case did. That allowed for an assessment of damages when the notice of motion came on for hearing. Rule 7 does not anticipate a motion for judgment. This is the significant difference between the two rules. Moreover, there was no suggestion that the amount of damages assessed was in any way in error. The second defendant's argument on this question fails.

18 Secondly, it was said that as a general rule a court will not make a declaration on a default judgment. In support of this proposition reference was made to the decision of Bass & Anor v Permanent Trustee Co Ltd & Ors [1999] HCA 9; (1999) 198 CLR 334. At 356 the majority (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ) cite with approval what was said by Lord Goff of Chieveley in In Re F (Mental Patient: Sterilisation) [1991] UKHL 1; [1990] 2 AC 1 at 82. His Lordship stated there that a declaration would not be made without proper argument. Such as is the case when judgment is given in default of defence. Neither Bass nor In Re F raise directly the question of whether or not declarations can be obtained by default. In any event, in this case the judgment was not obtained by default in the usual sense. The second defendant had been served and did not appear. The plaintiffs then moved for judgment and supported their application by affidavit. When the matter came on the plaintiffs argued that judgment should be entered and they were successful. In those circumstances I can see no reason why default judgment, so called, cannot be entered. Were the position otherwise a defendant could always resist a claim for a declaration simply by refusing to enter an appearance to a writ. Again, this submission by the second defendant fails.

19 Finally, it was said that the judgment entered was beyond the scope of what was sort in the statement of claim. By par 4 of the judgment the plaintiffs obtained a declaration that the second defendant "is not and never has been a director of the first plaintiff". Counsel for the second defendant pointed out that the amended statement of claim pleads (by par 7) that the second defendant was appointed a director of the first plaintiff on 24 January 1997. The relief claimed in par 24.2 of the amended statement of claim, which is reflected in par 4 of the judgment, is inconsistent with that plea. There is an obvious inconsistency between the pleading in the amended statement of claim, the prayer for relief and the judgment. However, the plaintiffs plead that the second defendant resigned his office as a director of the first plaintiff on 24 April 1997. It is the events subsequent to the alleged date of the resignation of the second defendant as a director of the first plaintiff which are relevant in this application. Given the nature of the inconsistency between the statement of claim and par 4 of the judgment, I would be prepared to allow any necessary amendment to the judgment under the provisions of the slip rule: see O 21 r 10. Assuming an application for amendment were made, this argument put by the second defendant falls away. The judgment then is regular.

20 The basis upon which a judgment regularly entered will be set aside was considered by the Full Court in Palmer v Prince [1980] WAR 61. Jackson CJ, with whom Virtue SPJ agreed, put the position as follows (at 62):

"The general rule is that where a judgment has been regularly entered, it is not to be set aside unless the court is satisfied that there is a defence on the merits ...

It is also important, because it is relevant to the exercise of the court's discretion, that a defendant seeking to have a judgment against him set aside should explain his failure to comply with the rules and the delay (if any) in making the application."

21 In my view the interests of justice in this case require that the default judgment be set aside. There are a number of matters raised by the second defendant in support of his application to set aside the judgment. One at least of these arguments has some strength. It is pleaded by the plaintiffs that on 3 September 1999 100 shares in the first plaintiff were issued to each of the first-named and the second-named second plaintiffs. That was said to be done pursuant to cl 4 of the Memorandum and Articles of Association of the first plaintiff. Clause 4 of the Memorandum and Articles (which appears as annexure "KB4" to the affidavit of the second defendant sworn 25 September 2001), does indeed authorise such a share issue. However, that clause is subject to the provisions of s 254D of the Corporations Act. Section 254D(1) reads:

"Before issuing shares of a particular class, the directors of a proprietary company must offer them to existing holders of shares of that class. As far as practicable, the number of shares offered to each shareholder must be in proportion to the number of shares of that class that they already hold."

22 It is possible for a company by a resolution passed at a general meeting to authorise directors to make a particular issue of shares without complying with subs (1): See s 254D(4). However, there is no evidence that this was done. Prima facie then, the issue of these shares to the second-named plaintiffs was invalid. This has flow-on affects to other aspects of the plaintiffs' claim.

23 Moreover, on the evidence as it stands at present it is difficult to see how the issue of shares to the second plaintiffs could be justified. It had the effect of changing control of the company from the second and third defendants to the second plaintiffs. It may be at trial the plaintiffs will be able to establish that there were perfectly valid and proper reasons for their adopting such a course. However, it is at least arguable that such conduct on the part of the directors was oppressive to the second defendant, providing him with a right of action which he should be permitted to raise in these proceedings.

24 In the circumstances I am satisfied that the justice of the situation requires the judgment be set aside. I have already made comment upon the failure of the second defendant to adequately explain why no appearance was entered to these proceedings and his lack of voracity on this question. So far as this raises a discretionary consideration, it weighs heavily against the second defendant and his application to set aside the default judgment. But on balance I think it is proper that the second defendant should have the opportunity to put his defence.

25 In relation to the exercise of discretion there is one further matter which I should mention. The plaintiffs' action against the first defendant has been entered for trial. The setting aside of this default judgment and the grant of leave to the second defendant to defend the proceedings will necessarily delay the trial of the action. When considering whether or not the default judgment ought be set aside, that is a factor that I have taken into account. Even so I am satisfied that the judgment should be set aside.

26 Having reached that conclusion it is a question of the form of the orders and as to costs. At the hearing of this application neither counsel addressed the question of costs. Subject to hearing from counsel I am of the view that the appropriate order in this case is that the second defendant should pay all of the costs incurred by the plaintiffs in attempting service of the proceedings and all of the costs associated with the application to set aside the default judgment. These costs should be taxed on a full indemnity basis with the effect that the plaintiffs are indemnified as to all their costs, save insofar as their costs were unreasonably incurred. The costs should be taxed and paid forthwith.

27 I will hear submissions in relation to costs and as to the form of the order.