Plaintiffs v Defendant

Kallinicos v Hunt [2005] NSWSC 1181, followed.

Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501, considered.

1 The first plaintiff ("Adam 12") is in liquidation. The second plaintiff, Mr Horne, is its liquidator. Until 16 May 2005 Adam 12 was the trustee of a discretionary trust named the "Adam Clark Family Trust". That trust was established pursuant to a deed dated 12 April 1999 and, as its name suggests, is associated with Mr Adam Clark and his family.

2 In March 2004, Adam 12, in its capacity as trustee of the trust, engaged the services of Ernst & Young Transaction Advisory Services Limited.

3 By an application dated 28 February 2005, issued out of the Sydney registry of the Federal Court, an applicant described as "Ernst & Young Limited" but with the ACN of Ernst & Young Transaction Advisory Services Limited, applied to wind up Adam 12. The application was founded on a statutory demand served on Adam 12 requiring payment of the sum of $275,000 said to be due for professional services. That statutory demand had also named the creditor as "Ernst & Young Limited". Mr Barrie Goldsmith, of the New South Wales firm of solicitors Goldsmiths, acted for Adam 12 in that proceeding until 19 May 2005 when a Notice of Ceasing to Act was filed. A winding up order was made on 10 June 2005.

4 On 16 May 2005, three days before Mr Goldsmith filed the Notice of Ceasing to Act, Adam 12 was removed as trustee of the Adam Clark Family Trust and was replaced by the defendant to this proceeding, Eat & Drink Holdings Pty Ltd ("Eat & Drink Holdings"). Eat & Drink Holdings has Victorian solicitors on the record, but Mr Goldsmith at Goldsmiths is also acting for Eat & Drink Holdings in this proceeding.

5 By a summons filed 17 March 2006, the plaintiffs have applied for an order that Eat & Drink Holdings be restrained from "receiving advice" from Goldsmiths in these proceedings.

Allegations in this proceeding.

6 In this proceeding Adam 12 alleges, among other things, the existence of the debt for $275,000, and asserts a right of exoneration entitling it to an equitable charge over specified trust property transferred to Eat & Drink Holdings. Mr Horne alleges that the transfer of specified trust property was an uncommercial transaction within the meaning of s.588FB of the Corporations Act ("the Act"), an insolvent transaction within the meanings of s.588FC of the Act, an unreasonable director-related transaction within the meaning of s.588DA of the Act, and a voidable transaction within s.588FE(2) or 588FE(6A) of the Act.

7 A defence and counterclaim dated 23 December 2005 was filed on behalf of Eat & Drink Holdings on 16 January 2006. A proposed amended defence and counterclaim has since been faxed to the solicitors for the plaintiffs by Goldsmiths. This proposed pleading was handed to me by counsel for the plaintiffs without objection on the hearing of this application.

8 The defence and counterclaim as filed, and the amendment proposed, contain the following relevant matters:

(a) The debt to Ernst & Young Transaction Advisory Services Pty Ltd is denied on the basis that the fee in question was never earned(paras 5, 10, 13(d)).

(b) It is alleged that the asset transferred to Eat & Drink Holdings occurred as a consequence of the replacement of Adam 12 as trustee, and on that ground it is denied that the transfer was a transaction a reasonable person would not have entered into (para 11(b)), and it is positively alleged that it is a transaction a reasonable person would have entered into (para 12(a) and 16(b)).

(c) Eat & Drink Holdings denies Adams 12 was insolvent at the time of the transaction, or became so as a result of the asset transfer (paras 13(b) and (c)).

(d) There is an estoppel plea (paras 19-31) which is not easy to comprehend, but which is premised upon the misdescription of the creditor in the statutory demand, an asserted failure by Adam 12 to set aside that demand in reliance upon its knowledge of that misdescription and alleged prejudice related to reliance upon "the statutory demand as the basis of the winding up application" (see, particularly, para 29).

Role of Goldsmiths.

9 Goldsmiths are not the solicitors on the record, but it is clear from the material deposed to and, indeed, from the material on the court file, that that firm, and Mr Barrie Goldsmith in particular, is acting on behalf of Eat & Drink Holdings in this proceeding. In a letter to the court dated 22 February 2006 concerning an earlier interlocutory hearing, Mr Goldsmith wrote:

"We are the Sydney solicitors for the defendant. Our Melbourne agents, Kalus Kenny, who are on the record as acting for the defendant, are acting pursuant to our instructions."

I refer also to the letters from Goldsmiths to the plaintiffs' solicitors forming part of exhibit "LVF1" to the affidavit in support of this application sworn by Leneen Veronica Forde on 17 March 2006, and in particular to the letters dated 1 December 2005, 9 December 2005, 15 December 2005, 19 December 2005, 10 February 2006 and 22 February 2006.

10 On this application counsel for Eat & Drink Holdings did not seek to contend that Goldsmiths were not relevantly acting as Eat & Drink Holdings' solicitors in this proceeding and, save for a submission as to the applicable principles to be applied, did not contend that there was any significance in the fact that there are Victorian solicitors on the record for Eat & Drink Holdings whilst Goldsmiths are acting for Eat & Drink Holdings from their offices in Sydney.

11 It is also clear that in the Federal Court winding-up proceedings, Mr Goldsmith and Goldsmiths acted as the solicitors for Adam 12. In the first letter Mr Goldsmith wrote to the applicant's solicitor in that proceeding, which is dated 23 March 2005, he began by stating: "We act for Adam 12 Holdings Pty Ltd".

12 Mr Goldsmith filed a Notice of Appearance on behalf of Adam 12 on 1 April 2005 in the Federal Court proceeding. He corresponded with the solicitors for the applicant in that proceeding, contending, amongst other things, that the application was flawed due to the manner in which the statutory demand and the application had named the creditor. He appeared on behalf of Adam 12 at at least one directions hearing, he corresponded with the applicant's solicitors as to interlocutory and procedural matters, and he eventually filed the Notice of Ceasing to Act.

13 Mr Goldsmith has sworn an affidavit on 30 March 2006 in response to this application. It is necessary to set out the relevant parts of that affidavit which deal with his role in the Federal Court proceeding and the transfer to Eat & Drink Holdings.

"13. On 22 March 2005, Adam Clark telephoned me. He told me that Adam 12 Holdings had been served with an application to wind up the company. The only other information given to me by Adam Clark in relation to the Federal Court proceedings was that;-

(a) Adam 12 Holdings had been served with a statutory demand;

(b) Adam 12 Holdings had not taken any action in relation to the statutory demand;

(c) Adam 12 Holdings disputed liability for the debt;

(d) Ernst & Young had not done the work for which it now sought payment; and

(e) there was some uncertainty as to which Ernst & Young entity was owed money, if any was owing.

14. Adam Clark told me that he would forward to me a bundle of emails and documents relating to his dealings with Ernst & Young. Adam Clark initially instructed me to take steps to defend the Federal Court proceedings and to oppose an application that Adam 12 Holdings be wound up. I gave Adam Clark certain advice in relation to the winding-up proceedings.

15. In about mid-May 2005, I was instructed by Adam Clark to file a Notice of Ceasing to Act in the Federal Court proceedings.

16. In early May 2005, Adam Clark telephoned me about the replacement of Adam 12 Holdings as trustee of the Adam Clark Family Trust. He gave me only the following information:

(a) That Adam 12 Holdings was the existing trustee;

(b) That the trust was established by deed dated 12 April 1999;

(c) That he wanted to replace Adam 12 Holdings as trustee; and

(d) That a new company would become trustee.

He instructed me to prepare a deed appointing a new trustee of the Adam Clark Family Trust. I then prepared a draft deed which I sent to Adam Clark. The deed did not include the name of the new trustee, as I was not aware of its identity at that time.

17. I did not receive any instructions from Adam Clark or anybody else to do any work in connection with the transfer of the shares in Like-minded People Pty Ltd ("the shares") from Adam 12 Holdings to Eat & Drink Holdings. I did not prepare the transfer form. Annexed hereto and marked "F" is a copy of the share transfer form dated 16 May 2005. I did not see this form until after Stirling Horne was appointed liquidator of Adam 12 Holdings.

18. Apart from the instructions deposed to by me in this affidavit, and the documents prepared by me in the letters sent and received by Goldsmiths Lawyers, I have no independent knowledge of the background facts and circumstances leading up to these proceedings. Apart from responding to Leneen Forde's affidavit, I have no independent knowledge of any of the relevant facts, matters and circumstances which are the subject of these proceedings."

14 Mr Goldsmith does not say what advice he gave Adam Clark. He does not say whether he received the bundle of emails and documents to which he referred.

15 Letters forming part of "LVF1" record that Mr Goldsmith explained to a Registrar of the Federal Court on 15 April 2005, in the winding-up proceeding, that the winding-up was opposed because the applicant "does not legally exist", because Adam 12 was solvent, and because there was a genuine dispute. On 18 April 2005, Mr Goldsmith advised the applicant's solicitors in the Federal Court winding up proceeding that his firm was "proceeding to prepare a notice of opposition and also an affidavit in answer". Eat & Drink Holdings' written outline on this application asserted that Adam Clark "sent Barrie Goldsmith a bundle of emails and documents relating to his dealings with Ernst & Young Transaction Advisory Services Limited" (para. 9(d)).

The competing contentions.

16 The plaintiffs contended that there are three grounds upon which the order they seek should be made. First, they relied on Nettle J's articulation of the ground concerned with protection of a former client's confidential information in Sent & Anor v. John Fairfax Publishing Pty Ltd & Anor[1]. Nettle J said:

"Authority establishes that the court will restrain a legal practitioner continuing to act for a party to litigation if a reasonable person informed of the facts might reasonably anticipate a danger of misuse of confidential information of a former client, and that there is a real and sensible possibility that the interest of the practitioner in advancing the case in the litigation might conflict with the practitioner's duty to keep the information confidential and to refrain from using that information to the detriment of the former client."[2]

17 Secondly, they relied on Brooking JA's analysis in Spincode Pty Ltd v. Look Software Pty Ltd[3], concerning a fiduciary duty of loyalty which prevents a solicitor from acting against a former client in the same or a closely related matter.

18 Finally, they relied upon what was submitted to be the court's inherent jurisdiction to ensure the due administration of justice, as referred to in Grimwade v. Meagher & Ors[4], in Spincode and in Sent. In this context the plaintiffs submitted that the relevant test is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice required that the legal practitioner be prevented from acting.

19 In relation to the issue of confidential information, the plaintiffs contended that it is clear Mr Goldsmith was given instructions by Mr Adam Clark, when acting in his capacity as Adam 12's solicitor, concerning the debt and concerning the statutory demand, and that Mr Goldsmith gave advice in response. The plaintiffs submitted that these matters are relevant to issues in this proceeding, in particular the controversial issue as to the existence of the debt, and the allegation of estoppel.

20 It was submitted on their behalf that there is a danger of misuse, and a sensible possibility that there will be a conflict between Mr Goldsmith's duty of confidentiality and his duty to advance Eat & Drink Holdings' case.

21 In relation to the other grounds, the plaintiffs submitted Mr Goldsmith was acting against his former client in a closely related matter, and that he was himself a potential witness.

22 Eat & Drink Holdings in its written outline contended that Mr Goldsmith did not act for or advise Adam 12 about either the retainer of Ernst & Young (to use an ambiguously neutral expression) or about the statutory demand. It submitted that he acted for Adam 12 in the Federal Court winding-up proceeding, but that the advice given was to Adam Clark, who was the appointor of the Adam Clark Family Trust.

23 Eat & Drink Holdings submitted that whilst Mr Goldsmith drew a draft deed of appointment on Adam Clark's instructions, he had no knowledge of, or involvement in, any transfer of trust property. The written outline on behalf of Eat & Drink Holdings did not make it clear whether it is accepted that Mr Goldsmith has confidential information or not, but what was submitted was that Mr Goldsmith "received no confidential information from Adam 12 Holdings which did not belong equally to the new trustee, Eat & Drink Holdings".

24 In oral submissions, counsel for Eat & Drink Holdings amplified this aspect of the submission. He submitted that there was no true issue here of disclosure of confidential information, as Eat & Drink Holdings and the Clark family were already in possession of all of the information which Mr Goldsmith might have.

25 Eat & Drink Holdings submitted that there is no duty of loyalty to a former client, as suggested in Spincode, in New South Wales, and that Goldsmiths' conduct should be assessed by reference to the law in that state. It submitted that the relevant test in New South Wales is based upon the risk of disclosure of the former client's confidential information alone. In this respect, the decision of Bergin J in Asia Pacific Telecommunications Ltd v. Optus Networks Pty Ltd[5], was relied upon, together with the two decisions of Young CJ, in Equity, cited in that decision.

26 The outline of contentions filed on behalf of Eat & Drink Holdings also submitted that "in reality" Mr Goldsmith has continued to act for the trustee of the Adam Clark Family Trust throughout, and that there has been no relevant "changing of sides".

27 By a letter dated 24 February 2006, the plaintiffs' solicitors forwarded to Mr Goldsmith an authority by Adam 12 requiring Goldsmiths to release the files held in relation to the Federal Court proceeding and the asset transfer. Mr Goldsmith's response by a letter dated 7 March 2006 was to assert that the documents sought were "trust documents". The letter went on to state that photocopies of the Federal Court proceeding documents would be provided, but "subject to a claim for legal and professional privilege by Adam Clark and the trustee of the Adam Clark Family trust".

28 The plaintiffs submitted on this application that the court should not sanction a solicitor refusing to disclose to the client the advice he gave, and, depending upon what that advice might be revealed to be, the plaintiffs foreshadowed the possibility of an amendment to rely on s.588FE(5) of the Act, which concerns transactions undertaken for the purpose of defeating or delaying creditors. Eat & Drink Holdings submitted that the privilege issue was a separate issue which the plaintiffs could and should pursue on a separate application.

The confidential information ground.

29 There was no controversy before me as to the principles applicable on this ground, although it was submitted by counsel on behalf of Eat & Drink Holdings that the fact situation here was not relevantly similar to that existing in any of the cited cases.

30 It seems to me that on any view Mr Goldsmith was given instructions whilst acting as Adam 12's solicitor on the issues of service of the statutory demand, action taken by Adam 12 in response, liability for the $275,000 debt, and the identity of the creditor. According to the written outline filed on behalf of Eat & Drink Holdings, he was also given a bundle of emails and documents relating to the dealings with Ernst & Young. The correspondence in relation to the Federal Court proceeding also leads me to conclude that he must have had at least some instructions as to Adam 12's solvency.

31 All of these matters are now in issue between Eat & Drink Holdings as the new trustee, and Adam 12 as the outgoing trustee, in this proceeding. Save for the issue raised orally by counsel for Eat & Drink Holdings, as to the Clark family and Eat & Drink Holdings already being in possession of all of the relevant information, I must say that it seems to me to be obvious that there is a danger of misuse and a sensible possibility of conflict as referred to by Nettle J.

32 As to the submission that the Clark family and Eat & Drink Holdings already have the confidential information, I do not think that alters the position.

33 First, the problem is not just disclosure, it is misuse. If Mr Goldsmith continues to act, there is a danger of continuous misuse of the knowledge he gained whilst acting for Adam 12 in the formation of and conduct of Eat & Drink Holdings' defence. It is neither necessary nor productive to say exactly how this might occur. The misuse might be subconscious. The risk of misuse is enough, and it seems to me that the risk exists here.

34 Second, I do not consider that it is clear that there is nothing known to Mr Goldsmith which is not also already known to Mr Adam Clark, the Clark family and Eat & Drink Holdings.

Public policy.

35 The submissions put on behalf of Eat & Drink Holdings proceed on the unstated assumption that the rejection in New South Wales of the duty of loyalty articulated by Brooking JA in Spincode, also constitutes a rejection of the court's ability to intervene so as to restrain a legal practitioner where it is necessary to do so in the interests of the administration of justice.

36 For reasons which are set out in considerable detail by Brereton J in Kallinicos v. Hunt[6], in my view that is not so. In New South Wales, as in Victoria, the court will intervene when, in the words of Brereton J in Kallinicos:

"A fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice."[7]

As was pointed out by his Honour in that case, intervention on this ground is exceptional and is only to be undertaken after giving due weight to the public interest in a litigant not being deprived of the lawyer of his or her choice.

37 In Kallinicos itself, an order was made restraining a solicitor from continuing to act, not because he held confidential information, which he did not, or because he had previously acted for the opposite party, which he had not, but because his personal involvement in the transactions which were the subject of the proceeding had been such as to render it likely that he would be a material witness, and that his conduct would be challenged. In the circumstances there, the court held that an informed member of the public would conclude that the solicitor's independent objectivity had been compromised by conflicts between loyalty to his client on the one hand, and his role as a witness and his personal interest in the outcome referable to the possible challenge to his own conduct on the other.

38 In my view, a relevantly similar position has arisen here. Mr Goldsmith is a potential witness. It seems to me that a challenge to his conduct is a possibility. Here, these circumstances are combined with the fact, not present in Kallinicos, that Mr Goldsmith was at the time acting for the company which is now the opposite party. In my view, a fair-minded, reasonably informed member of the public would conclude that these circumstances so compromise Mr Goldsmith's independent objectivity as to require the court's intervention in the interests of protecting the administration of justice and the appearance of justice.

39 The position in Kallinicos was not the same as the position here. The circumstances in Kallinicos were that the solicitor was a material witness whose conduct was likely to be challenged. In this case, it is not as clear that Mr Goldsmith will be a witness, or that his conduct will be challenged. But the potential for that to occur does exist, and it is combined here with the fact that at the relevant time he was acting for the opposite party.

Duty of loyalty.

40 Like Nettle J in Spincode, if it were necessary to resolve the difference between New South Wales and Victoria, I would choose to follow Brooking JA's analysis in Spincode. Given my findings on the other grounds, it is not necessary to do so. If the principle does apply, it would be an additional reason why the court should intervene to prevent Mr Goldsmith from continuing to act here in what is clearly a closely related matter to the matter in which he formerly acted for Adam 12.

Form of order.

41 The order sought is an order against the defendant, not against Goldsmiths or Mr Goldsmith. In this respect the application reflects the approach taken in Spincode. No point was taken on this application in that regard on behalf of Eat & Drink Holdings.

42 I will hear the parties on the appropriate form of order consistent with these reasons, and on any question of costs.

[1] [2002] VSC 429 ("Sent").

[2] [2002] VSC 429 at [33].

[3] [2001] VSCA 248; (2001) 4 VR 501 ("Spincode").

[4] [1995] VicRp 28; [1995] 1 VR 446.

[5] [2005] NSWSC 550.

[6] [2005] NSWSC 1181 ("Kallinicos")

[7] [2005] NSWSC 1181 at [76]