Plaintiffs v Defendants

2 Rata and GHA are companies in the Godfrey Hirst group, which is engaged in the business of manufacturing, wholesaling, distributing and exporting carpets.

3 The shares in Rata are held by trusts associated with the plaintiffs, the third, fourth and fifth defendants.[1] Rata owns approximately 98.2% of the issued shares in GHA. The first plaintiff owns approximately 1.8% of the issued shares in GHA. The first plaintiff, Ms Sharp, and the fourth defendant, Rudyard Grant McKendrick, are siblings and directors of Rata.

4 By originating process filed on 18 April 2013, the plaintiffs commenced a proceeding seeking relief under Part 2F.1 of the Corporations Law. In affidavits filed in support, the plaintiffs apply to the court for relief from oppression, alternatively for orders for the compulsory purchase of the interests of the plaintiffs in Rata and of the interests of the first plaintiff in GHA.

5 On 26 April 2013, Norton Gledhill filed an appearance in the proceeding for the third defendant RGMC Pty Ltd (a company controlled by Mr McKendrick)[2] and the fourth defendant, Mr McKendrick.[3] Subsequently, Norton Gledhill filed appearances on behalf of the first and second defendants. The fifth defendant, Geoffrey Robert McGee,[4] has filed an appearance. Mr McGee is separately represented.

6 In substance, the plaintiffs allege that Mr McKendrick is conducting the affairs of Rata and GHA in an oppressive manner and contrary to their interests.

7 For present purposes it is sufficient to state the key allegations of the plaintiffs.

(a) a third director, Ms Pauling, was recently appointed to the board of Rata. The plaintiff contends that the Power of Appointment was exercised by Mr McKendrick for the improper purpose of giving Mr McKendrick effective control of Rata;[5]

(b) In October 2012, Mr McKendrick proposed a rights issue by Rata to raise capital at an undervalue. The plaintiffs are concerned that they would not be in a financial position to take up rights offered to them, with the consequence that Mr McKendrick would be able to enlarge his shareholding and therefore his control;[6]

(c) Mr McKendrick has said he proposes to establish a carpet business in competition with GHA which the plaintiffs contend is in breach of duties owed to Rata and/or GHA;[7] and

(d) Companies owned and controlled by Mr McKendrick have bought properties which have either been sold or leased to GHA. GHA has expended money in making improvements to some of these properties, enhanced their value then caused the GHA or its subsidiaries to buy the properties.[8] Ms Sharp deposes that pursuant to these transactions her brother (through various entities) has earned in excess of $10 million from GHA or its subsidiaries.[9] The plaintiffs contend that these related party transactions were not and are not in the best interests of the company and were for Mr McKendrick's personal gain.

8 Mr McKendrick denies any allegations of impropriety. In substance, he deposes that:

(a) Ms Pauling is a suitable appointee, and was appointed as a director properly and in accordance with the constitution of Rata;

(b) that no decision has been made by Rata to effect a rights issue;

(c) before a decision could be made, the Godfrey Hirst group would need to make a final determination about its capital needs and sources of funding, and obtain advice about the value at which any shares to be issued should be issued;

(d) no step has been taken to implement a rights issue as GHA is still determining commercial matters which impact on the need for any rights issue;[10] and

(e) Mr McKendrick has no intention to set up a business in competition with the Godfrey Hirst group.

9 Mr McKendrick does not respond to the allegations concerning related party transactions in his affidavit though this issue was addressed in written submissions. For present purposes I assume that Mr McKendrick denies any breach of directors duties concerning those transactions.

10 In support of their application for interlocutory relief the plaintiffs rely on the Court's inherent power to restrain the conduct of its officers and the principle that lawyers owe a fiduciary duty of loyalty to their client. In particular, the plaintiffs submit that Norton Gledhill should be restrained from acting for Rata and GHA because:

(a) it is not, and will not be, able to discharge its fiduciary duty of loyalty to the companies while also acting for RGMC and Mr McKendrick in the proceedings; and

(b) it is not consonant with the maintenance of confidence in the administration of justice that a solicitor should represent, or be seen to represent, an adversary and an entity in which adversaries hold interests, without their consent, in circumstances where dealings affecting those interests are in issue.

11 I will deal with the administration of justice ground first.

12 The principles applicable to the public policy of ensuring the due administration of justice are uncontroversial. In Grimwade v Meagher, Mandie J considered statements of principle in New Zealand, New South Wales, Western Australian and Canadian cases and held that the court has an inherent jurisdiction to ensure the due administration of justice and to protect the integrity of the judicial process and as part of that jurisdiction, in an appropriate case, to prevent a member of counsel appearing for a particular party in order that justice should not only be done but manifestly and undoubtedly be seen to be done.

13 His Honour held that the objective test to be applied in the context of such a case is:

whether a fair-minded reasonably informed member of the public would conclude that the proper administration of justice required that counsel be so prevented from acting, at all times giving due weight to the public interest that a litigant should not be deprived of his or her choice of counsel without good cause.[11]

14 Grimwade v Meagher has been approved in subsequent decisions of this Court, including the Court of Appeal in Spincode Pty Ltd v Look Software Pty Ltd,[12] Nettle J in Sent and Primelife Corporation Ltd v John Fairfax Publications Pty Ltd,[13] Judd J in Commonwealth Bank of Australia v Kyriackou,[14] and Hollingworth J in Christopher Anthony Dale v Clayton Utz.[15] The principle applies equally to solicitors.

15 It is convenient here also to refer to Kallinicos v Hunt,[16] in which Brereton J comprehensively examined the authorities concerning the Court's supervisory jurisdiction over legal practitioners.

16 A number of authorities cited in Kallinicos referred to the principle that a solicitor owes a duty to the court, to the "public element" in the work of a solicitor as an officer of the court and to the need to uphold as a matter of public policy the "special relationship of solicitor and client" as reasons to justify intervention on the basis of the Court's supervisory jurisdiction .[17] In Oceanic Life Ltd v HIH Casualty and General Insurance Ltd, Austin J said that:

In addition to fiduciary duties and the duty not to misuse confidential information, a solicitor who acts in litigation owes a relevant legal duty to the court, as well as an ethical duty. The duty to the court arises from the court's concern that it should have the assistance of independent legal representation for the litigating parties: see D A Ipp, 'Lawyers' Duties to the Court' (1998) 114 LQR 63, 93. In the realm of conflicts of interest and conflicts of duty, the solicitor's duty to the court may not be much different from his or her fiduciary duties to former and present clients. However, the duty to the court tends to be expressed in such a way as to emphasise the public interest in preserving confidence in the administration of justice, and therefore in the appearance as well as the reality of independence, and the court's practical approach to its supervisory discretions (citations omitted).[18]

17 Brereton J also noted that the jurisdiction is to be exercised with caution, with due weight being given to the public interest that a litigant not be deprived of the lawyer of his or her choice without good cause. Further, that the timing of the application may be relevant consideration in that the cost, inconvenience or impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.[19]

18 The plaintiffs submitted that a fair-minded, reasonably informed member of the public would conclude, by reason of the issues in this proceeding and in particular Mr McKendrick's alleged oppressive conduct, that it is "quite wrong for the alleged wrongdoer and the alleged victim of the wrongdoing to be represented by the same solicitors" and that the proper administration of justice requires that Norton Gledhill be prevented from acting for Rata and GHA at the same time as it is acting for McKendrick (and his company, RGMC) to ensure that Rata & GHA obtain independent advice.

19 Counsel for Rata and GHA submitted that there is no conflict between the duty owed to Rata and GHA as opposed to the duty owed to Mr McKendrick and RGMC having regard to:

(b) the consent given by Mr McKendrick "in the event a conflict arises".

20 In relation to the question of relief, senior counsel for Rata and GHA focused upon the relief sought by the plaintiffs in the originating process, namely for orders:

(1) correcting the register of the first defendant that Ms Pauling be removed as a director of the first defendant;

(2) that Rata purchase shares held by the plaintiffs in Rata at a price to be determined by the court with the capital of Rata to be reduced accordingly;

(3) that GHA purchase shares from the plaintiffs in GHA at a price to be determined by the court with the capital of GHA to be reduced accordingly;

(4) (a) that Rata be restrained from issuing, offering, selling, transferring or transmitting shares in Rata to the second to fifth defendants or any one of them at a price below the true value of the shares in Rata; alternatively

(b) that the second to fifth defendants be restrained from acquiring, purchasing or taking any interest in any additional shares in Rata at a price below the true value of such additional shares.[20]

21 Senior counsel for Rata and GHA submitted that there cannot be an existing conflict because the only relief sought against the McKendrick interests (in paragraphs 4(a) and 4(b)) are for orders seeking to enjoin transactions in or in relation to shares in Rata at a price below their true value which are not opposed; and further, that the McKendrick interests will not take an active role in the proceeding and will abide the result.

22 I am not persuaded by this submission. First, the relief sought in the originating process does not fully define the issues in the case. In the absence of pleadings the issues in the case are defined by the originating process (including the scope of any relief sought) and the affidavit material.

23 Second, I do not accept that the third and fourth defendants are only exposed to the relief sought in paragraphs 4(a) and 4(b) of the originating process. In addition to that relief, which is specifically addressed to the second to fourth defendants, the plaintiffs seek "such further or other orders as the court considers appropriate". If Mr McKendrick (through various entities) is found to have inappropriately engaged in transactions for personal gain to the detriment of Rata and/or GHA the court will grant other relief by making appropriate remedial orders against the McKendrick interests.

24 In essence the plaintiffs' allege that Mr McKendrick breached fiduciary duties owed by him in his capacity as a director of Rata and GHA. Mr McKendrick denies any impropriety. If the matter proceeds to trial, it is apparent from the plaintiffs' affidavit material that the path of reasoning which will lead to a conclusion as to the value of the shares in Rata and/or GHA and to the relief which is sought against Rata and GHA will necessarily involve close scrutiny of the conduct of Mr McKendrick. Whilst it remains to be seen whether any of the allegations made by the plaintiffs are substantiated, it is obvious at this stage that the interests of Rata and GHA in the process and the outcome are not aligned with the interests of Mr McKendrick and RGMC.

25 This issue was drawn to the attention of Norton Gledhill by the solicitors for the plaintiffs. In correspondence to Norton Gledhill, the solicitors for the plaintiffs detailed the substantive issues in the proceeding in respect of which the plaintiffs contend that Rata and GHA should obtain legal advice independent from Mr McKendrick and RGMC including whether:

(a) the appointment of Ms Pauling as a director was valid and proper and whether in all of the circumstances Mr McKendrick's conduct in relation to her appointment exposes Rata to the orders sought in the originating process;

(b) Rata should support or oppose the share rights issue proposed by Mr McKendrick, whether the proposed share rights issue is contrary to the interests of the members of Rata and GHA as a whole, and whether in the circumstances the proposed share rights issue exposes Rata and GHA to the relief sought in the originating process;

(c) threats by Mr McKendrick to set up business in competition with GHA are contrary to the interests of the members of Rata and GHA as a whole and expose Rata and GHA to the relief sought in the originating process;

(d) in related party property transactions Mr McKendrick has acted improperly or in breach of his duties owed to GHA; whether such property transactions may or should be reversed or whether GHA might or should seek compensation; and whether such conduct exposes Rata and GHA to the relief sought in the originating process;

(e) Rata and GHA should take any and if so what steps in the proceeding, or whether they should abide the orders of the Court; whether Rata and GHA should exercise any rights they may have against Mr McKendrick in the proceeding; whether they should obtain evidence, especially expert evidence independently of Mr McKendrick, or whether they should adduce any (additional) evidence in respect of the issues in the proceeding.[21]

26 The first and second defendants are entitled to independent advice in respect of all such matters and, in my view, by definition cannot get independent advice from Norton Gledhill whilst Norton Gledhill are acting for the McKendrick interests. The Court is also entitled to independent legal representation for litigating parties by virtue of a solicitor's duty to the court and the importance of preserving public confidence in the administration of justice.

27 In a letter from Mr McKendrick to Norton Gledhill dated 23 March 2013,[22] Mr McKendrick states as follows:

I note that you also have instructions to act for Rata International Pty Ltd (Rata) and Godfrey Hirst Australia (GHA) in the Proceeding.

I am writing to confirm that in the event a conflict arises between my interests and/or the interests of RGMC on the one hand and the interests of Rata and/or GMA on the other in relation to the matters the subject of the Proceeding that I and RGMC irrevocably consent to Norton Gledhill (and any counsel retained by Norton Gledhill):

(a) continuing to act for Rata and GHA in relation to those matters; and

(b) acting for Rata and GHA against me and/or RGMC in relation to those matters.

28 Expressed literally, Mr McKendrick and RGMC consent to Norton Gledhill continuing to act for Rata and GHA and acting for Rata and GHA against the McKendrick interests in relation to these matters, the subject of the proceeding, in the event that a conflict arises. In argument, senior counsel for the first and second defendants clarified the meaning of the letter. He submitted that it "went without saying" that what was intended by the letter was that Norton Gledhill would cease to act in the event that a conflict arises.

29 Accepting for present purposes that that meaning was intended, self-evidently the third and fourth defendants have given Norton Gledhill only a qualified consent to act; that is, only until a conflict arises.

30 The test for the existence of conflicting duties of solicitors to two or more parties is as stated in Beach Petroleum NL v Kennedy:

In a situation of alleged conflict of duty and duty, there must be a 'real sensible possibility of conflict'. It is not enough to identify 'some conceivable possibility' which may result in a conflict...[23]

31 In my view, in light of the contentious affidavit material, a real sensible possibility of conflict is readily apparent.

32 Presumably, the legal practitioners for Rata and GHA will need to decide whether Mr McKendrick should give evidence in his capacity as a director for and on behalf of Rata and/or GHA. Decisions taken as to whether to call Mr McKendrick, and if so the questions that might be asked of Mr McKendrick, could be influenced, even unconsciously, by Norton Gledhill in its prosecution of the defence of Rata and/or GHA. The solicitors might be inclined to tread lightly around contentious issues involving Mr McKendrick's conduct in the knowledge that its retainer will be terminated "in the event a conflict arises". This is so even if the McKendrick interests choose to abide by the outcome of the proceeding. In addition, I accept the submission of senior counsel for the plaintiffs that it is undesirable for the alleged wrongdoer and the victim of wrongdoing to be represented by the same firm of solicitors. In my view, Norton Gledhill are in an untenable position whilst the firm continues to act for the company interests and for McKendrick interests.

33 Senior counsel for Rata and GHA submits that the application is premature. I disagree. The problem which has arisen is not hypothetical and is appropriate to be addressed at the first opportunity, particularly as delay is a factor which might be taken into account against such an application.

34 I note the public interest that a litigant should not be deprived of his or her choice of lawyer without good cause. In my view good cause is shown here. Further, the proceeding has only recently commenced. Minimal inconvenience is likely to be caused at this stage.[24] In this case, the effect of deprivation of choice of lawyer is likely to be less pronounced than might otherwise be the case given that Mr McKendrick has indicated that he and his company will not take an active role in the litigation.

35 In my opinion, a fair-minded, reasonably informed member of the public would be troubled by the fact that in a case where the underlying allegation is that the director of a company is in breach of fiduciary duties owed to the company, the alleged wrongdoer is represented by the same firm of legal practitioners as the firm of legal practitioners acting for the company. Such a person would conclude that the proper administration of justice requires that the firm be prevented from acting for the companies (Rata and GHA) at the same time as for the director, not only to ensure that justice is done but to ensure that justice is manifestly and undoubtedly seen to be done.

36 Having regard to my findings above, it is strictly unnecessary to make separate findings on the loyalty ground. However I will deal with this issue briefly. In substance, I accept the submissions of the plaintiffs. A solicitor owes a fiduciary to the solicitor's client. As Deane J said in Chan v Zacharia, a fiduciary must not place him or herself in a position where his or her duty may conflict.[25]

37 Clients are entitled to undivided loyalty from their legal practitioner.[26] In his article Fiduciary Law and the Modern Commercial World, Professor Finn observed in relation to same-matter conflicts:

These are in the very heartland of fiduciary law, though English law in contrast with some Commonwealth jurisdictions (particularly Canada and New Zealand), has been slow to appreciate the full significance of this. The agent or advisor acting for two parties with adverse interests in the same matter not only owes each party those common law duties of care, skill and the like appropriate to the function assumed, he also owes each a duty of loyalty.[27]

38 In Spincode, Brooking JA stated "that there is an equitable obligation of 'loyalty' which forbids...the concurrent holding of two inconsistent engagements by different clients in the same matter".[28]

• the duty of loyalty is not owed to the plaintiffs and therefore the plaintiffs have no standing to bring the application

• the premise for the application is that the interests of Mr McKendrick and his company diverge from the interests of Rata and GHA in the proceeding which rests on dual assumptions, that the allegations of conduct are correctly made and that Rata and GHA therefore have sound claims against Mr McKendrick and/or RGMC. The respondent submits that neither assumption can be made good on this application.

• the duties of loyalty have been attenuated by the consent given by McKendrick and RGMC.

40 It is unnecessary to decide the standing point as relief is to be granted as part of the Court's inherent jurisdiction.

41 As to the proposition that the application is premised on assumptions which cannot be made good on this application, senior counsel for the plaintiff conceded that self-evidently in this interlocutory application it is not possible to know whether the allegations of misconduct are correctly made or whether Rata and GHA have sound claims against Mr McKendrick or RGMC. Nonetheless, I accept the submission by senior counsel for the applicants that Rata and GHA are, from the outset, entitled to independent advice about the issues raised in the proceeding. The duty of loyalty does not arise after a judgment has been obtained but is an incident of the whole process. An entity in the position of Rata and GHA is entitled to disinterested advice as to the claims made in the proceeding and as to what it should do in relation to the conduct of the proceeding.

42 The consent given by Mr McKendrick, though characterised as an "attenuation of the duties of loyalty" is qualified and essentially reflects the position that Norton Gledhill is to cease to act for Mr McKendrick or the for McKendrick interests "in the event a conflict arises". Despite the form of consent, given my earlier findings that a real, sensible possibility of conflict has arisen and the public interest to be served in having independent representation for the litigating parties, in my view, Norton Gledhill must nevertheless cease to act simultaneously for Rata and GHA and the McKendrick interests.

43 Senior counsel for Rata and GHA requested in the event that curial intervention were considered necessary, that the appropriate form of order is an order enjoining the solicitors from acting for the first and second defendants Rata and GHA while the firm acts for the third and fourth defendants, Mr McKendrick and RGMC.

44 In light of the terms of the consent given by Mr McKendrick expressly allowing Norton Gledhill to continue to act for Rata and GHA in relation to the matter in the event that a conflict arises, I am prepared to make an order in the form requested by senior counsel for Rata and GHA.

45 I will hear from the parties on the matter of costs.

[1] The Havannah Trust, the Bromley Trust and the Cornwall Trust. See Exhibit LAS3 to the affidavit of Lyndsay Anne Sharp sworn 17 April 2013.

[2] In its capacity as trustee of the Cornwall Trust.

[3] In his personal capacity and in his capacity as a joint trustee of the Havannah Trust.

[4] In his capacity as a joint trustee of the Bromley Trust and the Havannah Trust.

[6] T6; Affidavit of Lyndsay Anne Sharp, [114]-[120]. Affidavit of Lyndsay Anne Sharp sworn 17 April 2013 [105]-[108].

[7] Affidavit of Lyndsay Anne Sharp, [103]-104]; Affidavit of David Anthony Sharp [78]-[79].

[8] Affidavit of Lyndsay Anne Sharp, [74]-[90].

[9] Affidavit of Lyndsay Anne Sharp sworn 17 April 2013, [76].

[10] Affidavit of Rudyard (Kim) Grant McKendrick sworn 1 May 2013, [5]-[20].

[11] Grimwade v Meagher [1995] VicRp 28; [1995] 1 VR 446, 452.

[12] [2001] VSCA 248; (2001) 4 VR 501, 515.

[13] [2002] VSC 429, [112] - [113].

[14] [2008] VSC 146, [38].

[15] [2013] VSC 54, [160]. Also see my decision in Harris v Stiefel Research Australia Pty Ltd [2013] VSC 90, [6].

[16] [2005] NSWSC 1181; (2005) 64 NSWLR 561 ("Kallinicos").

[17] Wan v McDonald [1992] FCA 4; (1992) 33 FCR 491 at 512-513, per Burchett J, McVeigh v Linen House Pty Ltd [1999] VSCA 138; [1999] 3 VR 394 per Batt JA, Oceanic Life Ltd v HIH Casualty and General Insurance Ltd [1999] NSWSC 292; (1999) 10 ANZ Insurance Cases 61-438 (74,968), Newman v Phillips Fox (1999) 21 WAR 309 per Steytler J as cited in Kallinicos, 572, 574-575.

[18] [1999] NSWSC 292; (1999) 10 ANZ Insurance Cases 61-438 (74,968) at 74978 [48] as cited in Kallinicos, 574.

[20] Originating Process dated 18 April 2013, [1]-[4].

[21] Exhibit MED7 to the affidavit of Michelle Elizabeth Dixon sworn 16 May 2013.

[22] Personally and as a joint trustee of the Havannah Trust, as sole director and secretary of RGMC Pty Ltd in its capacity as trustee of the Cornwall Trust.

[23] Beach Petroleum NL v Kennedy [1999] NSWCA 408, 48 NSWLR 1 at paras [425].

[24] Christopher Anthony Dale v Clayton Utz (No 2) [2013] VSC 54, [173] Hollingworth J. Cf Buffalo Corp Pty Ltd v Lendlease Primelife Corp Ltd & ors [2010] VSC 672.

[25] Chan v Zacharia (1984) 154 CLR 168, 198-199.

[26] See discussion in Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501, 515-516; Finn P, Fiduciary Law and the Modern Commercial World in Commercial Aspects of Trusts and Fiduciary Obligations edited by E McKendrick (1992) Clarendon Press at 224.

[27] Fiduciary Law and the Modern Commercial World in Commercial Aspects of Trusts and Fiduciary Obligations (1992) E McKendrick ed., at 23.

[28] Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; (2001) 4 VR 501 at 522.