Revised from transcript and annotated; issued on 27 May 2024
Before the Court is an application that I recuse myself from hearing these proceedings any further.
The proceedings are complicated partnership proceedings involving claims and cross-claims between the two individuals who were formerly in partnership, and parties associated with them. I have delivered judgment dealing with the disputes as to when, and on what terms, the partnership was terminated, and appointing a receiver ("the Receiver") to wind up the partnership's affairs: Shun Sheng Pty Ltd v Lei [2023] NSWSC 1176 ("J1"). I have also made some consequential orders for account and delivered two judgments on applications by the plaintiffs for asset preservation orders pending the final resolution of the proceedings: Shun Sheng Pty Ltd v Lei (No 2) [2023] NSWSC 1623 ("J2") and Shun Sheng Pty Ltd v Lei (No 3) [2024] NSWSC 72 ("J3").
The recusal application is made by the plaintiffs/cross-defendants. It is opposed by the first defendant/cross-claimant. The Receiver has appeared but has taken no position on the application. For convenience, I will refer to the parties as the "plaintiffs" and the "defendant" respectively.
[2]
Background and procedural history
At J2 [3]-[20], I summarise the claims and issues in the proceedings, my findings on those claims, and the post-judgment procedural history, up to December last year. A further abbreviated summary appears at J3 [5]-[15]. The present judgment should be read as a continuation of those passages.
It is a consequence of my principal judgment that accounts need to be taken between Ms Wei and Ms Lei as the former partners to the partnership. In the course of those accounting proceedings, both Ms Wei and Ms Lei will be obliged to account for any partnership income or assets which they may have appropriated to themselves or to entities associated with them (to the extent that such income and assets are not recovered directly from those third parties). This is common ground. On 15 December, I made orders for partnership accounts to be taken between Ms Wei and Ms Lei accordingly.
A further consequence of my principal judgment is that there are four other parties to the proceedings who have, or might have, received income or assets of the partnership. The orders on 15 December provided, separately from the account to be taken between the partners, for three of those parties to account to the partnership for any income or assets received. As I will explain in more detail in a moment, the position so far as the fourth party is concerned has been more controversial.
Three matters remain to be dealt with to finalise the proceedings at first instance.
The first is a claim for recognition of a constructive trust over the business which has been operated by Shun Sheng since October 2021. In substance, it is alleged that the partnership business was transferred to Shun Sheng by Ms Wei shortly after the dispute between the parties erupted.
Initially, I contemplated that any claim to recover the assets of the business (including goodwill) and income received by it since October 2021 would be pursued by the Receiver. I made directions for the receiver to file a cross-claim for this purpose and made interlocutory orders restraining the plaintiffs from dealing with Shun Sheng's assets and requiring them to provide information about its trading activities to the Receiver. But I had second thoughts about the Receiver filing a cross-claim. As I explained in a memorandum to the parties in December, there were procedural difficulties with it because the Receiver was not, strictly speaking, a party to the proceedings. The claim had originally been propounded by way of cross-claim by Ms Lei as first defendant. [1] It seemed to me that it should continue on that basis. Accordingly, I vacated the order requiring the Receiver to file a cross-claim and instead directed that any necessary amendments be made to the statement of cross-claim. The interlocutory orders in aid of the claim, however, remained undisturbed.
The second matter for determination is the rent claim between Sunshine Island and Ms Lei: J1 at [280]-[284]; J2 at [17]-[18]. This claim was originally propounded by Sunshine Island, as one of the plaintiffs, against Ms Lei, as one of the defendants. Ms Lei has informally cross-claimed for contribution from Ms Wei. The subject matter of the claim is rent allegedly unpaid on the partnership premises which belonged to Sunshine Island.
The third matter to be determined is the costs of the proceedings. I have proceeded on the basis that this issue will be dealt with when the two substantive claims have been determined.
In December, the parties agreed to a timetable for the necessary interlocutory steps to determine the constructive trust and rent claims. The timetable provided for the hearing to take place on 31 January this year, alongside the hearing of the application by the plaintiffs for extension of the asset preservation orders.
On 24 January, one week before the hearing was due to take place, a notice of motion was filed for the plaintiffs, seeking to have the hearing date vacated. That application was obviously urgent and was brought before me for hearing on 30 January, the day before the scheduled hearing of the outstanding matters.
A critical factor in the application was that the plaintiffs wished to pursue an appeal against my principal judgment. Following the delivery of that judgment, they had filed a notice of intention to appeal, but taken no further steps. In the course of a hearing in December, I was told that they had not yet decided whether or not to pursue the appeal. On 30 January, I was told that the decision had been made to go ahead and that the first return date for the appeal proceedings would be 12 February. Counsel for the plaintiffs submitted that in these circumstances it was best to leave the outstanding matters until the challenge to my principal judgment had been resolved.
I did not find the application persuasive. There was an obvious obstacle to its success in the form of the delay in bringing it before the Court. My view was that, far from being a factor in favour of the stay, the decision by the plaintiffs to pursue an appeal was a factor against further delay in finalising the outstanding matters at first instance.
I recognised that an application would probably be made for expedition of the appeal proceedings and that a concurrent hearing might well take place in the Court of Appeal. Nevertheless, given that by the date the application came before me the plaintiffs should have been well and truly ready to present their case on those outstanding matters, I was confident that the remaining claims could be heard and determined before the hearing of the appeal, so that that hearing could deal finally with all of the issues at first instance. I considered that this was a highly desirable course in all parties' interests. I therefore refused the application.
Despite this decision, the constructive trust and rent claims did not proceed to hearing on the following day in accordance with the timetable. It became apparent that the defendant was not ready (and nor in fact were the plaintiffs). As a consequence, the hearing on 31 January was confined to dealing with the plaintiffs' application for extension of the asset preservation orders and the other claims were held over.
On 9 February, following delivery of my decision on the application to extend the asset preservation orders the proceedings came before me again. The parties agreed to extend the timetable, with the result that the constructive trust and rent claims would be heard on 4 March. That date was chosen because I was Duty Judge in that week, and I expected that I would be able to fit the final determination of the claims in during that time.
Preparations appear to have commenced for the hearing on 4 March in accordance with the timetable, and some documents were filed. But in the meantime, the plaintiffs pressed on with their appeal proceedings. Because my principal judgment had been interlocutory, for the purposes of appeal, leave to appeal was required. But the Court of Appeal agreed to allocate a date for a concurrent hearing on the leave application and, should leave be granted, the merits of the appeal. That was fixed for 29 April.
After that happened, an application was made to the Court of Appeal for orders effectively staying the proceedings at first instance and vacating the March hearing. That application came before Basten JA, who delivered judgment on 29 February, the week before the hearing of the remaining claims at first instance was due to begin: Shun Sheng Pty Ltd v Lei [2024] NSWCA 43.
In his judgment, Basten JA noted my decision on 30 January in which I declined the application to vacate the hearing date. But his Honour considered that the fixing of the hearing date in the Court of Appeal on 29 April meant that events had moved on. He continued with the following comments (at [22]-[23], emphasis added):
Expedition is one thing, excessive haste another. In my view, if the matter were to proceed in the Equity Division in the first week of March (which is next week) and judgment were delivered by late March or early April, there would be an inevitable application to vacate the hearing date in this Court. At this stage, there is no proposal to seek to vacate that hearing date, perhaps because it might affect the application for leave. On the assumption that the hearing of the interlocutory appeal will proceed, the appropriate course is to vacate the hearing in the Equity Division next week. Neither party claimed prejudice should that occur; the trial judge is listed to be the duty judge throughout that week (and the next) and accordingly there is unlikely to be delay to the administration of justice.
There remains a question as to whether a judge of this Court should make an order vacating hearing dates in the Division, or whether, having expressed that view, it should leave the matter to the trial judge to determine how to proceed. As the evidence does not reveal that he has been asked to reconsider the matter since the hearing date was fixed in this Court, in my view he should be given the opportunity to take such steps as may appear appropriate to him, before this Court resorts to orders. That aspect of the motion will be stood over to allow that step to be taken.
Following this decision, an application was made on short notice to me to vacate the hearing date on 4 March. After initially being raised after court on 29 February, the application proceeded formally on the morning of Friday, 1 March.
As on 30 January, I was faced with a procedural choice between two courses. One was to vacate the first instance hearing, await the decision in the appeal proceedings on the challenge to my orders so far, and, depending on the result, schedule any further hearing later in the year. The other was to press on in the hope of completing the whole of the case at first instance in sufficient time before 29 April to allow any challenge to those orders to be included in the appeal hearing on that date.
The proceedings before Basten JA did not involve any appellate challenge to my decision on 30 January, in the sense that there was no argument that my decision on that date had itself involved any error. Completing the proceedings by the end of March was not necessarily impossible. It might have been argued that his Honour's decision left it open to me, as the trial judge, to exercise my own judgment about how to balance the relevant case management factors, including those which I had found persuasive on 30 January.
But no such argument was presented by counsel for the defendant. It was made clear to me by counsel for the plaintiffs that they held instructions, in the event that I did not vacate the hearing date fixed for the following Monday, to make a further application to the Court of Appeal. In these circumstances, I considered that I had no practical alternative but to defer to the views expressed by Basten JA. Accordingly, I vacated the hearing date and fixed the proceedings for further mention on 10 May.
The appeal hearing went ahead as scheduled on 29 April. Judgment was delivered on 9 May. At the mention on 10 May, I was ready to fix a hearing date for the outstanding matters and to set a timetable for that hearing. But the present application was then foreshadowed and I have deferred making any orders until I could deal with it.
[3]
Application for recusal
Counsel for the plaintiffs did not raise any issue in the application about the conduct of the proceedings up to and including my decision, on 1 March, to accede to the application to vacate the hearing date on 4 March. The application for recusal was grounded in remarks I made after giving brief reasons for my decision to vacate the hearing date and fixing the first instance proceedings for further mention on 10 May.
In those remarks I commented on the state of affairs which would obtain at first instance while the parties waited for the appeal to be heard and determined. The following exchanges took place with counsel for the Receiver (Mr Anderson) and senior counsel for the plaintiffs (Mr McGovern SC):
HIS HONOUR: All right, 10 May. Now, those are the orders that I will make.
The liberty to apply - I assume that I have made orders granting liberty to apply, I am very conscious of the fact that there are outstanding orders in favour of the receiver and the defendant so far as information about the conduct of the business is concerned and I want to make it clear that so far as I am concerned, those orders were made at a time when it was considered that the matter would be fully determined within a period of only a few months.
Now that it is going to take at least 6 months and probably longer, if any party wants to make any application for any alteration to those orders then they should have full liberty to do so. So, perhaps what I should do is grant formal liberty to the parties to apply with respect to the interlocutory orders made, I think they were made originally on 7 December or whether they have been varied. The interlocutory orders concerning the conduct of the business, is that clear enough?
ANDERSON: Yes, your Honour.
HIS HONOUR: But that also applies to anything else that the receiver wants to do. As far as I understand it, the receiver's job is still to continue to do what he can to retrieve assets.
ANDERSON: Yes, and he's working away.
HIS HONOUR: I also understand that there is nothing to stop him in retrieving assets, forming the view that assets which are now in the possession of Shun Sheng are assets of the partnership and should be retrieved.
MCGOVERN: That would be controversial, your Honour.
HIS HONOUR: Well, I do not see how it can be, Mr McGovern, I mean, you have not asked for a stay. That is the receiver's job is to find assets of the partnership. How can that be -
MCGOVERN: Consider our position -
HIS HONOUR: How can that be controversial, Mr McGovern? As I say, you have not asked for a stay of that, the receiver's job is - there is a declaration which says that there has been a partnership, there is an order that the partnership accounts be taken and the receiver is charged with the responsibility of getting in the partnership assets and no one has had a stay at that.
MCGOVERN: But that begs the question as to what the partnership assets are, your Honour.
HIS HONOUR: Well, in the ordinary course, the receiver would form a view, maybe write a letter of demand, and, if there was a difficulty, the receiver would either come back to me for directions or launch his own proceedings, because all the assets of the partnership as declared by me have been vested in him, including the business.
MCGOVERN: I understand that, your Honour.
HIS HONOUR: Including all the assets of the partnership as at 21 October, so, that is the way it would normally go if there was a third party in possession of a partnership asset. The receiver's job is to write to that party and get that asset in as quickly as possible and turn it into money. That is his job.
MCGOVERN: We will wait and see.
HIS HONOUR: Yes, all right. Well, anyway, that is the position and the receiver should understand that the receiver's responsibilities are not affected by any orders that anyone has made and that is his job…
There is no issue as to the principles to be applied on this application. Those principles are set out by the Court of Appeal in Polsen v Harrison [2021] NSWCA 23 at [23]-[24].
Counsel for the plaintiffs submitted that a reasonable observer would think that I had "determined" the following matters:
a. the current Lease of the Brothel held by Shung Shen is held on trust for the partners;
b. the Receiver, if he was doing his job, ought to seek possession of the Brothel;
c. if the Receiver sought possession his Honour would make orders for possession;
d. the order would not be an interlocutory order but a final order recognising that the lease is property of the partnership.
It is important to emphasise what counsel did not contend for. In my principal judgment, I made adverse credit findings against Ms Wei (and, incidentally, against the defendants' witnesses as well). Counsel did not suggest that those credit findings represented an obstacle to my hearing and deciding the remaining issues on the merits. That is so even though, it seems, that Ms Wei may be a witness in the further hearing.
Nor did counsel suggest that there was no difficulty in the form of prejudgment so far as the Sunshine Island rent claim was concerned or the claim for costs. Indeed, counsel candidly accepted that, due to my prior involvement in the case, it would clearly be best for me to deal with the costs issues if I could. But counsel submitted that if I could not deal with the constructive trust claim, then I could not effectively deal with the rent and costs claims either.
The present application, therefore, is confined to one of apprehended prejudgment of the constructive trust claim. In this regard, there is a contextual factor which I consider is significant.
It was clear on 1 March that if I was to determine the constructive trust claim, I would have to do so within the confines of the findings and conclusions which I had reached in my primary judgment, at least to the extent that such findings and conclusions were a necessary part of the orders which I had made on that occasion. As Mr McGovern SC conceded in the course of remarks he made on 1 March, any such constraints would present difficulties in defending the constructive trust application. Mr McGovern did not mention the precise difficulties, but it does at least seem clear that, having regard to the terms of the declarations I had made, the hearing would have to proceed on the basis that the partnership had not been terminated until a date in October, which postdated, or apparently postdated, the date on which Shun Sheng began operating the business.
I should say for the benefit of the plaintiffs that, in my own mind, I have not, and had not on 1 March, made any determination of the type attributed to me in this application. Indeed, it was not clear to me on 1 March, given the constraints to which I have referred, precisely what defence was being advanced on behalf of Shun Sheng and Ms Wei to the constructive trust claim. Pleadings, affidavits and submissions had been filed in the lead-up to the hearing on 1 March (and indeed, some had been filed previously in the lead-up to the abortive hearing on 31 January), but I had not studied those documents and had formed no view about the merits of the parties' positions as disclosed in them. Furthermore, on 1 March the timetable for the provision of submissions, at least, was incomplete.
The background to my comments on 1 March was that the plaintiff had not, in the more than five months which had elapsed since my principal judgment, applied to stay the receivership orders which I made when I delivered judgment.
Usually, where a receiver is appointed in a partnership case, and partnership assets or income have got into the hands, or allegedly got into the hands, of a third party, the question of recovery is a matter to be pursued by the receiver. The receiver is, and was in the present case, vested with all of the assets of the partnership and has full legal powers to pursue claims to them, including, if it proves necessary to do so, to bring proceedings. Such proceedings usually take place outside the confines of the partnership litigation and indeed may take place in a different court entirely from this Court.
The present case is unusual in that the third party in question (Shun Sheng) is itself a party to the proceedings and a cross-claim has been made which seeks relief which, now that the Receiver has been appointed, will effectively inure to the benefit of the Receiver on behalf of the partnership. What I wanted to make clear to the Receiver, through those who are advising him, was that the unusual circumstances of this case did not deprive him of responsibility or power to pursue his own claim in the interests of the partnership against third parties who have, or might have, received partnership income or assets, and that that included Shun Sheng.
In that sense, although my remarks were directed to all of the parties, they were principally directed to Mr Anderson as counsel for the Receiver. In fact, Mr Anderson was the first counsel to respond to what I had said when I asked him about the interlocutory orders concerning the conduct of the business and the retrieval of assets.
In the exchange which followed between myself and Mr McGovern, what I was trying to put to Mr McGovern for his response was that in the absence of a stay, the receiver's responsibility to collect assets of the partnership, and to pursue claims to them, if necessary, remained. It was that which I intended to put to Mr McGovern as being uncontroversial. I did not intend to suggest in any way that if the Receiver pursued some claim for relief concerning the partnership business, that such a claim would necessarily succeed, or that I would in any way deal with that other than on its merits in due course.
The position was, with respect, aptly summarised by Mr McGovern when he said, at the end of that exchange, that his clients would "wait and see". It was always my intention that the Court would do the same.
No doubt, counsel for the plaintiffs on this application would accept everything which I have just said about my subjective intentions when making the remarks which I made on 1 March. There is no allegation in this application of actual bias. It is only a case of apprehended bias. The issue is to be addressed by reference to the objective interpretation of my remarks by a fair-minded observer, acting reasonably.
Counsel acknowledged that it was an available objective interpretation of my remarks that they reflected nothing more than the subjective intentions which I have described. Counsel submitted, however, that that was not the preferable interpretation and that the better interpretation was that I had not only encouraged the Receiver to bring a claim, but had indicated that the claim would be successful.
I do not accept this submission. In my view, it is clear from the language that I used that I was going no further than reminding the Receiver of his responsibilities. I do not think that the language I used, when read as a whole, contains any statement as to how the Receiver's application, if one was made, would be dealt with.
It is also important to remember that no such application came forward from the Receiver. To the extent that any opinion which I might have expressed on the merits of an application by the Receiver was concerned, that would not necessarily follow through to the application which was then before me, namely, the claim brought by Ms Lei. But as I do not consider that the language, properly understood, expresses any view on a putative application by the Receiver, it is not necessary to pursue this question any further.
[4]
Conclusions and orders
For reasons I have given, the application fails and must be dismissed. Subject to any submission counsel for the plaintiffs may make, it seems to me that the application should be dismissed with costs.
(Counsel for the plaintiffs did not resist an order for costs.)
The orders of the Court made on 20 May on the plaintiffs' notice of motion filed 14 May 2024 were:
1. Order that the motion be dismissed.
2. Order that the applicants pay the respondents' costs of the motion.
[5]
Endnote
Mr Kitsos, the second defendant, was named as an additional cross-claimant, but he was not a partner and appears to have no legal interest in the claim. He should probably be removed as a cross-claimant.
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Decision last updated: 27 May 2024