Smith v J Z Interiors Pty Ltd [2015] VSCA 203

2 The first, and what may be regarded as principal, matter before this Court is an application for leave to appeal against orders made by Judge Kennedy, on 16 April 2015, granting Lee leave to file a greatly widened amended statement of claim.

3 The second matter is a more recent application by Smith and Donamis for a stay of the trial of the proceeding. That trial is presently scheduled to commence on 21 September 2015. In that second application, Smith and Donamis seek, inter alia, to have this Court vacate the current trial date. They do so principally on the basis that, having regard to Lee's decision to greatly expand its case against them, they will not be in a position, adequately, to prepare for and conduct their defence.

4 For some 19 years between 1994 and 2013 Mr Smith had a business relationship with a Mr Josip Vrapcenjak. Mr Smith was, and continues to be, the sole director and shareholder of Donamis. Mr Vrapcenjak was, and also continues to be, the sole director of Lee. Lee has one shareholder, a company called J & Z Vrapcenjak Pty Ltd. That company holds its shares as a trustee for the Josip Vrapcenjak Trust.

5 For many years up until 2013, Mr Smith managed the business of Lee. Although the precise nature of his role was somewhat unclear, he was broadly described as having performed the functions of a general manager, or CEO.

6 The capacity in which Mr Smith performed those functions is a matter of dispute between the parties. Lee alleges that from 1995 to about 5 July 2013, Mr Smith was an employee of the company, and performed his functions in that capacity. In the alternative, Lee alleges that at least during the period from 2007 to 5 July 2013 Mr Smith carried out those functions as an agent of Donamis, a company with which Lee had entered into a contract for the provision of administration and management services ('the Donamis Services Contract'). The Donamis Services Contract was not in writing, but was said to arise by implication from the conduct of the parties.

7 On 11 July 2014, Mr Vrapcenjak and Lee commenced two proceedings in the County Court. The first (CI-14-03344) was brought by Mr Vrapcenjak (as trustee for the Vrapcenjak Family Trust) and Lee against Mr Smith alone. The second (CI-14-03345) was brought by Lee against both Mr Smith and Donamis. It is that second proceeding which is the subject of the current application for leave to appeal to this Court.

8 As matters stand, the two proceedings are to be heard together. They are presently, as we have said, fixed for trial on 21 September 2015. The trial will be conducted before Judge Macnamara, with an estimate, so it seems, of 15 to 20 sitting days.

9 As originally instituted, the second proceeding concerns three allegations made by Lee against Mr Smith and Donamis. First, that Mr Smith caused Lee to make payments totalling $525,309.17 to various suppliers in connection with works to be carried out on properties that he owned. Secondly, that Mr Smith directed Lee personnel to carry out building works at one of those properties to the value of $122,663.18. Finally, that Mr Smith caused a rebate in the amount of $39,300, which Lee was entitled to receive from a third party, to be applied to the acquisition by Donamis of a motor vehicle.

10 By its original statement of claim, Lee sought relief from Mr Smith and/or Donamis based upon a number of separate and alternative causes of action. These included claims for breaches of various contractual, equitable and fiduciary duties said to be owed by Mr Smith to Lee by reason of his having been an employee of the company or, alternatively, by reason of the nature of the functions that he had been performing. Lee also sought orders for compensation under s 1317H and/or s 1324 of the Corporations Act 2001 ('Corporations Act'). Those orders were sought on the basis that Mr Smith was, in truth, a 'director' or 'officer' of Lee within the extended meaning of those terms in s 9 of the Act, and that he had breached the duties imposed upon such persons under ss 180, 181 and 182.[1]

11 On 13 January 2015, after pleadings had closed, discovery made by the parties, and a mediation completed, Lee applied for leave to file a proposed amended statement of claim. That proposed amended statement of claim sought to add two entirely new claims against Mr Smith and Donamis. It will be necessary to say something more about these additional claims shortly.

12 On 23 January 2015, Lee's application to amend its statement of claim first came on for hearing before Judge Anderson. His Honour adjourned that application part heard, but ordered that Lee deliver a further draft pleading by 4 February 2015. He also made provision for the parties to file and serve affidavit material in relation to the amendment application.

13 On 4 February 2015, Lee served a second proposed amended statement of claim ('PASOC2'). That document still bore the date 13 January 2015.

14 The two additional claims, as set out in PASOC2, are as follows:

(a) a claim described as 'Miscellaneous claims in respect of use of JZ Lee's funds', wherein it is alleged that, between 2007 and 2013, Mr Smith caused Lee to pay to him an amount of $73,636.50 by way of reimbursement for various personal expenses that Mr Smith had incurred which were unrelated to the business ('Miscellaneous Payments Claim'); and

(b) a claim described as 'Excessive payments by JZ Lee to Donamis for Administration Services', wherein it was alleged that, between 2007 and 2013, Mr Smith caused Lee to make 66 payments totalling $7,505,689.68 to Donamis in connection with the provision by Donamis of administration services to Lee. It is alleged that those payments were excessive ('Excessive Payments Claim').

15 There is some dispute between the parties as to the precise basis upon which the Excessive Payments Claim, in particular, is brought. However, it is sufficient for present purposes merely to note that Lee has alleged that both of the additional claims also give rise to breaches of the duties to which we have previously referred - namely, contractual, equitable, fiduciary and Corporations Act duties allegedly owed by Mr Smith and Donamis to Lee.

16 Mr Smith and Donamis contend that the proposed new claims effectively put in issue every payment that they received from Lee between 2007 and 2013. They also contend that Lee had provided no explanation for its delay in having brought forward these new claims. Nor had it provided any information as to when it first became aware of the matters that gave rise to those claims.

17 On 19 February 2015, Lee filed and served an affidavit sworn by Mr Bishoy Hanna, Lee's solicitor, in support of the amendment application.

18 On 24 March 2015, Mr Smith and Donamis filed an affidavit affirmed by Ms Lyndal Mews, their solicitor, in response to Mr Hanna's affidavit.

19 On 27 March 2015, Lee's application to amend its statement of claim was heard before Judge Kennedy. Her Honour reserved her decision as to whether Lee was to be given leave to file and serve PASOC2.

20 On 16 April 2015, Judge Kennedy granted Lee's application to amend its statement of claim by filing PASOC2. She delivered lengthy reasons for that decision. Her Honour then made consequential orders, and adjourned the directions hearing in both County Court proceedings to 22 June 2015.

21 On 23 April 2015, Lee filed and served its amended statement of claim.

22 On 15 May 2015, Mr Smith and Donamis filed an application for leave to appeal Judge Kennedy's order granting leave to amend Lee's statement of claim. That application was served upon Lee on 18 May 2015. At the same time, the applicants' solicitors sought, by consent, an order that the trial date for the two proceedings be vacated.

23 On 22 May 2015, Lee's solicitors responded, declining to consent to the adjournment proposed.

24 On 29 May 2015, the applicants' solicitors filed an application in the County Court for a stay of the proceeding, and an adjournment of the trial date. There was then a flurry of correspondence between the solicitors for both sides.

25 The stay application came on for hearing before Judge Anderson on 3 June 2015. His Honour refused to hear that application. Instead, of his own motion, he ruled that it was more appropriate that the Court of Appeal deal with the stay application. According to the applicants' solicitors, this was despite his Honour having accepted that the County Court itself had power to stay the proceedings, and no submission having been advanced on behalf of Lee as to why that power should not be exercised. Put simply, Judge Anderson indicated that he 'did not feel particularly comfortable' hearing the stay application or, presumably, being asked to consider for himself whether Judge Kennedy had fallen into error in granting leave to amend.

26 At both the hearings of 23 January 2015 (before Judge Anderson) and 27 March 2015 (before Judge Kennedy), counsel for the applicants submitted that the fresh claims, if permitted to be pleaded, would add a further five days to the estimated trial time. That estimate was not challenged by counsel for Lee.

27 According to the applicants' solicitors, as at 16 December 2014, prior to Lee's application to amend its statement of claim, the applicants were advised that the cost of preparing for and appearing at a 20 day trial would be approximately $453,200. The applicants now say that the estimated cost of preparing for and appearing on an additional 5 days' trial as a result of the fresh claims made by Lee would be over $200,000. That estimate includes the anticipated costs of discovery and consideration of voluminous documents in connection with the fresh claims. It also includes the costs of retaining a forensic accountant to go through, in detail, the freshly discovered documentation, and provide an expert report. The applicants' solicitors go on to say that discovery in connection with the new claims will amount to thousands of pages of documents, and that this is imposing a significant personal burden upon Mr Smith. They note that the Excessive Payments Claim concerns 66 alleged payments totalling more than $7.5 million, some of them going back a period of eight years or so.

28 As if the history of this matter were not already sufficiently troubling, there is more to come. On 15 June 2015, the applicants' solicitors filed an application in this Court, pursuant to s 74(4) of the County Court Act 1958, or alternatively r 64.39 of the Supreme Court (General Civil Procedure) Rules 2005, for a stay of the proceeding under appeal. This is the second application to which we previously referred.

29 What is sought is a stay of the proceeding under appeal until:

• the hearing and determination of the application for leave to appeal; alternatively
• the hearing and determination of the application for leave to appeal, and in the event that leave to appeal is granted, the hearing and determination of the appeal.

30 Further, and in aid of the stay sought, the applicants seek an order from this Court that the trial date of 21 September 2015 relating to the proceeding under appeal be vacated.

31 To complicate matters still further, the Court was informed as recently as 13 July 2015, only a few days before the hearing, that there had been correspondence between the parties regarding, in particular, one of the applicants' grounds in support of the application for leave to appeal. That ground concerned Lee's claims, and prayers for relief, in respect of various alleged breaches of the Corporations Act.

32 In a letter dated 23 June 2015 from the applicants' solicitors to the solicitors for Lee, the applicants contended, it would seem for the first time, that the County Court had no jurisdiction to grant the relief that Lee sought in respect of the Corporations Act claims, in both its original and amended statement of claim, whether under s 1317H or s 1324 of that Act. Those sections relevantly provide that a 'Court' (with a capital 'C') may order a person who has contravened particular provisions of the Corporations Act to pay compensation or damages.[2] Section 58AA of the Corporations Act defines 'Court' (with a capital 'C') as including the Supreme Court of a State or Territory, but does not extend to any District or County Court, or indeed any other inferior Court. This stands in stark contrast to the definition of court (with a lower-case 'c') which includes any court.

33 It was as a result of receiving this letter from the applicants' solicitors that Lee's solicitors finally twigged to the fact that a number of the claims brought within the ambit of PASOC2 were jurisdictionally incompetent, and could not be pursued in the County Court. Consequently, on 26 June 2015, they advised that Lee would file an application under the Courts (Case Transfer) Act 1991 to have both County Court proceedings transferred to the Supreme Court.

34 In summary then, it appears that a number of the claims now sought to be agitated under PASOC2, and some that were sought to be made in the original statement of claim, cannot be pursued in the County Court. That is not to say that the facts giving rise to such claims cannot form the basis of differently formulated causes of action and, for the most part, they have indeed been pleaded as such.[3]

35 There may well be another problem with the Corporations Act claims. The applicants contend that a number of those claims are now statute barred by reason of the operation of the relevant limitation periods.[4] They submit that these limitation periods operate jurisdictionally, as a complete and substantive bar, rather than merely as a bar to a remedy which may need to be pleaded, and can perhaps be overcome. If the applicants are correct, transferring the matter into the Supreme Court will not assist Lee in relation to those claims.

36 Based upon Lee's recent application to have these proceedings transferred into the Trial Division of this Court, it is reasonable to assume that it has now, effectively, given up all thought of having them heard in the County Court in September of this year. Of course, if the proceedings are transferred into this Court, they will certainly not be heard this year, and may not be heard until, at the earliest, the second half of next year. Both parties acknowledged in oral submissions before us that they were well aware of this likelihood.

Disposition of applications before this Court

37 The unusual circumstances set out above make this application for leave to appeal somewhat problematic. Mr Smith and Donamis remain adamantly opposed to Lee having been given leave to amend its statement of claim. They rely upon a multitude of grounds in support of their challenge, by way of appeal, to Judge Kennedy's decision. However, the arguments they now seek to put forward in support of the appeal must, as a result of the events that have transpired, differ in significant respects from a number of the grounds that were advanced below.

38 If this matter is to be transferred to the Supreme Court, as Lee now submits should occur, it would plainly make sense that the judge who is to have the ultimate carriage of the proceedings determine what should be done with the pleadings. There seems to be nothing in the Courts (Case Transfer) Act 1991 that precludes that course from being adopted.

39 Matters of case management, and the resolution of interlocutory disputes, should, as a matter of basic principle, be dealt with within the Court which is to hear the proceedings. That is particularly so in a case of this kind, and in circumstances where there is ample time for these issues to be resolved sensibly before trial. The Supreme Court should not be constrained by an interlocutory decision on a question of practice and procedure taken in the County Court, in circumstances where the judge who made that decision was under a complete misconception as to the County Court's jurisdiction to entertain at least some of the claims brought, although this was not the fault of her Honour, she not having received the assistance from counsel she was entitled to expect.

40 Moreover, the question whether the statement of claim should be amended should not now, in our view, be approached as a matter of identifying error in Judge Kennedy's reasons. Given the significance of a possible transfer of the proceeding to the Supreme Court, the need to consider that matter afresh seems paramount. It would be wholly artificial to assess the reasons of Judge Kennedy without appreciating the fundamental concern that they were given in a proceeding that should never have been commenced in the County Court. On any view, Judge Kennedy's ruling cannot stand. Her Honour has granted leave to amend the statement of claim to include a number of causes of action that the County Court simply is not competent to hear. Plainly, a pleading that includes allegations that cannot be entertained should not be permitted to go forward.

41 There is one complicating factor. Counsel for Lee, while accepting that his client was responsible for having initiated proceedings in the County Court which, as it happened, had no jurisdiction to entertain them, submitted that, notwithstanding that fact, his client should not be prejudiced by a transfer of those proceedings to the Supreme Court, and should be able to retain the benefit of having obtained leave to amend the statement of claim in April of this year. In other words, counsel submitted that the fresh claims made against the applicants which were embodied within PASOC2 should be protected from the operation of relevant limitation periods that might otherwise inure to the benefit of the applicants in the intervening period.

42 We have considered that submission, and the possible use of orders nunc pro tunc to render any future grant of leave to amend by a judge of the Supreme Court operative retrospectively. In our view, without needing to finally determine the point, a judge of this Court, having taken over the carriage of a case initially brought in the wrong court, cannot make an order nunc pro tunc protecting Lee from the ordinary effect of limitation bars where those bars extinguish the claims.

43 Whereas an order made nunc pro tunc may be appropriate where needed to overcome a mere procedural irregularity, it is not appropriate if the consequence is to alter the substantive rights of the parties.[5]

44 In the present case, the proposed claim for excessive payments includes an alleged payment of $88,000 made in the period between six years prior to Judge Kennedy's decision and the current date. That payment is said to have been made on 20 July 2009. As we indicated above,[6] in our view Lee's claim in respect of that payment, insofar as it is made under the Corporations Act, will be statute barred. Insofar as Lee's claim is based upon alleged breaches of other common law and equitable duties to which we have previously referred, it may also be barred by s 5 of the Limitation of Actions Act 1958.

45 To add further to the complexity of this matter, in submissions filed prior to the hearing of this application, counsel for Lee accepted, for the purposes of this application, that s 1317K of the Corporations Act had the effect of barring the right to bring a proceeding of a kind referred to in that section, and not just the remedy, and did not seek to argue that the judgment of Almond J in Austructures v Makin[7] which had so held was wrongly decided. However, in written submissions filed after the hearing (in relation to the question of whether a judge of the Supreme Court would have power to grant leave to amend nunc pro tunc in the event that the proceeding was transferred), counsel sought to resile from that position.

46 It is obviously not appropriate for this Court, in these circumstances, to express any concluded view about the correctness or otherwise of Almond J's judgment. The parties have not been fully heard on that question, and the Court has therefore not had the benefit of any proper argument regarding that matter. Both sides having initially accepted, for the purposes of the application before us, that his Honour's judgment was correct in that regard, we will proceed on that basis.

47 It follows that, if in the next few weeks, or however long it takes, the proceedings are transferred into the Supreme Court, it is likely, though perhaps not certain, that the applicants will benefit from the operation of the limitation periods that apply in relation to the Corporations Act claims, and may also benefit from the operation of the ordinary limitation periods applicable to the remaining claims. If that eventuates, it is a product of Lee's own error in having instituted these proceedings in the wrong court. It would not be unjust, in those circumstances, if Lee lost the benefit of being able to sue in respect of those now time-barred claims.

48 Whatever prejudice Lee may suffer is a direct result of having commenced a proceeding in the County Court when that Court is incompetent to hear the proceeding. A civil proceeding is made up of the claims relied upon by a plaintiff. It is not a matter of a court being competent to hear and determine a portion of a proceeding. The inclusion of the relevant Corporations Act claims deprived the County Court of jurisdiction to hear the proceeding. Furthermore, upon realising that the proceeding was incompetent Lee was not prepared to abandon any claim that did not fall within the jurisdiction of the County Court to maintain the proceeding in the Court in which it had been commenced or the benefit of any orders made in its favour. Of course, Lee has every right to rely upon claims it has identified as properly available on the facts and circumstances of the case. However, the consequence of Lee seeking to maintain the relevant Corporations Act claims is that the proceeding can only be heard in the Supreme Court and Lee must accept the consequences of that being so. As we have indicated, in our view, if the matter is transferred to the Supreme Court the question of the scope of the proceeding, and the range of permissible claims that can be tried, should be a matter for the trial judge. This is in order to ensure that all relevant issues are properly ventilated in the Supreme Court and the proceeding is put on a proper footing.

49 In these circumstances, we would make the following orders:

1. The application for leave to appeal be granted.

2. The appeal be treated as heard instanter, and allowed in part.

1. The order made on 16 April 2015 granting Lee leave to amend its statement of claim in proceeding number CI-14-03345 be set aside, but only insofar as that order relates to the claims based on breaches of the Corporations Act 2001 as set out in the following paragraphs of the amended statement of claim filed on 23 April 2015:

(iv) the words 'statutory and' and '7 and' in paragraph 50.

1. In the event that the proceedings are, ultimately, transferred from the County Court to the Supreme Court, the balance of that order will also be set aside. The question whether leave to amend should be granted is then to be heard by the judge in the Trial Division to whom the proceedings are allocated.
2. In the event that the proceedings are not, ultimately, transferred from the County Court to the Supreme Court, the balance of the application for leave to appeal, including those grounds not yet considered, is to be heard and determined by this Court, on a date to be fixed.
3. The trial date presently fixed for the hearing of these proceedings is vacated.
4. The proceeding in the County Court is stayed until further order of this Court.
5. The further hearing of the appeal (if necessary) is adjourned to a date to be fixed.

50 Having regard to the peculiar features of this case, and the somewhat unsatisfactory manner in which the various issues that have arisen for determination have come to notice, we consider it appropriate to do nothing more than reserve costs, both of the application for leave to amend below, and of the application for leave to appeal before this Court. We will provide the parties with an opportunity to make submissions on costs once the outcome of the application for transfer has become known, either as part of the balance of the appeal or as the sole remaining issue of the two applications before us.

[1] The claims against Donamis were put on the alternative bases that it had breached the Donamis Services Contract (by reason of the conduct engaged in by Smith as its agent), that it was involved in (within the meaning of s 79 of the Corporations Act), or was a knowing accessory to, Mr Smith's breaches of his Corporations Act duties, and/or that it had knowingly assisted Mr Smith in breaching his Corporations Act and fiduciary duties.

[2] Although s 1324 is prima facie concerned with injunctions, sub-s (10) empowers a Court, inter alia, to order damages in lieu of an injunction where an injunction has been sought.

[3] As previously noted, the conduct the subject of the Corporations Act claims is also said to give rise to breaches of various contractual, equitable and fiduciary duties.

[4] See Corporations Act s 1317K; Austructures Pty Ltd v Makin (2014) 290 FLR 153. Although the point concerning limitation periods was raised before Judge Kennedy, at least in a broad sense, the fact that breaches of the Corporations Act are arguably subject to a stricter, and jurisdictionally based interpretation, does not appear to have been an argument that was specifically put before her Honour.

[5] Hartley Poynton v Ali [2005] VSCA 53; (2005) 11 VR 568, 604-606 (Ormiston JA, Buchanan and Eames JJA agreeing). See also In the Will of McCrory [1925] VLR 298; Peter James Spencer v Wayne Dennis Bamber [2011] NSWSC 1313.