Terranora Leisuretime Resort Management Ltd (In Liquidation) v Harris

REASONS FOR JUDGMENT 1 This matter is set down for hearing to commence on 12 July next. The applicant ("Management") seeks to further amend its statement of claim. The respondents seeks an order for security for costs and an order that there be a separate trial with respect to the costs of the liquidator of Management and a direction for an extension of time in which they are to provide their witness statements.

the application to amend 2 Management's action was originally brought in the Supreme Court of Queensland in August 1998 and was transferred to this Court in 2003. The respondents were receivers and managers of the Management company and its claim against each of them is essentially for breach of duty in that capacity. 3 The Management company was involved with others, and in particular Terranora Time Share Developments Pty Ltd ("Developments") and Terranora Lakes Country Club Ltd ("Club"), in a plan to construct a resort in which persons would subscribe for redeemable preference shares. Construction of it was financed by money borrowed by Developments from a bank pursuant to a facility agreement entered into between the bank as lender, Club, Developments, Management and others who were all guarantors under the agreement. The facility agreement required Management to grant the bank a mortgage over the lease it held from Club, over the land upon which the resort was to be built, and a charge over all of its assets. It did so on 5 August 1988. 4 Management says that pursuant to a clause in the facility agreement it was entitled to a discharge of its securities upon 600 redeemable preference shares being subscribed for, funds totalling $3.6m having been paid to the trustee and those funds being paid to the bank in accordance with the bank's consent. It is alleged that those points were reached or were imminent by 14 September 1989. If the clause in question were held to be otherwise conditioned, Management alleges that the conduct of the bank and the other parties was such that they could not have relied upon those other conditions to have prevented a discharge of the security. 5 On about 14 September 1989 Management and the other parties to the facility agreement executed a further agreement ("the extension agreement") securing an overdraft facility provided by the bank to Management. Further, pursuant to this agreement, and despite the rights given to Management under the facility agreement referred to above, Management acknowledged that the lease and charge were to continue as security for repayment of the indebtedness under the facility agreement. It is alleged that the directors of Management entered into the extension agreement in breach of their fiduciary duty owed to it and for the benefit of others. Club is alleged to have been knowingly concerned in this breach. 6 In July and August 1992 Developments defaulted in its obligations to the bank and the bank made demand upon Club. Club paid an amount of just over $4.5m on the demand and thereupon claimed to be entitled to all the bank's rights and in particular to the mortgage of the lease and the charge. Club made statutory demand of Management for payment of a sum of $614,736.50 for goods sold and delivered and services supplied for $566,368.59 as contribution to the sum paid to the bank. Another demand made in January 1994 was also in the sum of $614,736.50. 7 The directors of Management were also directors of Club and it is alleged that they did nothing to deal with the demand and in particular to resist it or claim a set-off equal to the sums claimed by Club. On 24 August 1992 the respondents were appointed receivers and managers of Management. 8 On 10 February 1994 Club applied to wind up Management. It is alleged in the current pleading that the respondents knew of the facts concerning the facility agreement and the extension agreement because they had possession of relevant documents and communications and had obtained legal advice upon the documents. The respondents are said to have breached their duty of care to Management under s 232 of the Corporations Law by taking no step to set aside the demand or do other things to have the securities set aside or otherwise prevent Management from being wound up. 9 Management is alleged to have suffered, as a result of the breaches, the loss of the lease, the loss of the use of the resort and the income it would have earned from it, together with the expenses of the liquidator including the cost of the public examination conducted by him. They are also alleged to be liable to account for the benefit that Club received. The proposed amendments do not alter the losses claimed. 10 The amendments proposed, and to which objection is taken, involve further allegations of breach of duty on the part of the respondents. Reliance is now sought to be placed upon the entry into the facility agreement and the agreement of 5 August 1988 (now called the "release agreement") as breaches of fiduciary duty on the part of the directors of Management and for the benefit of others and in which Club was knowingly concerned. It is alleged that the respondents knew or ought to have known of these matters because of the documents which they had and upon which they had taken advice. Management sought to allege against the respondents that they breached their duty of good faith to Management by failing to ascertain the debt for which Management was truly liable, which Management alleges was nil or a much smaller amount, and they failed to protect Management's property and instead advised Club to sacrifice the lease. 11 The respondents, in objecting to the proposed amendments, point to the delay in bringing this application and in the delay not being sufficiently explained. The first notification of Management's intention to do so was on 31 March 2004. The explanation provided by Management's liquidator is that he received advice to do so only recently. When he sought further funding from the litigation funder, he was directed to obtain a further opinion. The advice he then received was that these claims were open and ought to be made, I infer. 12 The respondents also submit that, in addition to the delay, and the fact that the allegations relate to events many years ago, what is sought to be raised are very serious allegations. Although Management eschewed any allegation of dishonesty, it may be accepted that the allegations are nevertheless very serious. The Court would therefore be anxious to ensure that the respondents are not prejudiced in being able to meet the claims. In that regard it would be more difficult for Management to obtain an order if the facts relevant to the claims were raised for the first time. Here however the facility agreement and the release agreement were always part of the factual matrix to the claim. Whether the directors were guilty of a breach of fiduciary duty involves questions of fact and law. It may be that some additional evidence will be necessary as to what benefit others may have had from those transactions but, to an extent, these were already questions raised. That leaves only the respondents' knowledge and this is said to arise substantially from documents within their possession. 13 It was submitted for the respondents that in cases of long delay it often becomes difficult to identify areas of prejudice. So much may be accepted. I would however have expected some indication of how prejudice might arise in this case. None has been identified. The respondents were required, when the proceedings were first brought, to turn their mind to all of these events and it would seem to me that the proposed amendments add little except to require them to consider those facts in light of the allegations that they ought to have taken particular steps. It is of some importance that it is not suggested by the respondents that they are unable to meet the allegations if they are allowed. 14 Time however is close to trial. In these circumstances I would accede to the respondents' request that, as a condition of leave to amend, Management identify the evidence relied upon to support the new allegations. It should do so by 24 May 2004. There will be leave to amend the amended statement of claim in the terms of the document handed to the Court and the respondents at the hearing on 7 May 2004 and an order in the terms I have referred to. Management should file and serve its amended statement of claim by 14 May 2004.