Umberto Pty Ltd (in liq) v Candelori, in the matter of Umberto Pty Ltd

Introduction 1 Rossano Candelori, Gina Candelori, Candelori Group Pty Ltd, and Life Investment Pty Ltd (the cross-claimants) seek leave nunc pro tunc to rely on a cross-claim filed out of time against LCI Partners Pty Ltd, the sixth defendant. The claim the subject of the cross-claim is at risk of being statute-barred if it is now brought by way of separate proceedings but was arguably not statute-barred at the time the cross-claim was filed on 11 June 2021. 2 LCI resists the grant of leave on the basis that there is an inadequate explanation for the delay and further that resolution of the proceedings will be significantly delayed and there will be additional and duplicated costs incurred in investigating and responding to the cross-claim in circumstances where the proceedings are otherwise ready to take a hearing date.

Parties 3 On 21 May 2015, the first plaintiff Umberto Pty Ltd (in liquidation) was placed into liquidation and David Iannuzzi of Veritas Advisory was appointed as liquidator pursuant to a special resolution of members under s 491(1) of the Corporations Act 2001 (Cth). On 14 March 2018, Sule Arnautovic and Amanda Young were appointed as additional liquidators of Umberto. Mr Arnautovic, in his capacity as one of the liquidators of Umberto, is the second plaintiff. Ms Young was for a time the third plaintiff in these proceedings but ceased to be a party following her resignation as a liquidator of Umberto. 4 The cross-claimants are defendants in the substantive proceedings. The cross-respondent is the sixth defendant. Christian Candelori is the second defendant, he is not a party to the cross-claim. He is the sole director of Candelori Group, one of the cross-claimants.

Background 5 The following matters of background emerge from the pleaded allegations and are not findings of fact. In the main the matters set out by way of background summarise the allegations made in the pleadings which is sufficient for the purpose of this interlocutory application. 6 From about 1999, the cross-claimants, who are members, or related companies, of the Candelori family, had an interest in a restaurant business known as "Candelori's" which operated from premises in Smithfield, owned by Life Investment. 7 In or about 2004, a dispute concerning the rights and interests in the Candelori family trust was litigated in the Supreme Court of New South Wales (the Candelori Family Trust Dispute). The proceedings were settled in 2006 and a deed of settlement was executed on 15 August 2006. At that time, it was agreed that Umberto was the owner of the Candelori restaurant business and its assets. 8 From about 2012 onwards, LCI provided accounting and business advisory services to Umberto and to the cross-claimants. 9 In around June 2012, Candelori Group entered into a licensing agreement with Umberto giving it the right to operate and use the business assets, occupy the premises and use the name "Candelori's" to operate the business. 10 At some time prior to 2015 Umberto arranged for building works including fit-out works at the restaurant premises. The work was undertaken by GDK Projects Pty Ltd. 11 On 21 January 2015, GDK obtained a judgment in the sum of $240,605.23 against Umberto in the District Court of New South Wales. GDK's claim against Umberto was for payment for fit out and building works at the restaurant premises. 12 On 7 May 2015, Umberto filed a notice of motion in the District Court seeking to pay the judgment debt by instalments. 13 On 8 May 2015, LCI instructed a valuer to prepare a valuation report of business assets of Umberto and a report was obtained on 21 May 2015. The plaintiffs allege that the valuation report did not include a valuation of all of the relevant business assets and so in general terms a subsequent transfer of the business assets based on the valuation was at an undervalue. 14 The cross-claimants allege that LCI provided "accounting and business advisory services" to them and to Umberto from about 27 May 2012 to 21 May 2015. The cross-claimants allege that LCI advised Rossano and Gina to consider appointing a liquidator to Umberto and introduced them to Mr Iannuzzi. Further, that following a meeting with Mr Iannuzzi in or about May 2015, LCI provided advice and undertook a number of steps to transfer Umberto's assets to Life Investments. The transfer was effected prior to the time on 21 May 2015, when Mr Iannuzzi was appointed as liquidator and the members passed a resolution to wind up the company under s 491(1) of the Act.

Procedural History in this Court 15 On 18 May 2018, the plaintiffs commenced the substantive proceedings alleging that the transfer of business assets from Umberto to Life Investments and the Candelori Group were voidable transactions. As noted above, the plaintiffs contend that in so far as the transaction relied on the LCI valuation the failure to include all of the business assets resulted in the assets being transferred at an undervalue. The plaintiffs also allege that LCI breached its duty of care owed to Umberto by recording a loan from Umberto to Rossano, which arose in the context of the settlement of the Candelori Family Trust Dispute, as goodwill in the books of Umberto. 16 On 29 June 2018, the Court ordered that the substantive proceedings proceed by way of pleadings. On 6 July 2018, the plaintiffs filed a Statement of Claim. On 23 August 2018, the first to fifth defendants filed a defence. On 11 September 2018, LCI filed a defence. 17 By 24 September 2020 all parties had filed and served their evidence. 18 On 18 November 2020, the Court referred the matter to mediation. The mediation took place on 10 February 2021 and continued on 29 April 2021. The mediation did not result in the resolution of the proceedings. 19 On 21 May 2021 the cross-claimants filed the cross-claim against LCI, which was sealed and returned on 11 June 2021 and served on LCI on that day. The time for filing a cross-claim under r 15.04 of the Federal Court Rules 2011 (Cth) had elapsed. The cross-claimants did not obtain LCI's consent to, or the Court's leave for, the late filing of the cross-claim. The cross-claimants did not file and serve the present interlocutory application seeking leave to file the cross-claim and a supporting affidavit of Placido Costa, the cross-claimants' solicitor, until 10 December 2021. 20 In the cross-claim, the cross-claimants allege, that in the event that the plaintiffs' claim against them succeeds, then they are entitled to relief against LCI for, in effect, negligent advice. 21 An affidavit of LCI's solicitor, Peter Craney, was sworn on 14 February 2022 and sets out the basis on which LCI opposes the application for leave being granted to rely on the cross-claim.

Relevant principles 22 Rule 15.04 of the Rules requires a party to file and serve any cross-claim on the date that a defence is due. Rule 15.05 of the Rules provides that a party that does not comply with rule 15.04 must apply for leave. The application for leave must be supported by an affidavit setting out the nature of the cross-claim, its relationship with the subject matter of the proceeding and why the cross-claim was not filed in accordance with r 15.04. 23 In Rush v Nationwide News Pty Ltd (No 2) [2018] FCA 550; 359 ALR 564 (Wigney J) at [87] summarised the principles applicable to the grant of leave to file a cross-claim out of time as follows: The principles that are applicable to the grant of leave to file a cross-claim out of time are relevantly the same as those that apply in the case of applications for leave to amend. Relevant considerations include: whether the subject matter of the claim fell within the Court's jurisdiction; the extent of the delay; whether an acceptable explanation has been provided for the delay; any prejudice to the other party or parties occasioned by the delay; the merits or strength of the proposed cross-claim; the degree of connection between the proposed cross-claim and the subject matter of the principal proceedings; and the desirability that all disputed matters between the parties connected with the subject matter of the proceedings be dealt with in the main trial: Trade Practices Commission v Allied Mills Industries Pty Ltd (1980) 33 ALR 127 at 129, 133, 134; Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 348-9; Sunbeam Corporation Ltd v Breville Pty Ltd [2007] FCA 496; Lendlease Project Management and Construction (Australia) Pty Ltd v Construction, Forestry Mining and Energy Union (No 3) [2011] FCA 912 at [18]; Tada Constructions Corporation Pty Ltd v JP Dixon Real Estate Pty Ltd (No 3) [2012] FCA 329. 24 Section 37M(1) of the Federal Court of Australia Act 1976 (Cth) provides that the overarching purpose of the practice and procedure provisions is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. 25 In Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; 239 CLR 175 the plurality (Gummow, Hayne, Crennan, Kiefel and Bell JJ) made the following observations in the context of an amendment application: (a) where a party has had a sufficient opportunity to plead its case, it may be necessary for a Court to make a decision which may produce a sense of injustice in that party, for the sake of doing justice to the opponent and the other litigants: at [94]; (b) there is no entitlement to leave on the basis that a party has an arguable claim and will pay costs by way of compensation: at [111]; (c) the fact of substantial delay, wasted costs and the concerns of case management will assume importance on an application for leave: at [111]; and (d) parties have choices as to what claims are made and how they are to be framed, but limits will be placed on their ability to amend, particularly if the litigation is advanced: at [112].

Consideration 26 For the reasons which follow I am satisfied that although finely balanced, it is appropriate to grant leave to the cross-claimants to rely on the cross-claim on conditions. 27 First, it is not controversial that the proposed cross-claim properly invokes the Court's jurisdiction. 28 The second and third considerations identified in Rush weigh against granting leave. The procedural history set out above demonstrates that the extent of the cross-claimants' delay is significant, particularly in the context of insolvency litigation. Although an amended statement of claim was filed in March 2019, the only substantive change was to remove Ms Young as the third plaintiff upon her retirement as a liquidator of Umberto. Relevantly, LCI filed a further amended defence which included amendments of substance but that was filed and served in December 2019. The cross-claimants' delay in bringing forward the claim the subject of the cross-claim does not appear to be related to any development in the evolution of the pleaded case, nor do the cross-claimants submit that their delay is as a result of matters of which the cross-claimants were not aware until LCI served its evidence. Given that the allegation is one of negligent advice that is informed by the plaintiffs' allegations against the cross-claimants in the original statement of claim, the delay in bringing the cross-claim cannot be justified by reference to the other parties' actions in the proceedings. 29 The cross-claimants have not proffered an explanation for their delay. The only explanation that may be gleaned emerges from the perfunctory recital of the procedural chronology in their solicitor's affidavit. The cross-claimants first sought to agitate the cross-claim following the parties' attendance at a Court ordered mediation which did not resolve the dispute. The cross-claim was filed within a month after the mediation. I infer that it was not until after the mediation failed, that the cross-claimants were either advised to pursue, and/or instructed their solicitor to file, the cross-claim. The cross-claimants' solicitor does not shed any light on why no steps were taken to file the cross-claim until almost three years after the time to do so under the Rules had elapsed. Similarly, there is no explanation for why the cross-claimants did not move quickly to obtain the Court's leave to rely on the cross-claim after it was filed. The delay and the failure to explain the delay weigh heavily against the grant of leave, particularly having regard to the considerations identified by the plurality in Aon, set out at [25] above. 30 I turn next to consider the extent of any prejudice to, on the one hand, the cross-claimants and on the other, to LCI. 31 The cross-claimants contend that the cross-claim was filed on the last day before the expiry of the relevant limitation period. If the cross-claimants are correct in respect of the limitation period, they would suffer serious prejudice if leave is not granted. They contend that they would be statute-barred from pursuing their claim against LCI. In the course of the argument, counsel appearing for LCI properly noted that LCI wished to reserve its rights to any available limitation defence while not conceding that the cross-claimants' claim would necessarily now be statute-barred if brought in separate proceedings. For the purpose of this application, I am satisfied that there is a risk that if leave is not granted the cross-claimants may be statute-barred from seeking relief against LCI in respect of the claim that is the subject of the cross-claim. It is not a matter in respect of which I can form a concluded view at this stage having regard to the evidence on this interlocutory application and the generality of the allegations in respect of time and dates in the cross-claim. I am satisfied for present purposes that there is a real risk that the cross-claimants may be statute-barred as they contend and that if that risk manifests, it would be a matter of serious prejudice. While it would be possible to sever the cross-claim from the proceedings as a means of ameliorating the prejudice to LCI caused by delaying the substantive proceedings, I am satisfied that to do so would be undesirable for two reasons. First, from the perspective of the broader management of the Court's work there is a substantial, although not complete, overlap in the issues and the witnesses to be called. In terms of the degree of connection between the cross-claim and the substantive proceedings, I recognise that the factual basis of the cross-claim against LCI is different to the factual basis relied on by the plaintiffs against LCI. However, both the plaintiffs' claim and the cross-claimants' claim against LCI arise from broadly the same subject matter, being the restructure of Umberto and transfer of its assets and both involve an alleged breach of duty by LCI, although the allegations of breach appear to be distinct. It is strongly desirable to have all of the issues between the parties to these proceedings resolved in the one proceeding. Second, it would not be in LCI's interests if the cross-claim was severed because it would likely prolong the time taken to determine the dispute between the cross-claimants and LCI in circumstances where LCI is concerned to have the allegations which seek to impugn its professional reputation determined as soon as possible. 32 Similarly, while it may have been open to the cross-claimants to bring the claim against LCI in separate proceedings and thereby potentially avoid the need to obtain leave in respect of the cross-claim, I accept that in choosing instead to seek leave to pursue a cross-claim in these proceedings, the cross-claimants have adopted an approach that is consistent with the overarching purpose. This is a factor which I also take into account. 33 I must also take into account the prejudice to LCI if leave is granted. LCI submits that if leave is granted it will be necessary for it to undertake further investigations and to revisit its existing evidence, including by re-reviewing its files and re-interviewing witnesses. The cross-claimants concede that LCI's point is well made but say this can be adequately dealt with by an appropriate costs order. In my view, the circumstances in which the cross-claimants bring this application are such that if leave is granted it would be appropriate to consider a special costs order both in respect of the application for leave, but also in respect of the additional costs occasioned to LCI by the late filing of the cross-claim which would not have been incurred if the cross-claim had been filed on time. In making this observation I am conscious that there is no entitlement to leave where a party has an arguable claim and will pay costs by way of compensation. Preparedness to pay costs is a relevant but not decisive factor. 34 LCI submits that the lack of overlap between the relief sought by the plaintiffs against LCI and the relief sought by the cross-claimants against LCI is a factor against the grant of leave. Although I accept that there is not a complete overlap in the two claims against LCI, I do not agree that the overlap is so limited that leave should be refused. The basis of the cross-claim is that LCI should not have given the advice that it is alleged to have given and that it should have advised the cross-claimants to wait until Umberto was placed in liquidation and thereafter negotiate with the liquidator, thereby avoiding being at risk of the claims they now face at the suit of the plaintiffs. The basis of the plaintiffs' claim is also in negligence but the alleged breach is in respect of accounting treatment. Both claims against LCI will involve analysis of who LCI was acting for and when, what instructions were given and by whom, what LCI did and the respective roles (duties and responsibilities) of LCI and potentially Veritas. I am satisfied that the overlap is such that it would be highly desirable for all the disputed matters between the parties connected with the events leading to the winding up of Umberto to be dealt with in these proceedings. 35 In terms of the merit or strength of the cross-claim, I am satisfied that the cross-claimants have made out an arguable case for the purpose of the present application. They contend that if they are held liable to the plaintiffs because the transfer of business assets from Umberto to Life Investments and the Candelori Group were voidable transactions (which they otherwise deny) then in entering into those transactions they relied on what they contend was negligent advice of LCI. The cross-claimants contend that LCI should have advised that the cross-claimants should place Umberto into liquidation and then to have sought to purchase Umberto's assets from the liquidator. 36 The final matter which is relevant is to consider the concerns of case management in both the specific circumstances of these proceedings and more generally with respect to the broader management of the Court's work. LCI submits that the grant of leave will necessarily delay the hearing and finalisation of the proceedings. In the event that leave is granted, LCI further says that it will name Veritas as a concurrent wrongdoer thereby making it necessary for the cross-claimants to consider if they also want to join Veritas to the proceedings. Veritas is not a party to the primary proceedings. If the cross-claimants decide to join Veritas it is likely that doing so will be another factor which will delay the allocation of a hearing date. There have already been significant delays in bringing the matter to this point, including the impact of the COVID-19 pandemic on case management generally; applications for security for costs and the arrangement of insurance to deal with that issue; and the adjournment of the mediation. Those delays have not been of the cross-claimants' making. However, a hearing date has not been set down. No estimate has been given in respect of the likely hearing time. Subject to the estimate of the hearing time, it is possible that a hearing date may be allocated towards the end of this year. That being the position, I am satisfied that with close case management, the extent of the ultimate delay in the likely hearing date can be minimised. All parties will be required to adopt a disciplined approach to observing a strict procedural timetable. The desirability of all disputed matters arising from the events leading to Umberto being placed in liquidation being determined together in the one proceeding weighs strongly in favour of leave being granted. The imposition of a strict case management regime to bring the proceedings forward to hearing should minimise delay in allocating a date for hearing. This will ameliorate the prejudice to LCI that arises by delay in the finalisation of proceedings. 37 Taking into account all of these matters, I will grant leave to the cross-claimants, nunc pro tunc, to file the cross-claim subject to the condition that they pay LCI's costs of this interlocutory application on an indemnity basis, with such costs to be paid within 14 days of being agreed or determined. To ensure that progress of the proceedings does not stall by reason of a costs dispute, in the absence of LCI's costs being agreed within seven days, I will refer the assessment of LCI's costs to a registrar of the Court for determination as a lump sum on an indemnity basis. Once agreed, or failing agreement, determined by the registrar the cross-claimants must pay LCI's costs on the interlocutory application within 14 days. The grant of leave to the cross-claimants to rely on the cross-claim is conditional on payment of LCI's costs on the interlocutory application, as agreed or determined by the registrar, being made within 14 days. 38 Separately, I further order that costs incurred by LCI in defending the cross-claim that would not have been incurred had the cross-claim been filed within the time provided by the Rules, be LCI's costs in the proceedings, such costs to be agreed or assessed on an indemnity basis. 39 I direct the parties to confer in relation to a timetable for case management with a view to timetabling all steps through to the parties being ready to take a hearing date. The proceedings will be listed for case management for the purpose of entering a timetable on a date to be advised by my associate. The case management hearing will be convened shortly after the date by which the cross-claimants are required to pay LCI's costs on the interlocutory application. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.

SCHEDULE OF PARTIES NSD 829 of 2018 Defendants Fourth Defendant: CANDELORI GROUP PTY LTD ACN 159 211 444 Fifth Defendant: LIFE INVESTMENT PTY LTD ACN 098 057 919 Sixth Defendant: LCI PARTNERS PTY LTD ACN 124 037 163 Cross-Claimants Second Cross-Claimant: GINA CANDELORI Third Cross-Claimant: CANDELORI GROUP PTY LTD ACN 159 211 444 Fourth Cross-Claimant: LIFE INVESTMENT PTY LTD ACN 098 057 919