Under r 51.50 of the Uniform Civil Procedure Rules 2005 (NSW), the New South Wales Court of Appeal may, in “special circumstances”, order that such security as the Court of Appeal thinks fit be given for costs of an appeal.

In Xenos v FAL Healthy Beverages Pty Ltd [2017] NSWCA 240, Gleeson JA, sitting as a single justice of the New South Wales Court of Appeal, was satisfied that the respondents to the appeal had shown special circumstances which enlivened the Court’s discretion to order security for costs under r 51.50, and ordered security for the costs of the appeal.

His Honour indicated (at [19]-[23]) that the following legal principles were applicable in the context of r 51.50:

• Special circumstances were required to be shown before an order for security for costs of an appeal could be made under r 51.50.
• The considerations engaged by the concept of “special circumstances” had been considered by the Court of Appeal in Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136; (2004) 60 NSWLR 143, and in Porter v Gordian Runoff Ltd [2004] NSWCA 171.
• In Preston v Harbour Pacific Underwriting Management Pty Ltd [2007] NSWCA 247 (“Preston”) at [18], Basten JA (Ipp JA and Hoeben J agreeing) had identified the following principles from those cases:
  • no order for security should be made in the absence of “special circumstances”;
  • consideration of what might constitute special circumstances should not be fettered by some general rule of practice;
  • impecuniosity, without more, would usually be insufficient;
  • an order might be appropriate if the appeal was shown to be hopeless, unreasonable or of an harassing nature;
  • where a bona fide and reasonably arguable appeal would be stifled by an order for security, such an order should usually not be made; and
  • the subject matter of the appeal, including an issue as to the liberty of the individual, or a public interest might provide a reason for not imposing a security order which would stifle the continuation of the appeal.
• Basten JA in Preston at [19] had suggested that the last two factors might better be seen as being relevant to the exercise of the discretion rather than as potential “special circumstances”.
• When weighing all the circumstances of the case in the exercise of the discretion, it was necessary to keep in mind that the weight to be given to any circumstance depended not only on its own intrinsic persuasiveness, but upon the impact of the other circumstances which had to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping [1991] HCA 36 at [7]; (1991) 102 ALR 321 at 323.

The background to the case before Gleeson JA was that, in the court below, the appellant had been found to have breached his duties as director and officer owing to the respondent companies by improperly authorising payments in respect of a large number of transactions and had been ordered to pay to the respondents an amount exceeding $1 million plus costs. After the appellant appealed against the judgment, the respondents brought an application seeking that the appellant provide security for costs of the appeal under r 51.50. The appellant did not file and serve any evidence in response to the application and there was no appearance by or on his behalf at the hearing of the application.

Gleeson JA was satisfied, having regard to evidence put forward by the respondents about the financial position of the appellant, that the appellant was impecunious or of very limited means in the sense that he was not in a position to pay the judgment debt and costs of the proceedings at first instance, or any costs order, if the appeal was unsuccessful but accepted that impecuniosity alone was not sufficient to constitute special circumstances. However, his Honour went on to say that impecuniosity could constitute special circumstances when combined with other factors (at [27]). His Honour also said that the appellant bore an evidentiary onus of establishing that any order for security would stultify his appeal, although the ultimate onus establishing special circumstances rested on the respondents. His Honour considered that, given the absence of evidence from the appellant in response to the application, the appellant had not shown that the appeal would be stultified if security were ordered (at [28]).

His Honour then went on to consider a number of circumstances which, taken together, the respondents claimed constituted special circumstances justifying an order for security for costs of the appeal. His Honour concluded (at [51]) that he was satisfied that special circumstances had been shown which enlivened the discretion to order security for costs under r 51.50. His Honour said that, while mere impecuniosity would not ordinarily justify an order for security for costs, there were additional matters in the case which, in combination, were capable of constituting special circumstances including:

• the appellant’s very weak prospects of success in the appeal;
• the raising by the appellant of new points on appeal which were not taken at trial;
• the wide ranging scope of the issues sought to be agitated by the appellant on the appeal;
• the absence of evidence that the appeal would be stultified if security were ordered; and
• the substantial risk that the respondents, if successful, would not recover their costs of the appeal from the appellant.

In addition, his Honour took into account the appellant’s apparent willingness and ability to fund his own costs of the appeal in circumstances where there was a substantial risk that, if successful, the respondents would be deprived of costs (at [52]).

In the result, his Honour ordered that the appellant provide security for costs in the sum of $65,000 by payment into court, or in such other form of security as might be agreed between the parties, and stayed the proceedings pending the provision of such security.

Introduction

The Victorian Court of Appeal in Modeca Investments Pty Ltd v Commonwealth Bank of Australia [2017] VSCA 203 has refused to set aside a creditor’s statutory demand for payment of a debt which was the balance of a loan after a mortgagee sale. The debtor had claimed that it had an offsetting claim under s 459H of the Corporations Act 2001 (Cth) (“CA”) because the sale had been at an under value in breach of the mortgagee’s duty of care in exercising the power of sale under s 420A of the CA. However, the Court of Appeal found that the debtor had failed to establish the offsetting claim because it had not attacked the sale process. An alternative claim by the debtor that there was “some other reason” to set aside the demand under s 459J of the CA also failed.

Relevant provisions

Section 420A(1) of the CA provides that, in exercising a power of sale in respect of property of a corporation, a “controller” (defined in s 9 of the CA) must take all reasonable care to sell the property for:

“(a) if, when it is sold, it has a market value — not less than that market value; or

(b) otherwise — the best price that is reasonably obtainable, having regard to the circumstances existing when the  property is sold.”

Section 459G of the CA enables a company, upon which a creditor’s statutory demand has been served, to apply to the Court for an order setting aside the statutory demand. On such an application, the company must show one or more of the grounds made available in ss 459H and 459J of the CA which, relevantly, include that:

• the company has an “offsetting claim” (s 459H(1)(b));
• there is “some other reason why the demand should be set aside” (s 459J(1)(b)).

Background

In 2010, the applicant (“company”) had entered into a contract of sale to purchase certain vacant land for $4.05 million. In 2012, the respondent (“bank”) had provided a loan of $1.4 million to the company to assist it to complete the purchase of the land. The company’s obligations to the bank were secured by a registered mortgage over the purchased land and by a guarantee given by the company’s sole director.

In 2015, the company had defaulted in payment and the bank had taken possession of the land as controller. The bank had then:

• obtained a valuation of the land from PPV which expressed the opinion that the open market value of the land for realisation purposes was $1.4 million (exclusive of GST) and that the market value range was $1 million to $1.4 million (exclusive of GST);
• obtained advice from Merc Property as to how to best sell the land to achieve the maximum price; and
• appointed PRD as real estate agent to market and sell the land by way of an informal tender.

The land had subsequently been sold for $1.3 million (plus GST) which did not cover the amount outstanding under the bank loan. The bank served a statutory demand on the company for the shortfall.

Shortly after the bank sale, the purchaser of the land began offering the land for sale through PRD, the agent used by the bank, for $6 million plus GST.

The application to set aside the demand

The company brought proceedings in the Supreme Court of Victoria to set aside the statutory demand under s 459H(1)(b) or, alternatively, under s 459J(1)(b) of the CA.

The company’s main case was that it had a claim which entirely offset and extinguished the bank’s claim. It said that the bank had contravened s 420A(1)(b) of the CA as a result of which the price achieved for the land had been less than the market value, and that, if the contravention had not occurred, the land would have been sold for an amount that would have repaid the amount owing to the bank.

At first instance, the judge was satisfied, without deciding what the market value of the land was, that the land had been sold at an under value but found that this was not sufficient to establish that there was a genuinely arguable offsetting claim under s 459H(1)(b). The trial judge said that the company needed to establish that a want of reasonable care had occurred in the sale process. The trial judge then found that the company had failed to establish this because it had not attacked the sale process. Accordingly, the trial judge dismissed the application to set aside the statutory demand without considering the claim under s 459J(1)(b).

The company sought leave to appeal to the Court of Appeal. The Court of Appeal (Tate, Ferguson and Hansen JJA) granted leave to appeal but dismissed the appeal.

The offsetting claim

Relevant legal principles

The Court of Appeal said (at [18]) that an applicant could establish an offsetting claim under s 459H(1)(b) without having to advance evidence as would be required at the trial of an action for judgment for the amount claimed. The Court further said that the approach taken to whether there was an offsetting claim had been summarised in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 at [48]-[49]. In that case, the following points had been made:

• It was not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute.
• What the applicant was required to establish was a plausible contention requiring investigation of the existence of either a dispute as to the debt or an offsetting claim.
• What the court was required to determine was whether the dispute or offsetting claim was “genuine “ i.e. that the dispute was bona fide and truly existed in fact, and that the grounds for alleging the existence of a dispute were real and not spurious, hypothetical, illusory or misconceived. The dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and must also have sufficient factual particularity to exclude the merely fanciful or futile.

The Court of Appeal also said (at [16]) that the accepted approach to the application of s 420A of the CA was as stated in Artistic Builders Pty Ltd v Elliot and Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16; (2002) 10 BPR 19,565 at [126]. In that case, the following points had been made:

• To determine whether there had been a breach of s 420A, a court looked at the process that a controller of property of a corporation had gone through in selling the property.
• The enquiry was whether, in the course of the process, the controller had taken all reasonable care to sell the property for not less than its market value.
• It was not necessary to prove that the property was in fact sold for less than its market value as a controller could breach s 420A, but, through luck, still manage to sell the property for its market value or more.
• It was not necessary for the court to determine what actually was the market value of the property in order for it to find that s 420(1)(a) had been breached. All that the court needed to find was that the process gone through was not one where all reasonable care had been taken to sell the property for its market value, whatever that market value might be.

Company’s arguments and court’s reasoning

The Court of Appeal said that the company did not challenge the trial judge’s conclusion that an error in the sale process had to be shown but rather submitted that the trial judge had erred in finding that the company had not attacked the process and had not shown negligence in the process.

The company relied on two reports (“Stephen reports”) which had been prepared by a valuer after the sale of the land. The company contended that the Stephen reports revealed material errors in the PPV valuation obtained by the bank, which errors had become those of the bank because it had relied on the PPV valuation. The land had been included in a local council plan which, if approved, would result in the land being rezoned which might have increased the value of the land. The Stephen reports said that it was the land’s future development potential which defined its value rather than its present use and criticised the manner in which the PPV valuation had applied the direct comparison method. According to the Stephen reports, the market value of the land at the relevant time was $1.95 million.

The Court of Appeal, however, said (at [39]) that, given that the Stephen reports had been prepared after the land had been sold, it was arguing backwards to impose on the bank an awareness of ‘errors’ of which it was not shown to be aware. Moreover, the Court said that it remained necessary for the company to show negligence in the process of the sale.

The company claimed that the following matters showed that negligence:

• The company had agreed to buy the land in 2010 for $4.05 million which should have put the bank on enquiry that the PPV valuation was or could have been substantially inconsistent with the true market value of the land.
• After default in payment and prior to the bank sale, the company had engaged Colliers to attempt to sell the land for a price between $7.2 million and $7.6 million and Colliers had recommended that the potential sale price range was some $7 million to $7.6 million. The bank had been aware of this and had not informed PPV of this or considered it.
• There was evidence given by the company’s director that, based on his dealings with other land nearby, the land had a market value of $150,000 to $200,000 per acre and so was worth $4.5 to $6 million at the time of the bank sale, and that a real estate agent in the area had informed him that the land was worth about $200,000 per acre in the current market.

The Court of Appeal, however, found that none of these matters established negligence in the sale process.

As for the company’s agreement to buy the land for $4.05 million, the Court said (at [41]) that market value of a property could fluctuate from time to time especially in the case of vacant land with the possibility of a change in zoning, and that speculation might have inflated the price. Furthermore, the Court said that the purchase in 2010 had been a terms sale, whereas the bank had not sold on a terms contract in 2015. Thus, the Court said that the transactions occurred in a different market, at a different time, and on contracts of a different nature. The Court seemed to take a similar view of the later offer to sell the land for $6 million by the successful purchaser on the bank sale (at [42]).

As regards the Colliers’ recommendation as to price and the authorised selling range, the Court of Appeal made the following points (at [43]):

• The recommendations were not founded upon a valuation such as that provided by PPV, or in the Stephen reports.
• They were provided at a time when the company both needed time and money, and the attempt to sell had quickly fallen away.
• It was axiomatic that a vendor’s desired selling price was not the same thing as market value.
• It was merely speculation that the bank did not inform PPV of Colliers’ recommendation or consider it.

As for the company director’s claims, the Court of Appeal said (at [44]) that they were not supported by evidence, let alone valuation, and could not constitute the basis for an attack on the sale process.

The Court of Appeal then concluded (at [45]) that the trial judge had been correct to conclude that the matters relied on by the company did not attack the sale process. The Court said that there was nothing to link the several matters to the conduct of the sale process and thereby to show negligence or neglect in the course of that process that could have constituted a breach of the duty under s 420A.

The Court had also commented earlier in its reasons (at [36]) that the company’s evidence did not depose as to the manner of the conduct of the sale process, such as, for instance, how PRD marketed the land or otherwise of any relevant action or event in that process, and that a fair reading of its evidence showed that it focused not on the process, but solely on the sale price achieved.

Accordingly, the offsetting claim under s 459H failed.

The “some other reason” claim

In separate proceedings, the bank had sued the company’s director on his guarantee to recover the shortfall. The director had filed a defence and counterclaim which had also maintained that the bank had breached its duty under s 420A(1)(b) and that, if it had not breached its duty, the land would have sold for an amount that would have repaid the amount owing to the bank.

The company contended that, as the issue of the bank’s breach of s 420A and the matter of the alleged shortfall would be determined in the guarantee proceedings, this constituted “some other reason” for setting aside the statutory demand under s 459J(1)(b).

The Court of Appeal, however, said (at [47]) that, the company having failed under s 459H, the existence of the claim under the guarantee did not justify setting aside the statutory demand to await determination of the issue in the guarantee proceedings. The Court went on to say (also at [47]):

“The statutory demand regime relies on speed and enables a presumption of insolvency to arise where there is no genuine dispute as to the debt and where no genuine offsetting claim exists. The merits of the claim are not investigated fully with the benefit of discovery and a trial. As a counterbalance, the threshold for establishing that there is a genuine dispute or offsetting claim is relatively low. Once the presumption of insolvency arises, action can be taken quickly through the winding up process to prevent an insolvent company from continuing to trade. In that context, it is difficult to see how if the debtor has failed to satisfy the genuine dispute/offsetting claim threshold that the mere pleading of a defence or counterclaim by a guarantor challenging the creditor’s right to the debt can give rise to some other reason why the demand should be set aside. Certainly, in this case, there is no basis for it.”

Accordingly, although the Court of Appeal granted leave to appeal, it dismissed the appeal.

The New South Wales Court of Appeal in Craig-Bridges v NSW Trustee and Guardian [2017] NSWCA 197 has found that a deceased person lacked the capacity to make her last three wills because she did not understand the extent of her estate and was not able to comprehend and appreciate the claims upon her estate.

Background

The deceased died in 2015, aged 90, having executed 5 wills, all of which had been professionally drafted.

By her first will, executed in 1990, the deceased appointed her husband as executor and made him sole beneficiary but provided that, if he and their son did not survive her, her estate should go to her son’s five daughters in equal shares.

By the time the deceased executed her second will, in June 2011, both her husband and son had died. By the June 2011 will, the deceased appointed H, one of her granddaughters, as executrix and gave her estate to her five granddaughters in equal shares.

The deceased’s three later wills were drafted by a new solicitor who came to be retained by the deceased after she had consulted another legal practice in relation to another matter. That other legal practice had sent a letter to the new solicitor informing him that a question had arisen as to the deceased’s personal affairs, that it appeared that the deceased’s will was out of date and that it had been suggested to the deceased that she should consult the new solicitor as his practice was closer to where she lived. The three later wills left the whole of her estate equally to two named charitable organisations and were as follows:

• A November 2011 will by which the deceased appointed her brother C as executor although C had died some nine years earlier. Although the whole estate had been left to charities, the will gave a power to the executor to apply money for the maintenance, education or benefit of any minor beneficiary.
• A 2012 will which was in identical terms to the November 2011 will except that the deceased appointed her surviving brother E as executor although he was in very poor health at the time and died less than a month later. The will retained the power given to the executor to apply money for the maintenance, education or benefit of minor beneficiaries.
• A 2013 will by which the deceased appointed the NSW Trustee and Guardian as executor (“NSW Trustee”). The power to apply money for the maintenance, education or benefit of minor beneficiaries was deleted but otherwise the will was in identical terms to the two earlier wills.

H sought a grant of probate in respect of the June 2011 will, or alternatively the 1990 will, asserting that the deceased had lost testamentary capacity following the execution of the June 2011 will. The NSW Trustee claimed a grant of probate in respect of any of the last three wills.

At first instance, the judge concluded that the deceased had capacity to make each of the last three wills. H appealed.

Decision on appeal

The Court of Appeal (Gleeson, Leeming and Simpson JJA) allowed the appeal and ordered that there be a grant of probate of the June 2011 will to H.

Legal principles and issues

The Court of Appeal noted that the formula for determining testamentary capacity was that stated in Banks v Goodfellow (1870) 5 QB 549 at 565 which was that a testator must:

• understand the nature of the act of making a will and its effects;
• understand the extent of the property of which he was disposing; and
• be able to comprehend and appreciate the claims to which he ought to give effect and, with a view to this object, that there be no disorder of the mind poisoning his affections, perverting his sense of right or preventing the exercise of his natural faculties, and that no insane delusion should influence his will in disposing of his property and bring about a disposal which, if his mind had been sound, would not have been made (at [112]-[113]).

The Court also noted that the criteria in Banks v Goodfellow were not matters that were directly medical questions but were matters for commonsense judicial judgment on the basis of the whole of the evidence. While medical evidence as to the medical condition of a deceased person might be highly relevant, and might sometimes directly support or deny a capacity in the deceased person to have understanding of the matters in the Banks v Goodfellow criteria, evidence of such understanding could come from non-expert witnesses (at [133]-[134]).

The Court of Appeal said [at [113]) that the critical issues in the case were whether the deceased understood the extent of her estate, and was able to comprehend and appreciate the claims upon that estate.

Onus of proof

H had submitted that the trial judge had failed to correctly apply the onus of proof and so had required H to prove incapacity rather than requiring the NSW Trustee to prove capacity.

The Court of Appeal said that, although the deceased’s November 2011 will was rational and there was clear proof that it had been duly executed, it was common ground that the presumption of capacity had been displaced, such that there was a shifting of the evidentiary onus onto the NSW Trustee which, as the propounder of the three later wills, had the burden of showing that the deceased had such capacity at the relevant time (at [26]; [114]). The presumption of capacity had been displaced because:

• the deceased had been confused at the time she gave the name of C as executor to the new solicitor and had probably also been confused when she executed the November 2011 will a month later;
• the will included an inappropriate power to apply money for the maintenance, education or benefit of any minor beneficiary; and
• given that the new solicitor probably believed that C was alive, this gave rise to further questions as to whether C was also in his 80s or 90s, what his life expectancy might be and what regard the deceased had given to any claims on her estate which he and his family (if any) might have (at [23]-[25]).

In the result, the Court of Appeal did not accept H’s submission that the trial judge had failed to correctly apply the onus of proof and found that the trial judge’s conclusions were not expressed to turn on onus but on the evidence as a whole (at [119]).

Knowledge and approval

H had also submitted that the trial judge had erred in finding that the deceased had known and approved of the three later wills. However, the Court of Appeal was satisfied that, in light of all of the evidence, the trial judge had been entitled to conclude that the deceased knew and approved of these wills. The Court said that the three wills identified the same beneficiaries, in each case in accordance with instructions recorded in a file note of the solicitor, and the simplicity and rationality of these dispositions supported the conclusion that the deceased knew and approved them (at [122]).

Testamentary capacity

The Court of Appeal, however, agreed with H’s submission that the trial judge had erred in concluding that the deceased had the capacity to make each of the three later wills.

The Court referred to a “series of unfortunate events” (at [124]) leading to the execution of the November 2011 will. These were as follows:

• Unchallenged evidence that the deceased’s decision to retain a new solicitor to draft the November 2011 will had been because her existing solicitors – who had drafted the June 2011 will – had told her that she needed to give them some sort of papers before they would do it. On one view, this suggested a measure of caution in advising an elderly client who wished to alter a recently made will so as to exclude all her surviving family.
• The terms of the letter from the other legal practice to the new solicitor that the deceased’s will was out of date, which suggested that the deceased had failed to disclose to that legal practice that she had executed a will only 4 months earlier in favour of her five granddaughters.
• As a result of the deceased’s decision to see the new solicitor, rather than her existing solicitors, there was no reason to believe that the new solicitor became aware of the change which the deceased had made to her will, substituting the two charities for the five granddaughters.
• The deceased’s nomination of C, her long deceased brother, as her executor (at [124]-[128]).

The Court of Appeal then questioned (at [129]) as to how evidence was to be adduced to demonstrate that the deceased had sufficiently understood the claims of her granddaughters when she was so mistaken in relation to her brother. The Court said that ordinarily such evidence would come from the solicitor who had prepared the will and might be along the lines of a file note to the effect that the deceased appreciated that she owned certain assets and that she was conscious that her new will would leave no assets to her grandchildren. However, the Court said that such evidence was “singularly unavailable” in the facts of the case. There was only a file note by the solicitor which contained brief instructions, mainly being the details of the intended executor and the intended beneficiaries. There were no other file notes in relation to the will, and neither the solicitor nor the other person who had witnessed the November 2011 will had any recollection of the circumstances in which it had been executed.

Finally, after conducting a review of the entirety of the evidence in relation to the making of the three later wills, the Court reached the following conclusions (at [158]; see also [130]-[156]):

• The trial judge appeared not to have had regard to significant portions of H’s unchallenged evidence of the deceased’s declining capacity.
• The trial judge appeared to have disregarded or given no weight to the opinion of the medical expert called by the NSW Trustee in relation to the November 2011 will which was that there was significant cognitive deficit. Both that expert and H’s medical expert were in substance of the view that they could not be satisfied that the deceased had capacity at this time.
• The trial judge formed a favourable view of certain lay witnesses called by the NSW Trustee who had given evidence to the effect that the deceased had presented as being attentive and alert around the time of the November 2011 will. However, none of these lay witnesses had discussed matters concerning the deceased’s estate and it was one thing for a person to convey the appearance of full cognitive competence in ordinary conversations; it was another for the person to have testamentary capacity. The evidence of these lay witnesses was unavailable in respect of the two later wills, or else was in stark contrast with the medical evidence, and with the largely unchallenged evidence of H.
• The trial judge erred in relying on the simplicity of the November 2011 will as probative of the deceased’s capacity. While the simplicity of the wills leaving her estate to two charities was relevant to a conclusion that the deceased knew and approved of her wills, it did not logically bear upon the issue of whether she had capacity to comprehend or appreciate the claims of her granddaughters. There was also the problem that the will itself named her long deceased brother as executor.

Accordingly, the Court allowed the appeal and ordered that there be a grant of probate of the June 2011 will to H.

The Supreme Court of Western Australia in Lafferty v Waterton [No 3] [2017] WASC 230 has restrained a lawyer from acting as counsel for the plaintiff, his wife, because of a combination of factors: it would be difficult for him to maintain professional independence by reason of their relationship; his own financial affairs were important to the issues in the proceedings; and he had directly participated in events which were part of the facts in issue in the proceedings.

Background

The plaintiff’s father had died in Victoria in 2003, leaving real property in that State. Probate of his last will, which had provided for his entire estate to pass to the plaintiff’s mother, had been granted in the Supreme Court of Victoria in 2004.

In 2013, the plaintiff had commenced proceedings in the Supreme Court of Western Australia claiming, in substance, that:

• the plaintiff’s mother had made a representation in 2004 that, on the mother’s death, all of her property (including the assets which had passed to her from her husband’s estate) would be left to her three children equally;
• the plaintiff, who had been entitled to apply for an order for provision out of the estate of her father pursuant to Pt IV of the Administration and Probate Act 1958 (Vic), had relied on her mother’s representation by refraining from applying for such an order within time or at all;
• the plaintiff’s mother had acted inconsistently with her representation; and
• the plaintiff had thereby suffered detriment and was entitled to various equitable relief.

The defendants denied that the plaintiff had been entitled to a family provision order or had suffered any detriment and alleged that the court in any proceedings would have determined that her father had had no responsibility to provide for her.

Two days before the date on which the trial of the proceedings was due to commence, the plaintiff changed her legal representatives. Her husband, a lawyer, came onto the record as solicitor for the plaintiff and, on the first day of the trial, appeared as counsel for the plaintiff.

One of the defendants then raised the issue of the husband acting as counsel for his wife.

Decision

The issue was dealt with by Allanson J.

His Honour said (at [10]) that the matters which would be considered in an application under the Administration and Probate Act included the financial resources and financial needs of the plaintiff at the time and for the foreseeable future, and the liability of any other person to maintain her. Accordingly, the factual issues in the trial would include the financial position of the plaintiff and her husband around the time of her father’s death.

His Honour then noted as follows (at [11]-[12]):

• The plaintiff had referred in opening submissions to her husband’s employment and earnings, and to other financial matters of her husband.
• The plaintiff had referred in her witness statement to her husband having told her that she might be entitled to make a claim against her father’s estate, and to family meetings having been held at which her husband was present when the estate and gifts from her mother to the children were discussed.
• Some of the parties had provided the court with documents which related to companies in which the husband held office and to real property which was jointly owned by the plaintiff and her husband.

After commenting (at [12]) that the husband’s financial position at various times could not be disentangled from the issues in the proceedings, Allanson J referred to and adopted (at [14]) the principles applicable to restraining a legal practitioner which had been summarised in Frigger v Mervyn Jonathon Kitay in his capacity as Liquidator of Computer Accounting & Tax Pty Ltd (in liquidation) [No 10] [2016] WASC 63 at [23].  Those principles included the following:

• The Court, in its inherent supervisory jurisdiction, could restrain practitioners from acting for a client in proceedings if the Court considered it was necessary to do so in order to ensure the due administration of justice.
• The Court might exercise this control in the event that a practitioner had a personal interest, because, for example, he or she was closely related to the client or had a financial or professional interest in the outcome of the proceedings or where he or she was likely to be called as a witness, such that he or she was unable to give the Court the independent and uninvolved assistance which it expected.

His Honour said (at [15]) that the power to restrain a practitioner from acting was not lightly exercised and was a power which had been described as extraordinary, to be used sparingly and only in a clear case. His Honour then said (also at [15]) that the case before the Court was “both extraordinary and clear” by reason of the following combination of factors:

• the relationship (as husband) which the practitioner had with the plaintiff;
• the proscription in the Legal Profession Conduct Rules 2010 (WA) that a practitioner must not act as counsel if it would be difficult for the practitioner to maintain professional independence because of that relationship (see r 33(2));
• the importance of the husband’s own financial affairs to the issues in the proceedings; and
• the husband’s direct participation in events which were part of the facts in issue in the proceedings, even if he was not to be called as a witness.

Accordingly, his Honour adjourned the trial and ordered that the husband not act as counsel for the plaintiff.

The Victorian Court of Appeal in Melbourne City Investments Pty Ltd v Myer Holdings Limited [2017] VSCA 187 has upheld the decision of a judge at first instance to stay a group proceeding as an abuse of process because the lead plaintiff’s predominant purpose in bringing the proceeding was to generate income from the proceeding itself rather than to seek compensation for any wrong done to it or to assist group members by acting as lead plaintiff.

Background

The lead plaintiff (“MCI”) had commenced a securities class action against Myer Holdings Limited (“Myer”) in the Supreme Court of Victoria alleging that Myer had breached its continuous disclosure obligations under the Corporations Act 2001 (Cth) and that Myer had engaged in misleading and deceptive conduct. MCI held 400 shares in Myer which it had purchased for just over $700 and any damages which it might recover in the proceeding would be, at most, in the hundreds of dollars.

MCI had been created as a vehicle for bringing class actions against publicly listed corporations for breaches of the continuous disclosure obligations. It had purchased and held small parcels of shares in many listed companies and so could commence a class action acting as the lead plaintiff in the event that any of those companies breached the continuous disclosure obligations. Indeed, MCI had commenced a number of securities class actions against listed companies in which it held shares. Its sole director and secretary was Mark Elliott and its sole shareholder was BSL Litigation Partners Limited (“BSLLP”), a company associated with Mr Elliott. In some of the proceedings, BSLLP had been the litigation funder and Mr Elliott had acted as solicitor for the plaintiff.

In the proceeding against Myer, however, there was no litigation funder and Mr Elliott was not the solicitor for MCI but evidence was given that, if MCI received a favourable result in the proceeding, it would apply under s 33ZF and/or s 33V of the Supreme Court Act 1986 (Vic) (“SCA”) for an amount to reimburse it for its time and effort in acting as lead plaintiff and that it might also seek additional compensation to the extent that it acted as a funder for the litigation. Section 33ZF of the SCA contains the general power of the Court to make orders in any proceeding, while s 33V of the SCA requires Court approval for settlement of a group proceeding and, where such approval is given, empowers the Court to make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement.

Myer sought an order that the proceeding be stayed as an abuse of process. It was successful at first instance, the judge holding that the predominant purpose of the proceeding was to generate income or revenue for interests associated with Mr Elliott which was not a legitimate predominant purpose. The proceeding was permanently stayed.

MCI sought leave to appeal from the orders made.

Decision on appeal

The Court of Appeal (Osborn and Ferguson JJA, Whelan JA agreeing) granted leave to appeal but dismissed the appeal.

Osborn and Ferguson JJA in a joint judgment (“joint judgment”) first considered (at [7]-[23]):

• the legal principles governing abuse of process in the sense of proceedings instituted and maintained for an improper purpose, as set out by the High Court of Australia in Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509;
• various authorities which had considered abuse of process in the context of group proceedings; and
• some other MCI group proceedings which had been stayed as an abuse of process.

The joint judgment then examined MCI’s fundamental argument which was that it was not an abuse of process for a lead plaintiff to institute and maintain a genuine class action for the purpose of generating income or profit that could be properly earned from that proceeding pursuant to a valid legal process. This, it was claimed, was especially so when that legal process was sanctioned, controlled and regulated by the SCA and overseen by the Court such that no amount which the lead plaintiff might earn from the proceeding could be paid to it without close scrutiny by the Court and a formal order being made (at [31]).

To understand MCI’s argument, the joint judgment used the analogy of three silos from which MCI might obtain money as a result of the proceeding (at [32]):

• Silo 1, the damages silo – the amount which MCI might hope to gain by way of compensation and interest payable on it;
• Silo 2, the representative plaintiff silo – the amount which MCI might receive by an order under s 33V and/or s 33ZF of the SCA as compensation for its time and effort acting as lead plaintiff; and
• Silo 3, the funding silo – the amount which MCI might hope to be paid for funding the class action through orders made under s 33V and/or s 33ZF of the SCA.

The joint judgment said that, in summary, MCI’s argument could be reduced to the following contentions (at [39]):

• There was nothing in and of itself improper about a plaintiff putting itself in a position to have standing to commence a proceeding.
• Before it could earn income from the proceeding (Silos 2 and 3) there had to be a vindication of its rights through settlement or judgment in its favour.
• Income from Silos 2 and 3 was dependent upon an order of the Court.
• That income was a benefit which the law gave it as it could only be achieved by virtue of the proceeding.
• Accordingly, there was no abuse of process.

The joint judgment, however, rejected MCI’s argument. The joint judgment’s reasoning was as follows (at [41]-[52]):

• Williams v Spautz had made it clear that it was essential to consider the proper purpose of the proceeding and then to determine whether the plaintiff’s predominant purpose in bringing the proceeding was to fulfil that proper purpose or was to gain some other collateral advantage.
• In the ordinary course, the proper purpose of a proceeding was for the plaintiff to obtain redress for a wrong done to it, or to prevent a wrong i.e. to obtain some form of substantive relief which relief could take different forms including an award of damages. When the authorities spoke of the plaintiff intending to obtain relief within the “scope of the remedy” available in the proceeding such that there was no abuse of process, it was this substantive relief to which they were referring.
• When the proceeding was a representative action, the proper purpose was not limited to the determination of the lead plaintiff’s claim but also involved the determination of the common questions for the benefit of group members.
• It had long been recognised by the courts that commencement of an action was not an abuse of process if the plaintiff’s predominant purpose was to settle the claim before it was determined. This applied equally as a proper purpose of a class action.
• Consequently, in the class action area, the question of whether the proceeding had been brought for an improper purpose could not be determined simply by asking whether the lead plaintiff would have brought the proceeding as a sole plaintiff. Nevertheless, the proper purpose of such an action looked to enforcing the substantive rights of the plaintiff and laying the groundwork for enforcing the substantive rights of the group members.
• A class action was not designed and did not exist for the purpose of the lead plaintiff obtaining ancillary orders of the kind which MCI was hoping it might obtain under s 33ZF and/or s 33V of the SCA. MCI was created for the purpose of bringing class actions to earn that kind of income and its predominant purpose in instituting the proceeding was to obtain such orders. It was not interested in pursuing the claim for recovery of the damages it alleged it had sustained or for a settlement in respect of that claim and so had no substantial interest in recovering money in Silo 1. Its focus was on Silos 2 and 3. Nor was MCI’s predominant purpose in instituting the proceeding to have the common questions determined for the benefit of group members or to settle the litigation for their benefit.
• A contrast could be made with the position which applied where a consequence flowed from a judgment, for example: the vindication of a plaintiff’s reputation from a verdict for defamation; the alderman seeking disqualification of an opponent following conviction; and the public examination of a bankrupt following sequestration. In these cases, each consequence was separate from the proceeding itself which could only achieve the principal result for which it was designed – the verdict, the conviction or the bankruptcy. In instituting the proceeding, the litigant in each of these cases had the predominant purpose of using the proceeding to achieve that result, although consequences could flow outside the proceeding from having achieved the result in the proceeding. Williams v Spautz was referring to the legitimate consequences that flowed from a successful conclusion of the proceeding and which were separate from the proceeding itself when the majority of the High Court spoke of the “advantage of an entitlement or benefit which the law gives the litigant”.
• Unlike the above position, MCI wanted to use the proceeding predominantly to gain the consequential advantages offered by Silos 2 and 3, and not for the purpose for which the proceeding was designed, being Silo 1 and/or the benefit that a group proceeding might deliver to the group members, and this was an abuse of process. MCI had no substantial legitimate purpose (let alone a predominant one) in bringing the proceeding. It had no right to Silos 2 and 3 which were not within the “scope of the remedy” referred to in the authorities. In most commercial litigation, the plaintiff was primarily concerned with the recovery of Silo 1 money and instituting and maintaining litigation for this was a legitimate purpose. It was what the proceeding was designed to be used for by litigants and was what the authorities were referring to when they spoke of “vindication of rights”.
• It was no answer that, if the proceeding was allowed to continue, it might achieve one or more of the purposes for which it was designed. It was the predominant purpose of the lead plaintiff that was relevant and the trial judge had found that to be to generate collateral income or revenue for interests associated with Mr Elliott. That finding of fact had not been challenged by MCI, and was not contrary to compelling inferences nor glaringly improbable.
• This analysis was not altered by the fact that entitlement to monetary gain from Silos 2 and 3 was dependent upon court order and close supervision by the Court. The focus was on the predominant purpose of the plaintiff and whether that was improper. As the purpose of the proceeding was not the conduct of the substantive claim (either for the benefit of MCI or for the benefit of the group members) but rather the consequential orders that might be made if MCI was successful or the proceeding was settled, the advantages which MCI sought were collateral.
• This was a case where the plaintiff had been created for the purpose of earning income from class actions above and beyond compensation for its loss as a shareholder. This differed from the position where a party, having acquired shares as part of its normal investment portfolio and seeking to make a profit from the expected increase in value of the shares and dividends, had to be persuaded to take on the risk of being lead plaintiff in the event that there was a breach of the continuous disclosure obligations.
• While it was not uncommon for persons to obtain standing where they originally had none, usually this occurred where the right had already accrued and was then assigned to give the new owner standing. It was not obtained “as it were, speculatively.”

Accordingly, the joint judgment concluded (at [56]) that the trial judge had been correct to stay the proceeding because MCI had commenced the proceeding with the predominant purpose of generating income from the proceeding itself, and not with the predominant purpose of seeking compensation for any wrong done to it, or for assisting the group members by acting as lead plaintiff. Therefore, the proceeding had not been commenced for the purpose for which class actions were designed but to gain a collateral advantage and so was an abuse of process.

Additional observations by Whelan JA

Although Whelan JA agreed with the joint judgment, his Honour made a number of additional observations (at [59]-[75]). These included, in substance, the following:

• What MCI was doing was an abuse of process not only because of the purpose for which MCI had instituted and was maintaining the proceeding, as the joint judgment had explained, but because of the circumstances in which the claim which it had sought to maintain had arisen.
• Those circumstances were that MCI had bought small shareholdings in a large number of companies with a view to its suffering a loss i.e. a reduction in share price of its small shareholdings as a result of non-disclosure, so that it might bring a representative action.
• The loss was sought out by MCI by calculated and deliberate steps and MCI’s business model depended upon its suffering such losses. MCI had actively sought out the loss it claimed to have suffered because its objective was to make profits, as a professional litigant and as a professional ‘loss sufferer’. It wanted to suffer a loss because, under its business model, the opportunity to make a profit was assessed as being more valuable than the apparent losses sustained and the costs likely to be incurred. That opportunity to make a profit arose as follows:
  • MCI, as lead plaintiff, had the opportunity to obtain an order under s 33V and/or s 33ZF of the SCA;
  • Mr Elliott, or a firm with whom he had a relevant arrangement, had the opportunity to earn legal fees; and
  • BSLLP had the opportunity to enter into a litigation funding agreement with MCI and earn profits under such an agreement.
• Thus, MCI had manufactured or engineered a claim which it could then use as a platform for the purpose of bringing a class action as lead plaintiff and had done so because it sought the opportunity for itself and those associated with it to profit from the legal proceedings.
• While MCI, Mr Elliott and BSLLP could only obtain the benefits they sought through court sanction and court orders, they were seeking to put themselves in a position of unique advantage – to be in a position where they could exert considerable control over the litigation. For example, it seemed that the litigation funding arrangements were to be negotiated between two bodies each of which were controlled by Mr Elliott. While the Court might eventually be in a position to address these circumstances, the relevant issue was whether they should be permitted to arise at all.
• The courts should not countenance the commencement or maintenance of a claim that a party has actively sought out and deliberately manufactured or engineered so as to profit from the process of litigation.