FEDERAL COURT OF AUSTRALIA Pridmore v Magenta Nominees Pty Ltd [2001] FCA 815 BANKRUPTCY – claims of negligence against trustee – whether claims should be struck out as disclosing no reasonable cause of action – whether claims previously vested in trustee – whether claims should be dismissed for want of prosecution Bankruptcy Act 1966 (Cth) Federal Court Rules O 7 r 1, O 20 r 2(1) Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 referred to Faulkner v Bluett (1981) 52 FLR 109 cited Re Dosanjh (1995) 56 FCR 521 cited Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 55 – 56 cited Macchia v Nilant [2001] FCA 7 referred to Watson v Healey (1996) 64 FCR 301 cited Bellin v Pattison (as Trustee) [1999] FCA 51 cited Re Gault; Gault v Law (1982) 57 FLR 165 referred to Re Cheesman; Cheesman v Waters (1997) 143 ALR 78 cited Official Receiver in Bankruptcy v Todd (1986) 70 ALR 119 cited National Mutual Life Association of Australasia Ltd v Reynolds [2000] FCA 267 referred to Allen v Sir Alfred McAlpine & Sons Limited [1968] 2 QB 229 applied cf Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 cited Birkett v James [1978] AC 297 cited Lewandowski & Ors v Lovell (1994) 11 WAR 124 cited cf Cooper v Hopgood & Ganim (1999) 2 QDR 113 cited ANTHONY CHARLES PRIDMORE, HANS LOTHAR WITTE, MARINA PRIDMORE and RENATE WITTE v MAGENTA NOMINEES PTY LTD and HALL CHADWICK W 164 of 1998 RD NICHOLSON J 29 JUNE 2001 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 164 of 1998 BETWEEN: ANTHONY CHARLES PRIDMORE FIRST APPLICANT HANS LOTHAR WITTE SECOND APPLICANT MARINA PRIDMORE THIRD APPLICANT RENATE WITTE FOURTH APPLICANT AND: MAGENTA NOMINEES PTY LTD (ACN 009 340 158) FIRST RESPONDENT HALL CHADWICK SECOND RESPONDENT JUDGE: RD NICHOLSON J DATE OF ORDER: 29 JUNE 2001 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The second respondent's motions filed on 27 April 2001 and 9 May 2001 be granted. 2. The application against the second respondent be dismissed. 3. The applicant pay the costs on the application, the motions referred to in order 1 and all reserved costs, to be taxed of: (a) Messrs Rowe and Evans of the second respondent; (b) Messrs Williamson, Posma and Lyford of the second respondent; subject to the right of the applicant to contend before the taxing officer that it was not necessary for there to be separate representation for members of the second respondent. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 164 of 1998 BETWEEN: ANTHONY CHARLES PRIDMORE FIRST APPLICANT HANS LOTHAR WITTE SECOND APPLICANT MARINA PRIDMORE THIRD APPLICANT RENATE WITTE FOURTH APPLICANT AND: MAGENTA NOMINEES PTY LTD (ACN 009 340 158) FIRST RESPONDENT HALL CHADWICK SECOND RESPONDENT JUDGE: RD NICHOLSON J DATE: 29 JUNE 2001 PLACE: PERTH REASONS FOR JUDGMENT 1 These reasons concern two notices of motion brought by members of the second respondent (an accounting firm) seeking to bring an end to the applicants' claim against them. In the case of Rowe and Evans (two former members of the second respondent firm), it is sought to dismiss the application pursuant to O 20 r 2(1) of the Federal Court Rules ("FCR") as disclosing no reasonable cause of action and for want of prosecution and pursuant to FCR O 7 r 1 for failure to file and serve an amended statement of claim within the time limited by an order. In respect of Williamson, Posma (two present members of the second respondent firm) and Lyford (a former member of the second respondent firm) the dismissal of the application is sought for want of prosecution. 2 The circumstances in which these motions arise are that the claim which they seek to have dismissed has previously been the subject of judgment in Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458. Those reasons should be read with the present reasons to provide the full context in which the present motions arise. Nature of claim 3 For the purpose of the motions the applicants' case is taken to be represented by their further re-amended statement of claim dated 17 April 2001, filed without leave. Although the amended statement of claim purports to be filed pursuant to orders made on 21 October 1999, those orders gave leave to amend the statement of claim only if the filing occurred within 28 days of the determination of any motion for dismissal of the action against the first respondent by the third and fourth applicants. Such determination took place on 9 December 1999. Nevertheless, it is not contested for the applicants that the present motion should be judged in respect of that proposed amended statement of claim. 4 In the amended statement of claim the first and second applicants make identical claims. They seek as against the second respondent damages, interest thereon, a declaration of indemnification by the first respondent in respect of legal costs as well as additional relief. Also, they seek as against Mr Lyford of the second respondent ("the Trustee") exemplary damages and costs. 5 It is pleaded (par 34) that at all material times Mr Lyford owed to the first and second applicants a duty of care in relation to their bankrupt estates, Proposed Compositions and the general performance of his duties. It is pleaded (par 41) that the duties were breached in that Mr Lyford failed to call for and obtain certain proofs of debt or a statement of claim; to properly call the Creditors' meeting; to comply with certain provisions of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"); to ensure certain matters in the drafting of special resolutions; to allow for a risk of failure to compel the first respondent to comply with the terms of the Proposed Composition; and, additionally, by his authorised representative, Mr Anderson, wrongly declared the Special Resolutions to be passed. It is further alleged (par 42) that but for Mr Lyford breaching the duties owed to the first and second applicants, the first respondent would either have surrendered the Pridmore Mortgage and the Witte Mortgage and proved for the Secured Debt in the Proposed Compositions as required under the provisions of the Bankruptcy Act or not surrendered either of the mortgages and not proved for the Secured Debt in that way. It is alleged (par 43) that, as a consequence, the first and second applicants suffered loss and damage in that they met the cost of repaying to the first respondent the present value of the Secured Debt in the amount of $116,963.66 and additional costs arising from their inability to consolidate loans in December 1993. There is an alternative plea (par 44) in the event of the Court determining that the first respondent would not have surrendered either of the mortgages. The alleged breach of duties is pleaded additionally (par 46) as the foundation for an indemnification by the second respondent for all legal costs which the first respondent is liable to pay the first and second applicants and which they are unable to recover from it. 6 A further alternative plea (pars 41 and 48 – 67) is that Mr Lyford was in breach of the duties he owed to the first and second applicants in that he failed to bring proceedings under s 134(1)(j) of the Bankruptcy Act by no later than June 1994 seeking clarification as to the status of the mortgages. As a result it is alleged (par 69) the first and second applicants have suffered loss and damage, namely, costs incurred in seeking to have the mortgages discharged as well as the costs, liability arising in relation to the first respondent and in proceeding against it on an indemnity basis. 7 Finally, it is alleged (par 70) that the second respondent, as the firm of which Mr Lyford was a member at all material times, is liable to the first and second applicants for Mr Lyford's alleged breaches of duty. Additionally, there is the claim (par 71) for compensationary damages against Mr Lyford. 8 It will be observed that the third and fourth applicants, though joined, do not assert any claim. Whether no reasonable cause of action disclosed Respondents' contentions 9 The case for the second respondents Rowe and Evans in relation to dismissal relies, firstly, on the provisions of FCR O 20 r 2(1) and the ground that the pleadings disclose no reasonable cause of action. The case made for them relies upon the Court's description of the relevant principles set out in its judgment of 25 February 1999 in Pridmore at pars 23 and 24. 10 For Rowe and Evans it is said that the causes of action pleaded against them arose during the time in which the first and second applicants were bankrupts. Their bankruptcy continued until termination in or about June 1995. It is pleaded (pars 3 and 4 of the amended statement of claim) that the applicants were respectively declared bankrupt on 2 June 1992. There are provisions for statutory discharge at the end of the period of three years from the date on which a bankrupt files a statement of affairs: the Bankruptcy Act s 149. 11 The pleading (par 43(b)) particularised the additional monies paid on the loans as arising since December 1993. The alternative pleading (par 44) in the event that Magenta is found not to have surrendered the mortgages, referred to events occurring no later than December 1993. The pleading (par 45) relates allegation of loss and damage to the difference between their present net worth of their estates had they been liquidated in January 1994 or (in the case of par 68) no later than June 1994. It is submitted that it therefore follows that the causes of action arose during the bankruptcies of the first and second applicants. 12 Accordingly, it is submitted that those causes of action, being part of the after acquired property of the first and second applicants, vested in the trustee: s 116(1)(a) of the Bankruptcy Act. That section provides for such vesting in respect of "property" or proceedings in respect of "property". The submission is that the claims pleaded are clearly claims of a proprietary nature (see pars 42, 43, 44, 45, 46 and 69). The primary and substantial right of action is direct pecuniary loss to the property or estate of the bankrupt. It is said that in those circumstances the right to sue passes to or is vested in the trustee: Pridmore at 469 (pars 51 – 63); Faulkner v Bluett (1981) 52 FLR 109 at 119; Re Dosanjh (1995) 56 FCR 521 at 523 – 4; Daemar v Industrial Commission of New South Wales (1988) 12 NSWLR 55 – 56. The claims of the first and second applicants to recover damages or compensation are not of the limited type of damages or compensation (namely, for personal injury or in respect of death) for which the exception exists in s 116(1)(g) of the Bankruptcy Act. 13 Therefore, it is submitted that the claims which the first and second applicants now advance are not claims which they are entitled to enforce. It is submitted that the appropriate course for the applicants to have followed was to seek the removal of Mr Lyford under s 179(1) (if, when his resignation was sought, he did not resign) and request a new trustee to investigate and, if appropriate, to pursue a claim for damages against him. However, no such claim was pursued which is supportive of the view that the case of the applicants is unsustainable. 14 Secondly, for the second respondents Rowe and Evans, it is submitted that the amended statement of claim is pleaded in defiance of provisions of the Bankruptcy Act, namely ss 58(1), 116(1)(B), 58(3) and 153(1) and on the mistaken assumption that Div 1 of Pt VI of the Bankruptcy Act applies to compositions under s 73, which is not the case. 15 Furthermore, it is submitted that the statement of claim does not plead a sustainable cause of action because each of the paragraphs at the heart of the pleading (42, 43, 44, 45, 46 and 68) is not sustainable. Given several previous amendments and interlocutory history the Court could not be confident that another version of the statement of claim making an amended case on loss would plead a sustainable cause of action. Applicants' submissions 16 For the first and second applicants a number of responses are made. Firstly, its is asserted that "the bankruptcies of the first and second applicants were annulled on 3 November 1993". This contention for the applicants is based on the application of s 74(5) of the Bankruptcy Act which provides that, upon the passing of a special resolution at a meeting of creditors of a bankrupt under subs 73(4), the bankruptcy is annulled, by force of the subsection, on the date on which the special resolution was passed. 17 Secondly, it is submitted for the first and second applicants that ss 178 and 179 of the Bankruptcy Act do not extend to provide statutory mechanisms by which claims for torts said to have been committed against a bankrupt in the administration of the estate or otherwise under the general law can be pursued: Macchia v Nilant [2001] FCA 7 at par 44. 18 Thirdly, the case for the first and second applicants placed reliance on Re Gault; Gault v Law (1982) 57 FLR 165 at 196. There it was said at p 196 by Ellicott J that "the applicant is…free to pursue such rights (if any) as he may have against the respondent for breach of trust whether under the Bankruptcy Act or the general law". 19 Fourthly, for the applicants it is submitted that the pleading in its content discloses a reasonable cause of action in that it adequately pleads the alleged negligence of Mr Lyford and the loss and damage so that it does disclose a cause of action. Resolution of contentions 20 In my opinion the primary submissions made for the second respondents Rowe and Evans are unanswered and are correct. For the applicants it has already been accepted that there was no binding composition: Pridmore at 463, par [27]. This followed from the acceptance by way of common cause that the alleged "special resolution" was not a special resolution within the meaning of s 5 of the Bankruptcy Act and thereby within the meaning of Pt IV Div 6 of the Bankruptcy Act because it was not passed by a majority in number and at least three quarters in value of the creditors present at the meeting. There was, therefore, no resolution to qualify as a "special resolution" for the purposes of the operation of s 74(5). It follows that there is no foundation for the contention that the bankruptcy of the first and second applicants was annulled as contended. On the applicants' own concession, no annulment of the bankruptcies of the first and second applicants could have taken place. Consequently, the causes of action became part of the after acquired property and the consequence is that neither of those applicants have the capacity to sue on those causes of action. 21 I accept the submission for the respondents that in the circumstances, including the circumstances relating to the ground concerning want of prosecution to which I am yet to turn, there is no apparent reason why the applicants should have a further opportunity to make an amended statement of claim on loss if they were able to do so. It has not been suggested to the Court that there is an alternative claim which is not yet properly formulated. 22 Accordingly, on those grounds I consider that the motion for the second respondents Rowe and Evans should be allowed and that the application against them should be dismissed pursuant to FCR O 20 r 2(1) as disclosing no reasonable cause of action. 23 This being the case, it follows that no cause of action would be available either against the other members of the second respondent, Williamson, Posma and Lyford. Leave should be given for an application to be made to amend the motion brought on their behalf to include this ground. 24 The other submissions for the first and second applicants are also able to be answered. In relation to the second submission, the statement which appears in Macchia v Nilant in the reasons for judgment of French J continues by stating "that is not to say that conduct which attracts remedial intervention under these control provisions may not also give rise to causes of action in tort or otherwise. Nor does it preclude the possibility that orders may be made under these sections based upon common law or equitable rights." The submission for Rowe and Evans of the second respondent only involves the utilisation of s 179 to effect a new appointment so that the new appointee may pursue the claim for damages. 25 Watson v Healey (1996) 64 FCR 301, a case relied on for the applicants, is authority for the proposition that a discharged bankrupt whose estate has been fully administered and finalised by the trustee cannot commence litigation in the bankruptcy jurisdiction of this Court but, where he or she alleges a breach of duty by the trustee, must pursue any remedy conferred by common law or equity in a court with common law or equitable jurisdiction (at 304). In Bellin v Pattison (as Trustee) [1999] FCA 51 at par 20 the authority of Watson was accepted. It was said that as the applicant had not yet been discharged from her bankruptcy and the administration of her estate had not been concluded, she would be entitled to invoke the jurisdiction conferred not only by s 178 but also by s 179 of the Bankruptcy Act to seek to redress the wrong, if any, which the respondent may have done her. In any event the view reached in Watson was disapproved and not followed in Re Cheesman; Cheesman v Waters (1997) 143 ALR 78 at 92 per Merkel J which found support in the decision of the Full Court in Official Receiver in Bankruptcy v Todd (1986) 70 ALR 119 by the majority (Fisher and Lockhart JJ) to the effect that the definition of "bankrupt" in s 5(1) of the Bankruptcy Act is not subject to any temporal restraints. 26 Accordingly, I cannot accept the submission made for the first and second applicants that the actions could not vest in the Trustee when the actions related to the alleged misconduct of the Trustee. 27 In relation to the third submission, the observations in Gault relate to the position of the trustee of a Pt X deed of arrangement: see at 167. Causes of action accruing to a person subject to a deed of arrangement do not vest in the trustee of the deed because neither the bankrupt's property nor after acquired property vest in the trustee. Sections 58(1) and 116(1) of the Bankruptcy Act, upon which the case for the second respondents Rowe and Evans now relies, do not apply to a deed of arrangement: s 237(2) of the Bankruptcy Act. Whether want of prosecution Relevant circumstances 28 The motions in their reliance on want of prosecution invoke FCR O 30 r 5. 29 The relevant history of events for consideration of this aspect is as follows. 30 The applicants were apparently aware of the facts giving rise to their cause of action, or were put on inquiry as to the existence of the cause, no later than April 1994, as appears from the statement of claim. The action was instituted in the Supreme Court in 1997. Its interlocutory history is set out in Pridmore at 461 – 2. 31 The matter was transferred to the Federal Court on 25 October 1998. On 11 December 1998 the Court heard the motion by the first respondent to dismiss the claim. Judgment was delivered on that motion on 25 February 1999 and orders were made. 32 On 21 October 1999 the Court made directions for the filing and service of an amended statement of claim as has previously been referred to, the amended statement of claim being filed on 17 April 2001. 33 Nothing having occurred in relation to the matter, the Court of its own motion caused the matter to be listed for directions and hearing on the motions now under consideration. Respondents' submissions 34 The case for the second respondents Rowe and Evans, relies on the test formulated by Spender J in National Mutual Life Association of Australasia Ltd v Reynolds [2000] FCA 267 adopting the statement of Salmon LJ from Allen v Sir Alfred McAlpine & Sons Limited [1968] 2 QB 229 at 268 having the effect that a respondent seeking dismissal of an application for want of prosecution must show: "(1) that there has been inordinate delay. It would be highly undesirable and indeed impossible to attempt to lay down a tariff – so many years or more on one side of the line and a lesser period on the other. What is or is not inordinate delay must depend upon the facts of each particular case. These vary infinitely from case to case, but inordinate delay should not be too difficult to recognise when it occurs. (2) that this inordinate delay is inexcusable. As a rule, until a credible excuse is made out, the natural inference would be that it is inexcusable. (3) that the defendants are likely to be seriously prejudiced in the delay. This may be prejudice at the trial of the issue between themselves and the plaintiff, or between each other, or between themselves and the third parties. In addition to any inference that may properly be drawn from the delay itself, prejudice can sometimes be directly proved. As a rule, the longer the delay, the greater the likelihood of serious prejudice at the trial." 35 It is submitted for the second respondents Rowe and Evans that there has been inordinate delay in that the applicants have done nothing effective to progress the application towards a hearing since the strike out motion was disposed of in February 1999. Furthermore, it is submitted there is no excuse, credible or otherwise, advanced for the delay so that it is inexcusable. Additionally, it is said the respondents are likely to be prejudiced by the delay. The principal events complained of occurred in October and November 1993, some seven and half years ago. The application is not ready for trial and will clearly not be ready for trial for some time. The result will be that the quality of evidence will deteriorate as memories dim and the actors grow older. In the case of the second respondents Rowe and Evans, they have retired as partners of the second respondent on 30 June 1994 and Mr Lyford retired some date after that. Nevertheless, the threat of this proceeding continues to hang over them and to place their assets in jeopardy: cf Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 51. 36 The contentions for the second respondents Williamson, Posma and Lyford are in similar vein. They accept that for the Court to dismiss the action on the ground of want of prosecution there must be shown to be inordinate and inexcusable delay in prosecuting the action and that such delay gives rise to a substantial risk that it is not possible to have a fair trial of the issues or that serious prejudice is likely to be caused: Birkett v James [1978] AC 297 at 318; Lewandowski v Lovell (1994) 11 WAR 124. Prejudice, it is submitted, maybe inferred from impairment of the recollection of witnesses and the inability to locate relevant documents. Furthermore, regard should be had to the complex factual allegations depending in substantial part on events taking place nearly ten years ago where there is not yet any proper statement of claim: cf Cooper v Hopgood & Ganim (1999) 2 QDR 113. 37 Notwithstanding that the motion for the second respondents Williamson, Posma and Lyford is directed to want of prosecution, contentions were also directed to the unmeritorious and unparticularised character of the pleading. From that the Court is asked to infer support for the fact that there is want of prosecution because the claim has not been in a form in which it could be prosecuted. 38 Additionally, it is submitted that no explanation has been given of the delay which has occurred. The affidavit evidence for the applicants in that respect from Mr Koroveshi is said to offer no credible excuse. Applicants' submissions 39 Submissions for the first and second applicants rely on final orders having been made on 9 December 1999, the occurrence of the Christmas vacation and the application of FCR O 3 r 5 in those circumstances, and the involvement of the applicants in various proceedings in the Supreme Court of Western Australia which required the urgent and ongoing attention of the applicants and their solicitors. I accept the submissions made for the second respondents Williamson, Posma and Lyford to the effect that that affidavit evidence does not provide any particular explanation of the delay which has occurred. 40 For the applicants it is submitted that the members of the second respondent are not alleged to suffer from any disability or infirmity affecting their memory and, being professional people, it could not be inferred that such delay as has occurred is sufficient to affect the viability of the trial of the action. Resolution of contentions 41 Turning to the tests enunciated by Salmon LJ in Allan as set out above, I reach the following conclusions. Firstly, there has been delay. However, I do not consider that the delay is in the category of "inordinate", given that steps were taken to file the amended statement on 17 April 2001, before the Court's intervention. Secondly, the affidavit evidence does not provide a proper explanation of such delay as had occurred. Thirdly, I am not convinced that the lapse of time is yet such that the respondents are likely to be "seriously" prejudiced by the delay. While the non-resolution of the action is clearly a considerable personal inconvenience and concern to the respondents, there is some force in the submission made for the first and second applicants that, given the respondents' professional standing and likely reference to records, the present probability is that their capacity to give evidence has not been prejudiced. 42 Therefore, I do not consider that the ground seeking dismissal for want of prosecution can be made out, although it may be close to doing so. Conclusion 43 For the above reasons I consider that the motions should be resolved as follows: (1) The second respondents Williamson, Posma and Lyford should have leave to apply to amend their notice of motion to include reliance on the ground in FCR O 20 r 2(1) that the pleadings disclose no reasonable cause of action. (2) Each of the second respondent's motions should be allowed on the ground reliant on FCR O 20 r 2(1). (3) The application should be dismissed against the second respondent. (4) The applicants are to pay the second respondent's costs of the application, of the notices of motion and all reserved costs, to be taxed. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson. Associate: Dated: 29 June 2001 Counsel for the First, Second, Third and Fourth Applicants: Mr R P Camm Solicitor for the First, Second, Third and Fourth Applicants: Camm & Associates Counsel for the Second Respondent: Mr D M Stone (Rowe & Evans) Solicitor for the Second Respondent: Williams & Hughes (Rowe & Evans) Counsel for the Second Respondent: Mr D Martino (Williamson, Posma and Lyford) Solicitor for the Second Respondent: Brickhill Banaszak (Williamson, Posma and Lyford) Date of Hearing: 30 May 2001 Date of Judgment: 29 June 2001