FEDERAL COURT OF AUSTRALIA Terranora Leisuretime Resort Management Ltd (In Liquidation) v Harris [2004] FCA 587 PRACTICE AND PROCEDURE – application to amend statement of claim – leave to amend – delay in bringing application – seriousness of allegations – whether other party prejudiced in being able to meet the claims – whether facts relevant to the claims are raised for the first time – identification of evidence relied upon to support new allegations as a condition of leave to amend PRACTICE AND PROCEDURE – security for costs – application – where applicant unable to pay the costs of respondents if unsuccessful - whether order for security is required if able to seek an order directly against the fund provider of the applicant's litigation PRACTICE AND PROCEDURE – assessment of liquidator's costs – application for separate trial – whether issue of the quantum of liquidator's costs needs to be the subject of evidence at trial – orders for assessment able to be sought in the event that judgment with respect to the issue of quantum is obtained PRACTICE AND PROCEDURE – witness statements – extension of time to file and serve TERRANORA LEISURETIME RESORT MANAGEMENT LTD (IN LIQUIDATION) v ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE Q28 of 2003 KIEFEL J BRISBANE (VIA VIDEO LINK FROM SYDNEY) 11 MAY 2004 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q28 OF 2003 BETWEEN: TERRANORA LEISURETIME RESORT MANAGEMENT LTD (IN LIQUIDATION) ACN 003 020 693 APPLICANT AND: ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE RESPONDENTS JUDGE: KIEFEL J DATE OF ORDER: 11 MAY 2004 WHERE MADE: BRISBANE (VIA VIDEO LINK FROM SYDNEY) THE COURT ORDERS THAT: 1. The applicant have leave to amend its amended statement of claim in the terms of the draft handed to the Court and the respondents at the hearing on 7 May 2004. 2. As a condition of that leave the applicant is to advise the respondents by 24 May 2004 of the evidence relied upon to support its new allegations. 3. The applicant is to file and serve its further amended statement of claim by 14 May 2004. 4. The applicant is to provide further security for the trial costs of the respondents in the amount of $203,742 within twenty-one (21) days of this order and in a manner to be approved by the District Registrar. 5. The respondents have an extension of time of fourteen (14) days from today's date within which to file their witness statements. THE COURT FURTHER DIRECTS THAT : 6. The issue of the applicant's liquidator's costs are not to be the subject of evidence at the hearing to commence on 12 July 2004. 7. The parties are to seek necessary orders and directions with respect to that issue on the giving of judgment on the other issues. THE COURT FURTHER ORDERS THAT: 8. The applicant is to pay the costs of the application for leave to amend its amended statement of claim and the costs thrown away by those amendments. 9. The applicant is to pay the respondents' costs on the motion for security for costs. 10. The costs of the applications for a separate trial and for directions are to be the parties costs in the proceedings. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q28 OF 2003 BETWEEN: TERRANORA LEISURETIME RESORT MANAGEMENT LTD (IN LIQUIDATION) ACN 003 020 693 APPLICANT AND: ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE RESPONDENTS JUDGE: KIEFEL J DATE: 11 MAY 2004 PLACE: BRISBANE (VIA VIDEO LINK FROM SYDNEY) REASONS FOR JUDGMENT 1 This matter is set down for hearing to commence on 12 July next. The applicant ("Management") seeks to further amend its statement of claim. The respondents seeks an order for security for costs and an order that there be a separate trial with respect to the costs of the liquidator of Management and a direction for an extension of time in which they are to provide their witness statements. the application to amend 2 Management's action was originally brought in the Supreme Court of Queensland in August 1998 and was transferred to this Court in 2003. The respondents were receivers and managers of the Management company and its claim against each of them is essentially for breach of duty in that capacity. 3 The Management company was involved with others, and in particular Terranora Time Share Developments Pty Ltd ("Developments") and Terranora Lakes Country Club Ltd ("Club"), in a plan to construct a resort in which persons would subscribe for redeemable preference shares. Construction of it was financed by money borrowed by Developments from a bank pursuant to a facility agreement entered into between the bank as lender, Club, Developments, Management and others who were all guarantors under the agreement. The facility agreement required Management to grant the bank a mortgage over the lease it held from Club, over the land upon which the resort was to be built, and a charge over all of its assets. It did so on 5 August 1988. 4 Management says that pursuant to a clause in the facility agreement it was entitled to a discharge of its securities upon 600 redeemable preference shares being subscribed for, funds totalling $3.6m having been paid to the trustee and those funds being paid to the bank in accordance with the bank's consent. It is alleged that those points were reached or were imminent by 14 September 1989. If the clause in question were held to be otherwise conditioned, Management alleges that the conduct of the bank and the other parties was such that they could not have relied upon those other conditions to have prevented a discharge of the security. 5 On about 14 September 1989 Management and the other parties to the facility agreement executed a further agreement ("the extension agreement") securing an overdraft facility provided by the bank to Management. Further, pursuant to this agreement, and despite the rights given to Management under the facility agreement referred to above, Management acknowledged that the lease and charge were to continue as security for repayment of the indebtedness under the facility agreement. It is alleged that the directors of Management entered into the extension agreement in breach of their fiduciary duty owed to it and for the benefit of others. Club is alleged to have been knowingly concerned in this breach. 6 In July and August 1992 Developments defaulted in its obligations to the bank and the bank made demand upon Club. Club paid an amount of just over $4.5m on the demand and thereupon claimed to be entitled to all the bank's rights and in particular to the mortgage of the lease and the charge. Club made statutory demand of Management for payment of a sum of $614,736.50 for goods sold and delivered and services supplied for $566,368.59 as contribution to the sum paid to the bank. Another demand made in January 1994 was also in the sum of $614,736.50. 7 The directors of Management were also directors of Club and it is alleged that they did nothing to deal with the demand and in particular to resist it or claim a set-off equal to the sums claimed by Club. On 24 August 1992 the respondents were appointed receivers and managers of Management. 8 On 10 February 1994 Club applied to wind up Management. It is alleged in the current pleading that the respondents knew of the facts concerning the facility agreement and the extension agreement because they had possession of relevant documents and communications and had obtained legal advice upon the documents. The respondents are said to have breached their duty of care to Management under s 232 of the Corporations Law by taking no step to set aside the demand or do other things to have the securities set aside or otherwise prevent Management from being wound up. 9 Management is alleged to have suffered, as a result of the breaches, the loss of the lease, the loss of the use of the resort and the income it would have earned from it, together with the expenses of the liquidator including the cost of the public examination conducted by him. They are also alleged to be liable to account for the benefit that Club received. The proposed amendments do not alter the losses claimed. 10 The amendments proposed, and to which objection is taken, involve further allegations of breach of duty on the part of the respondents. Reliance is now sought to be placed upon the entry into the facility agreement and the agreement of 5 August 1988 (now called the "release agreement") as breaches of fiduciary duty on the part of the directors of Management and for the benefit of others and in which Club was knowingly concerned. It is alleged that the respondents knew or ought to have known of these matters because of the documents which they had and upon which they had taken advice. Management sought to allege against the respondents that they breached their duty of good faith to Management by failing to ascertain the debt for which Management was truly liable, which Management alleges was nil or a much smaller amount, and they failed to protect Management's property and instead advised Club to sacrifice the lease. 11 The respondents, in objecting to the proposed amendments, point to the delay in bringing this application and in the delay not being sufficiently explained. The first notification of Management's intention to do so was on 31 March 2004. The explanation provided by Management's liquidator is that he received advice to do so only recently. When he sought further funding from the litigation funder, he was directed to obtain a further opinion. The advice he then received was that these claims were open and ought to be made, I infer. 12 The respondents also submit that, in addition to the delay, and the fact that the allegations relate to events many years ago, what is sought to be raised are very serious allegations. Although Management eschewed any allegation of dishonesty, it may be accepted that the allegations are nevertheless very serious. The Court would therefore be anxious to ensure that the respondents are not prejudiced in being able to meet the claims. In that regard it would be more difficult for Management to obtain an order if the facts relevant to the claims were raised for the first time. Here however the facility agreement and the release agreement were always part of the factual matrix to the claim. Whether the directors were guilty of a breach of fiduciary duty involves questions of fact and law. It may be that some additional evidence will be necessary as to what benefit others may have had from those transactions but, to an extent, these were already questions raised. That leaves only the respondents' knowledge and this is said to arise substantially from documents within their possession. 13 It was submitted for the respondents that in cases of long delay it often becomes difficult to identify areas of prejudice. So much may be accepted. I would however have expected some indication of how prejudice might arise in this case. None has been identified. The respondents were required, when the proceedings were first brought, to turn their mind to all of these events and it would seem to me that the proposed amendments add little except to require them to consider those facts in light of the allegations that they ought to have taken particular steps. It is of some importance that it is not suggested by the respondents that they are unable to meet the allegations if they are allowed. 14 Time however is close to trial. In these circumstances I would accede to the respondents' request that, as a condition of leave to amend, Management identify the evidence relied upon to support the new allegations. It should do so by 24 May 2004. There will be leave to amend the amended statement of claim in the terms of the document handed to the Court and the respondents at the hearing on 7 May 2004 and an order in the terms I have referred to. Management should file and serve its amended statement of claim by 14 May 2004. SECURITY FOR COSTS 15 Funding for Management's litigation has been obtained from Gordian Runoff Limited. It has previously been ordered by the Supreme Court of Queensland to provide security for the respondents' costs in the sum of $200,000 and has done so. The respondents' costs of the trial itself were left for a later application. Mr Murphy, the liquidator of Management, gave evidence that the original limit placed by the fund provider was $750,000. That limit has been reached and he has now obtained a new limit of $1,070,000 to cover the costs of Management's trial. He had assessed, and requested, a larger sum but was told that Gordian Runoff would not advance further funds at this point. He has however assumed that it might be approached for further funding during the course of the trial. Gordian Runoff has declined to provide any further security for costs. 16 In the event that it is unsuccessful, Management will not be able to pay the respondents' costs. Prima facie it should therefore provide security for their costs. I do not think it could be concluded that Management's litigation is likely to be stifled if such an order were made. The litigation funder clearly has a substantial interest in the litigation and does not appear unwilling to advance funds necessary to have it litigated to its conclusion. No doubt it has advanced these funds upon its assessment of its legal advice. I do not understand Management to make such a submission. Rather, it is submitted that the respondents should not have their order for security because they will be able to seek an order directly against Gordian Runoff at the conclusion of the proceedings, in the event that they are successful. I do not think that that provides the necessary security for a party exposed to the prospect of non-recovery of its trial costs from the party to the proceedings. The circumstances pertaining to Gordian Runoff are not gone into in the evidence and in any event circumstances can change. 17 The quantum of the amount sought for security has not been challenged. There will be an order that the applicant provide security to the satisfaction of the District Registrar within twenty-one (21) days from today in the amount of $203,742. Management should pay the respondents' costs on this motion. SEPARATE TRIAL 18 The respondents have not undertaken the substantial task of having Mr Murphy's bill assessed. Management agrees that it should not be the subject of evidence in the course of the hearing in July. That evidence could very well be substantial. I agree with the course proposed. It does not however seem necessary to provide for a separate trial of the issue at a later point. If Management is successful an order might be made for the liquidator's costs to be assessed by the relevant officer, namely the taxing officer of the Supreme Court of Queensland, in the event that they were not agreed upon and in the event that I considered them to be part of Management's damages. There does not seem to me to be any reason why evidence and argument as to whether they form part of the damages could not be gone into. It does not seem to depend upon the quantum of the costs. In these circumstances I propose simply to direct that the issue of the quantum of Management's liquidator's costs not be the subject of evidence in the hearing to commence on 12 July and that the parties seek necessary orders upon the obtaining of judgment with respect to that issue. WITNESS STATEMENTS 19 The respondents should have an extension of time to file and serve their witness statement of fourteen (14) days from today's date. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel . Associate: Dated: 10 May 2004 Counsel for the Applicant: Mr R Lilley Solicitor for the Applicant: Deacons Counsel for the Respondents: Mr B Oslington QC and Mr Kelly Solicitor for the Respondents: Allens Arthur Robinson Date of Hearing: 7 May 2004 Date of Judgment: 11 May 2004