FEDERAL COURT OF AUSTRALIA Trilogy Funds Management Limited v Sullivan [2013] FCA 185 Citation: Trilogy Funds Management Limited v Sullivan [2013] FCA 185 Parties: TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383 679) AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND (ARSN 088 139 477) v PHILIP KEITH SULLIVAN, THOMAS WILLIAM SWAN, STEPHEN ANTHONY MCCORMICK, PETER CHARLES TRATHEN AND IAN WILLIAM DONALDSON File number: NSD 604 of 2012 Judge: EMMETT J Date of judgment: 26 February 2013 Legislation: Corporations Act 2001 (Cth) ss 601FS Date of hearing: 14 December 2012 and 26 February 2013 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 18 Counsel for the applicant: S Nixon Solicitor for the applicant: Maurice Blackburn Counsel for the third respondent: F Lever SC Solicitor for the third respondent: Mahoney Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 604 of 2012 BETWEEN: TRILOGY FUNDS MANAGEMENT LIMITED AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND Applicant AND: PHILIP KEITH SULLIVAN Respondent JUDGE: EMMETT J DATE OF ORDER: 26 FEBRUARY 2013 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The interlocutory application filed on 17 September 2012 be dismissed. 2. The applicant on that application pay the costs of the respondent to that application. THE COURT DIRECTS THAT: 3. The costs in Order 2 above would not include the costs of furnishing the particulars dated 12 February 2013. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 604 of 2012 BETWEEN: TRILOGY FUNDS MANAGEMENT LIMITED AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND Plaintiff AND: PHILIP KEITH SULLIVAN Respondent JUDGE: EMMETT J DATE: 26 FEBRUARY 2013 PLACE: SYDNEY REASONS FOR JUDGMENT 1 In this proceeding, Trilogy Funds Management Limited (Trilogy), as the responsible entity for the Pacific First Mortgage Fund (the Fund), seeks an order that five individuals compensate the Fund for damage alleged to have been suffered by the Fund, by reason of contraventions by those individuals of provisions of the Corporations Act 2001 (Cth) (the Corporations Act). Each of the individuals (the Officers) was an officer of City Pacific Limited, which was previously the responsible entity of the Fund. 2 In the proceeding, Trilogy alleges that in making loans and entering into various loan facilities in its capacity as responsible entity of the Fund, City Pacific breached its obligations under the Corporations Act. In addition, Trilogy alleges that each of the Officers breached statutory duties in respect of the making of the advances and entering into the loan facilities. 3 By cross-claim filed on 27 September 2012, one of the officers, Mr Stephen McCormick, seeks orders that Trilogy pay to him the amount of legal costs incurred in defending the proceeding and costs that will be incurred in the future in the defence of the proceeding. Mr McCormick claims payment of legal costs under a deed of indemnity, signed by Mr McCormick and City Pacific on 7 April 2009 (the Deed of Indemnity). In addition, Mr McCormick seeks declarations that the Deed of Indemnity is binding on Trilogy, that Trilogy is liable for the obligations of City Pacific under the Deed of Indemnity and that Trilogy is liable to indemnify him for the legal costs he incurs in defending the proceeding. 4 By interlocutory application filed 17 September 2012, Mr McCormick seeks an order that there be a separate trial of the cross-claim against Trilogy. Trilogy resists the application on the basis that the issues raised in the cross-claim are inextricably bound up with the issues raised by Trilogy as against Mr McCormick in its statement of claim. It says that it is not possible to separate out the issues raised in the cross-claim from those raised in the remainder of the proceeding. 5 Mr McCormick contends that, under s 601FS of the Corporations Act, Trilogy became liable for the obligations of City Pacific under the Deed of Indemnity and that the proceeding brought by Trilogy triggers his entitlement under the Deed of Indemnity to have Trilogy, as the successor of City Pacific, pay to him his reasonable costs of defending the proceeding. Section 601FS of the Corporations Act provides that if the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme, become rights, obligations and liabilities of the new responsible entity. It is common ground that the Fund is a registered scheme. Mr McCormick contends that the effect of s 601FS is that Trilogy stepped into the shoes of City Pacific and that there was an automatic statutory novation in favour of Trilogy in respect of all rights, obligations and liabilities of its predecessor, City Pacific. 6 In the statement of claim, Trilogy alleges, relevantly, that it replaced City Pacific as the responsible entity for the Fund on 25 June 2009, that from April 2006 to December 2007 Mr McCormick was a member of the credit committee of City Pacific and was an officer of City Pacific, and that Mr McCormick had personal involvement in the making of the loans from the Fund for transactions involving real estate development. Trilogy alleges that each of the transactions, and Mr McCormick's involvement in them, was in relation to, and for the purposes of, the Fund. Mr McCormick admits that Trilogy replaced City Pacific as responsible entity and that he was a member of the credit committee and an officer of City Pacific, and admits his involvement in numerous ways in relation to the relevant transactions. He does not dispute that his involvement was in relation to, and for the purposes of, the Fund. 7 Clause 2.2 of the Deed of Indemnity provides an indemnity for legal costs upon provision of satisfactory evidence. Clause 4.3 provides that City Pacific must advance legal costs reasonably incurred, or expected to be incurred, in defending an action for a liability incurred or allegedly incurred by Mr McCormack in any capacity. Clause 4.3 authorises and decrees the payment of legal costs prior to the outcome of the proceeding being known. 8 Mr McCormick contends that it is appropriate and desirable for a separate trial of the cross-claim to be conducted prior to a trial of the issues raised by the statement of claim. He says that if there is no prior determination of the entitlement to indemnity, he will lose the practical benefit of the Deed of Indemnity to recoup costs already incurred and to be put in funds in respect of costs to be incurred while the litigation is actually running. If he is required to wait until judgment of the main proceeding for the cross-claim is determined, that benefit would be entirely lost. 9 Mr McCormick's income and net assets are such that the defence of the proceeding will inevitably be a serious burden. He says that justice requires that he be afforded the opportunity of establishing now, before he incurs such expenses, that he is entitled to an indemnity under the Deed of Indemnity. He says that the question raised by the cross-claim is predominantly, if not entirely, a question of law and essentially involves the construction of the Deed of Indemnity and several provisions of the Corporations Act. Specifically, he asserts that questions raised by the cross-claim do not overlap in any substantial way, if at all, with questions raised by the statement of claim. 10 Mr McCormick, through his counsel, has somewhat retreated from that position during the course of oral argument. Mr McCormick does not in fact seek to have the cross-claim determined in its entirety prior to the balance of the proceeding. As I apprehend the position, it is now common ground that the matters raised in the cross-claim, which I shall mention shortly, would require a very considerable trial and entail substantial factual issues. 11 In its defence to the cross-claim, Trilogy admits the Deed of Indemnity was signed by Mr McCormick and by Messrs John Ellis and James Finucan, purportedly in their capacity as officers of City Pacific. However, it does not admit that Mr Ellis or Mr Finucan was authorised to execute the Deed of Indemnity on behalf of City Pacific, and says that, in so far as City Pacific did enter into the Deed of Indemnity, it did not do so in its capacity as responsible entity of the Fund. 12 Next, Trilogy denies that it became responsible for the obligations and liabilities of City Pacific in relation to the Fund. It says, however, that on 7 July 2009, by the operation of s 601FS(2)(d) of the Corporations Act, the rights, obligations and liability of City Pacific in relation to the Fund became rights, obligations and liabilities of Trilogy, but that any liability for which City Pacific could not have been indemnified out of the property of the Fund, if it had remained the legal entity responsible for the Fund, did not become a liability of Trilogy, but remained a liability of City Pacific on and from that date. 13 Trilogy denies that it became liable for the obligations assumed by City Pacific under the Deed of Indemnity. It says that the terms of the Deed of Indemnity did not comprise obligations or liabilities of City Pacific in relation to the Fund within the meaning of s 601FS. Trilogy says that, in so far as City Pacific entered into the Deed of Indemnity in its capacity as responsible entity of the Fund, which Trilogy denies, it relies on the allegations made in the statement of claim. 14 Trilogy says that, as at 7 April 2009, by reason of certain matters alleged in the statement of claim, Mr McCormick was liable to City Pacific, as responsible entity to the Fund, in respect of breaches of duty alleged in the statement of claim. It accepts that clause 2.4 of the Deed of Indemnity purported to give retrospective effect to the indemnity given under the Deed of Indemnity and then says that, by reason of the matters that I have just mentioned, City Pacific, in entering into the Deed of Indemnity in its capacity as responsible entity for the Fund and in purporting to giving an indemnity to Mr McCormick with retrospective effect, was acting in contravention of City Pacific's duties to exercise the degree of care and diligence that a reasonable person could exercise, if that person was in the responsible entity's position and to act in the best interests of members of the Fund. 15 Detailed particulars of those allegations have been given by Trilogy. The particulars raise many of the substantial allegations of fact made in the statement of claim. As I have said, as I understand it, it has accepted that the trial of that question, namely whether or not the Deed of Indemnity was entered into in breach of duty by City Pacific, will involve substantial factual dispute. 16 The difficulty with Mr McCormick's position is that he has been unable to formulate a preliminary question that would be raised by the cross-claim, the determination of which would advance the dispute between the parties or resolve any aspect of the dispute. Counsel for Mr McCormick was invited to formulate any question that he proposed for preliminary determination in relation to the cross-claim. The response rather emphasises the difficulty of Mr McCormick's position. What was proposed was that the Court grant the relief sought in the cross-claim, subject to the determination by the Court, at the final hearing of the proceeding, that Trilogy did not become responsible for the obligations and liabilities of City Pacific pursuant to s 601FS of the Corporations Act. 17 There does not seem to me to be any basis upon which the Court can order the relief claimed in the cross-claim without giving Trilogy the opportunity of raising and having determined the questions raised in its defence. Those questions are, substantially, whether or not City Pacific breached its duty in relation to the loan facilities and advances to which I have referred and whether Mr McCormick was involved in those breaches. 18 There has been no preliminary question formulated that is capable of narrowing the dispute, certainly not of eliminating the dispute between Trilogy and Mr McCormick in a way that would justify the making of an order for the preliminary determination of a separate question. Mr McCormick no longer presses for a preliminary hearing of the cross-claim, because there would be no utility in that course. He has been unable to formulate a question that seems to me to be capable of preliminary determination. In all of the circumstances, I consider that the present application should be dismissed. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 6 March 2013