FEDERAL COURT OF AUSTRALIA Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) [2015] FCA 311 Citation: Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) [2015] FCA 311 Parties: MICHAEL JOHN MORRIS SMITH IN HIS CAPACITY AS LIQUIDATOR OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) and ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536 v BILL ROY STARKE, BERYL JEANETTE STARKE, JOHN SALVINU CARUANA, MICHAEL WILLIAM WHYBREW and ELIZABETH SUSAN WHYBREW File number: NSD 2451 of 2013 Judge: GLEESON J Date of judgment: 1 April 2015 Catchwords: PRACTICE AND PROCEDURE – application to vacate hearing – application for leave to file cross-claim out of time – where defendants wish to rely on expert evidence not yet obtained – where defendants have had difficulty in paying legal fees – no evidence about why defendants failed to file cross-claim or obtain expert evidence – application dismissed Legislation: Corporations Act 2001 (Cth), s 588FDA(1)(c) Federal Court of Australia Act 1976 (Cth), ss 37M and 37N Cases cited: Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 Cement Australia Pty Ltd v Australian Competition and Consumer Commission [2010] FCAFC 101; (2010) 187 FCR 261 Cropper v Smith [1884] 26 ChD 700 Date of hearing: 1 April 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 31 Counsel for the Plaintiffs: Mr J Rose Solicitor for the Plaintiffs: Watson Mangioni Lawyers Pty Ltd Counsel for the Defendants: Mr H Somerville Solicitor for the Defendants: Nelson McKinnon Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2451 of 2013 IN THE MATTER OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536 BETWEEN: MICHAEL JOHN MORRIS SMITH IN HIS CAPACITY AS LIQUIDATOR OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) First Plaintiff ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536 Second Plaintiff AND: BILL ROY STARKE First Defendant BERYL JEANETTE STARKE Second Defendant JOHN SALVINU CARUANA Third Defendant MICHAEL WILLIAM WHYBREW Fourth Defendant ELIZABETH SUSAN WHYBREW Fifth Defendant JUDGE: GLEESON J DATE OF ORDER: 1 APRIL 2015 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The interlocutory application be dismissed with costs. 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 2451 of 2013 IN THE MATTER OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536 BETWEEN: MICHAEL JOHN MORRIS SMITH IN HIS CAPACITY AS LIQUIDATOR OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) First Plaintiff ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536 Second Plaintiff AND: BILL ROY STARKE First Defendant BERYL JEANETTE STARKE Second Defendant JOHN SALVINU CARUANA Third Defendant MICHAEL WILLIAM WHYBREW Fourth Defendant ELIZABETH SUSAN WHYBREW Fifth Defendant JUDGE: GLEESON J DATE: 1 APRIL 2015 PLACE: SYDNEY REASONS FOR JUDGMENT 1 By interlocutory application dated today, 1 April 2015, the defendants seek orders including that next week's hearing be vacated and that the defendants be granted leave to file out of time a cross-claim against the former accountant of the second plaintiff. 2 This proceeding is fixed for hearing for four days, commencing next Tuesday, 7 April 2015. The hearing date was set in September 2014, and detailed directions were given for the preparation of the matter for hearing on that occasion and on earlier occasions. 3 According to the plaintiffs' written outline of submissions filed on 10 March 2015, the main issues in the proceedings are: (1) Whether certain payments, comprising payments by the company in reduction of loans obtained by various of the defendants, were transactions made by the company; (2) Whether certain payments were made to the defendants or to another person on their behalf or for their benefit; (3) Whether it may be expected that a reasonable person in the company's circumstances would have made those payments, having regard to the matters referred to s 588FDA(1)(c) of the Corporations Act 2001 (Cth). 4 The matters referred to in section 588FDA(1)(c) are: (i) benefits, if any, to the company of entering into the relevant transaction; (ii) the detriment to the company of entering into the transaction; (iii) the respective benefits to other parties to the transaction of entering into it; (iv) any other relevant matter. 5 The application is supported by an affidavit of Steven Agosta, the defendants' solicitor, sworn today. 6 In answer to the application, the plaintiffs relied upon an affidavit of Michael Lim, solicitor, also sworn today. 7 The defendants do not say that they are not ready to proceed to a hearing on the issues currently before the Court on the evidence served to date. However, they seek a vacation of the hearing for two reasons: (1) The defendants wish to bring a cross-claim against the company's former accountant, Mr Holman, but have only just prepared the draft of the proposed cross-claim because of their financial difficulties; and (2) The defendants wish to rely on expert evidence, which has not yet been obtained, again because of the defendants' financial difficulties and because they believed that the matter would settle. 8 The defendants contend that they will suffer significant prejudice if the hearing is not adjourned because, if the plaintiffs succeed, the defendants are likely to be bankrupted and, among other things, unable then to bring the action against Mr Holman. 9 The following circumstances are said to be relevant context in which the application is made: (a) It became apparent during the course of taking the defendants' evidence, (contained in various affidavits sworn in late August 2014) that the defendants may have a potential cross-claim against Mr Holman; (b) Instructions were first sought about a possible cross-claim on about 11 September 2014 but no instructions to proceed were received at that time; (c) There has been a reluctance to seek to take action against Mr Holman because he was continuing to act for other companies in the "Action Paintball Group"; (d) The defendants are said to have had extreme difficulty in paying their legal fees in connection with the litigation and were "unable" to raise the necessary funds to pay fees to prepare a cross-claim and for preparation of the matter for hearing. On 10 March 2015 Mr Agosta served a Notice of Intention to Cease to Act on the defendants; (e) (Presumably as a result) Mr Agosta did not receive instructions to brief counsel in relation to the potential cross-claim and to appear at the hearing until 5 March 2015; (f) On 6 March 2015, the defendants contributed towards (but did not pay all) their arrears in legal fees and Mr Agosta agreed to brief Hugh Somerville of counsel on 18 March 2015 to appear in the matter and to prepare the proposed cross-claim against Mr Holman; (g) On 20 March 2015, Mr Agosta wrote to the plaintiffs' solicitor seeking their consent to an adjournment of the hearing; (h) On 23 March 2015, the plaintiffs' solicitor informed Mr Agosta that the plaintiffs did not consent to an adjournment; (i) The plaintiffs have been involved in protracted but unsuccessful settlement negotiations, most recently in January 2015. 10 There is no evidence from any of the defendants themselves about why they failed to take steps to prosecute the proposed cross-claim or to obtain expert evidence before now. Although it was mentioned in court that one of the defendants, Mrs Starke, is seriously ill, it is not suggested that her illness has affected the defendants' ability to prepare for the hearing. 11 The evidence as to the financial circumstances of the defendants is unsatisfactory. I do not doubt that Mr Agosta's evidence is based upon his instructions but I do not know whether he was in a position or whether he is in a position to verify the truth of those instructions. As a result, I can only give limited weight to his evidence that the defendants' preparation for hearing has been affected by their financial situation. Even if I accept that evidence at face value, it is far from obvious that this explanation is an adequate justification for the lateness of the current application. 12 Further, the evidence does not explain how the defendants will be able to fund the proceedings if they are vacated and leave is granted to file the cross-claim out of time. 13 The proposed cross-claim is sparse. I was informed from the Bar table that the proposed cross-claim is based on instructions that Mr Holman advised the defendants on the relevant transaction and there is some support for that contention in an affidavit of Mr Holman filed in this proceeding in August 2014. I am not meaning to criticise the pleader (because the document has obviously been prepared in a short space of time) but the facts pleaded do not support a cause of action in contract and the material facts to support a claim in negligence are not fully set out. The pleading does not state whether the alleged advice was given orally or in writing. More significantly, it does not plead facts to support the allegation that the proposed cross defendant would have known that the impugned transactions would (or may) be characterised as unreasonable director-related transactions so that the alleged advice was negligent. 14 I would not grant leave to file the cross-claim in its current form because it appears to raise causes of action that are not tenable and it does not sufficiently plead the action in negligence against the accountant. 15 The proposed expert evidence has not been served. I will not grant leave to file and serve that evidence unless and until the plaintiffs are given an opportunity to consider whether they would be prejudiced by that course because the evidence should have been served last year by 20 November 2014, in accordance with the direction made by Jacobson J on 11 September 2014. Relevant principles in relation to the application to vacate the hearing 16 The relevant principles are set out in the decision of Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 and Cement Australia Pty Ltd v Australian Competition and Consumer Commission [2010] FCAFC 101; (2010) 187 FCR 261 at [43]. The Full Court observed that the philosophy said by their Honours to inform the relevant rules in Aon Risk Services Australia Ltd v Australian National University can also be discerned in ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth). 17 The classical statement of the approach to be taken in the exercise of discretions, such as the discretion to vacate a hearing date, is found in the opinion of Bowen LJ in Cropper v Smith [1884] 26 ChD 700, in which his Lordship said at 710-711: It is a well-established principle that the object of courts is to decide the rights of parties and not to punish them for mistakes they make in the conduct of their cases by deciding otherwise than in accordance with their rights. Speaking for myself, and in conformity with what I have heard laid down by the other division of the Court of Appeal and by myself as a member of it, I know of no kind of error or mistake which, if not fraudulent or intended to overreach, the Court ought not to correct, if it can be done without injustice to the other party. Courts do not exist for the sake of discipline but for the sake of deciding matters in controversy and I do not regard such amendment as a matter of favour or of grace. 18 I accept that the dictates of justice must prevail in relation to the parties when considering the orders sought but note that those dictates of justice oblige me to look more broadly at the effect any adjournment may have on the efficient disposal of the court's business, the timely disposal of these in other proceedings and the efficient use of available judicial resources. 19 In this case, it is sufficient for me to focus on the position of the parties to the proceedings, although I do acknowledge that the late vacation of hearing dates is likely to detract from the efficient disposal of the Court's business. 20 The stated reasons for the delay in bringing the application and for failing to obtain the expert evidence now sought to be obtained and to prosecute the proposed cross-claim are not good reasons. The defendants' delay is not adequately justified. Prejudice 21 Will the defendants be unfairly prejudiced if the hearing is not vacated? The issues are relatively simple. They have put on their evidence. They have chosen, albeit it seems for financial reasons, not to obtain expert evidence. It is not clear why they are only now able to spend money on this. Further, it is not clear that they would be permitted to rely on any expert evidence that they now seek to obtain, having regard to their lateness in obtaining that material. Further, it is not clear to me that evidence of this kind would significantly add to the strength of the defendants' defence. 22 As a result, I do not accept that there is a risk of unfair prejudice in the conduct of the hearing on the issues currently before the court. 23 The defendants submit that the consequences of an adverse outcome in the proceedings is bankruptcy for each of them, which could potentially prejudice the interests of entities associated with the businesses being run by three of the defendants, including but not limited to creditors and employees. There is also a possibility that two of the defendants will lose their family home. 24 I am prepared to accept that these possibilities are real ones. Given their gravity, it is very difficult to understand how the defendants could have placed themselves in the position of not taking the steps they now wish to take, unless they have simply been unable to fund their defence. That is the position as explained by Mr Agosta. However, to accept that the hearing should be vacated on the basis of a late change in their ability to fund the litigation, which is essentially what is put, I would need evidence of the circumstances of the change in position from one of the defendants. I do not currently have that evidence. I was informed from the Bar table that the defendants are able to take the steps that they now propose because they have borrowed funds. I would need evidence about that, including why those funds were not available earlier. 25 Accordingly, while I can see a possibility of prejudice to the defendants arising because they will not be permitted to conduct their defence with the benefit of expert evidence, and with a cross-claim against Mr Holman, I am not presently satisfied that this prejudice is not simply the product of their own choices not to prepare for the hearing. 26 The liquidator submits that the plaintiffs will be prejudiced by the costs thrown away if the hearing is vacated. I accept that that is a matter to be weighed in the scales. Avoidance of multiplicity of proceedings 27 At this late stage, I do not accept that the avoidance of multiplicity of proceedings is a material factor in favour of vacating the hearing. Rate of return to creditors 28 Ultimately, a significant factor is whether the proposed adjournment would be likely to improve the prospects of a recovery for creditors. The liquidator does not accept the defendants' contention that the proposed vacation is likely to produce such a result. 29 I am unable to form a view about that matter on the material currently available, although I accept that it is possible. On the other hand, it is a matter of concern to me that the liquidator does not accept the likelihood of such a prospect. Conclusion 30 The interlocutory application should be dismissed with costs. 31 I note that this does not prevent the defendants form making a further application on the basis of further evidence if that is warranted. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 1 April 2015