FEDERAL COURT OF AUSTRALIA Hanwood Pastoral Co Pty Limited v Kelly [2020] FCA 1020 File number(s): NSD 1053 of 2019 Judge(s): RARES J Date of judgment: 7 July 2020 Catchwords: PRACTICE AND PROCEDURE – application for default judgment under r 5.23 of the Federal Court Rules 2011 – application for adjournment not supported by evidence – where first defendant did not appear and had not filed a defence – application for adjournment refused – partial judgment entered Legislation: Corporations Act 2001 (Cth) Federal Court Rules 2011 Federal Court of Australia Act 1976 (Cth) Cases cited: Ahmad v Minister for Immigration and Border Protection [2018] FCAFC 199 Catchwords CLU16 v Minister for Home Affairs [2019] FCA 147 Dinomyte Pty Limited v Australian Security & Investments Commission, in the matter of Hanwood Pastoral Co Pty Limited [2019] FCA 1989 Gulati v Minister for Immigration and Border Protection [2017] FCA 225 Searson v Salmon [2014] FCA 748 Speedo Holdings BV v Evans (No 2) [2011] FCA 1227 Thunder Studios Inc (California) v Kazal (No 5) [2017] FCA 1572 Thunder Studios Inc (California) v Kazal (No 9) [2020] FCA 846 Yeo v Damos Earthmoving Pty Ltd, in the matter of Beachwood Developments Pty Ltd (in liq) [2011] FCA 1129 Date of hearing: 7 July 2020 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 37 Solicitor for the Plaintiff: Mr D. Farrar of Farrar Lawyers Counsel for the Second, Third, Fourth and Fifth Defendants: Mr J. Knackstredt Solicitor for the Second, Third, Fourth and Fifth Defendants: Patey & Murphy Solicitors ORDERS NSD 1053 of 2019 BETWEEN: HANWOOD PASTORAL CO PTY LIMITED Plaintiff AND: FREDERICK NORMAN KELLY First Defendant MATTHEW JOSEPH SOMERS Second Defendant THE TRUSTEE FOR THE MJS TRUST ABN 35 138 979 776 (and others named in the Schedule) Third Defendant JUDGE: RARES J DATE OF ORDER: 7 JULY 2020 THE COURT ORDERS THAT: 1. The first defendant pay to the plaintiff a sum of $1,398,967.62 inclusive of interest up to today. 2. The first defendant pay the plaintiff's costs of the application for default judgment. 3. The case management hearing scheduled for 23 July 2020 be vacated. 4. The matter be listed for a case management hearing on 24 July 2020. THE COURT DECLARES THAT: 5. The first defendant improperly used his position as a director of the plaintiff to gain an advantage for himself in contravention of s 182(1)(a) of the Corporations Act 2001 (Cth) by removing Frederick William Renton as a director of the plaintiff and causing the sixth defendant to register on or about 20 May 2014 that Frederick William Renton had resigned as a director of the plaintiff when, in fact, he had not resigned that office. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) RARES J: 1 On 1 July 2019 this proceeding commenced originally at the suit of Frederick Renton and Dinomyte Pty Limited, a company which he controlled as its director and shareholder,. Mr Renton and Dinomyte sought orders under ss 236 and 237 of the Corporations Act 2001 (Cth) authorising them to bring the proceeding against various defendants in the name of the company, Hanwood Pastoral Co Pty Limited. Mr Renton had been a director of Hanwood since 14 February 1994 until removed on 20 May 2014, allegedly without his consent by Frederick Kelly, now the first defendant. 2 On 26 November 2019 Gleeson J granted the then plaintiffs leave to file further evidence in support of their application to bring the proceeding in the name of Hanwood: Dinomyte Pty Limited v Australian Security & Investments Commission, in the matter of Hanwood Pastoral Co Pty Limited [2019] FCA 1989. 3 Mr Kelly originally appeared in the proceeding by his former solicitors, Makinson d'Apice Lawyers, who filed a notice of appearance on 27 September 2019. On 17 February 2020 those solicitors filed a notice of ceasing to act and gave the last known residential or business address of Mr Kelly as a post office box at Northbridge, a suburb of Sydney. 4 On 2 March 2020 her Honour granted leave under s 237 of the Corporations Act 2011 for the plaintiffs to file a statement of claim and amended originating application in Hanwood's name as plaintiff and listed the matter for case management. 5 In the event, on 6 April 2020 her Honour ordered that Hanwood be permitted to serve Mr Kelly with the amended originating process and statement of claim, both dated 6 March 2020, together with her Honour's orders made on 2 March 2020 by sending those documents to Mr Kelly at the email address of his former partner in an accounting firm, Terence Staines, and Mr Kelly's email address by 5pm on 6 April 2020. Her Honour ordered, that pursuant to r 10.24(c) of the Federal Court Rules 2011, that the documents would be taken to have been served personally on Mr Kelly upon transmission to each of those email addresses. 6 I am satisfied by the affidavit of Danielle Francis, sworn on 14 April 2020, that she served Mr Kelly in accordance with those orders by transmitting emails that she sent at 11.58am and 11.59am respectively on 6 April 2020 to the two email addresses referred to in her Honour's orders to which she had attached each of the documents to which her Honour referred in those orders, as well as the orders made on 6 April 2020. 7 Since then Mr Kelly has not filed an address for service as r 5.02 required him to do, nor did he appear at the subsequent case management hearing on 28 May 2020 before her Honour or today. 8 On 28 May 2020 her Honour ordered that Hanwood have leave to serve any application for judgment in default of appearance by Mr Kelly, together with affidavits in support by 18 June 2020. The orders provided that he could be served with the application and evidence at the two email addresses above by 19 June 2020 and that the documents would be deemed to have been personally served on Mr Kelly upon transmission to those email addresses pursuant to r 10.24(c). The application was fixed for hearing today. 9 On 19 June 2020, in accordance with the orders of 28 May 2020, Ms Francis sent to Mr Kelly's specified email address the application dated 18 June 2020 and Mr Renton's unsworn affidavit in support dated 18 June 2020, together with a link to the exhibit to that affidavit. I am satisfied that this brought the current application to Mr Kelly's attention by way of service on him. The present application 10 Hanwood's application filed on 18 June 2020 sought declarations that Mr Kelly had contravened a number of civil penalty provisions in the Corporations Act and orders that he compensate Hanwood by reason of his improper actions as a director in causing it to dispose of the proceeds of sale of its real property at Rothbury, following completion of the sale on 13 March 2015. The sale realised over $3.625 million for Hanwood. 11 Her Honour confirmed that the hearing of the application filed on 18 June 2020 had been fixed for today by orders made in chambers on 1 July 2020, that vacated a case management hearing that had been scheduled for 2 July 2020. 12 On 1 July 2020 Mr Kelly emailed her Honour's associate noting that he was 77 years of age and saying that he was still experiencing incontinence issues following a recent surgery. He asserted that, "No one, more than I, wishes to bring this matter to a conclusion", but then made assertions about matters that he wished to challenge or raise in the proceeding. He asked the associate, quite improperly, to forward his communications to the other parties to the proceedings. In a response to that email, the Registrar emailed Mr Kelly confirming that he was obliged to direct correspondence to the Registry and not to chambers. Mr Kelly yesterday sent two emails, again, just to the Registrar asking the Registrar to act somehow as his forwarding agent, to provide what he had written to the other parties to the proceeding who are represented. That behaviour, again, was deliberate and an attempt to frustrate proper means by which he should have been communicating with the other parties to the proceeding. 13 In his first email of 6 July 2020 consisting of about six pages, Mr Kelly made some detailed assertions and submissions about the facts of the matter and what he may have wanted to say in his defence. At the conclusion of that email he asserted that his non-appearance since December 2019 could be explained by reference to "my submissions and advice, supported by specialist medical professionals of the justifiable and valid reason for non-appearance". He said that his recovery was far from complete and "I have deferred going back to the medical specialist because of the fact that further surgery may be necessary and such could add another 2 or 3 months to the recovery process". He asserted he could not use public transport or come to the Court, notwithstanding the fact that he was aware from communications by the Court to him that this hearing would be proceeding by way of audio-visual technology on Microsoft Teams. 14 Mr Kelly sent a subsequent email at about 1pm yesterday just to the Registrar containing what he said were 19 reasons why he questioned the suitability of having a remote hearing using Microsoft Teams. He asserted in those reasons, as he had previously, that "The reason for my non-appearance in the immediate past has been explained and backed up my medical advice by 3 senior and experienced doctors". He claimed that he was entitled to appear and present details that Hanwood's legal representatives had overlooked and asked for the hearing to be rescheduled. 15 I was not prepared to act on that unverified material. Subsequently, at about 3.45pm on 6 July 2020 Mr Kelly sent another email to the Registrar, copying in the solicitor for Hanwood, but not the solicitor for the second to fifth defendants. He asked the Registrar to communicate to me that I should take into account he had never appeared in the Federal Court (by which, I assumed, he meant in person, since his solicitors had appeared for him until they ceased to act) and that he was not "versed in appropriate procedures". He asserted that his ability to hear did not allow him properly or accurately to interpret messages over the telephone or to listen clearly to voices on his computer, which was why he said that he never made phone calls, but always used text messages. He said he had begun testing for an ear implant, but that was still some time away. He referred to a medical certificate from his general practitioner, Dr Chiew, that he had sent to Gleeson J at an earlier time and again sought adjournment. 16 I again refused the adjournment and the Registrar communicated that refusal to him. The Registrar informed Mr Kelly that I would take account of the fact that Mr Kelly was not experienced with court procedures, and that he had to send any communication to all parties in the proceedings. 17 The medical certificate of Dr Chiew was dated 23 March 2020. It stated that as at 23 March 2020 Mr Kelly "suffers from multiple medical conditions including severe hearing loss", and for which condition was under the care of a specialist. The doctor also stated that Mr Kelly had issues with his vision, and that both of those issues, "make it hard for him to communicate". The certificate also stated "He is currently undergoing an operation and will not be recovered for at least six weeks" and that all of those issues "made it very difficult for Mr Kelly currently to attend the court" (emphasis added). 18 Mr Kelly did not appear this morning. Clearly, the medical certificate is and has been, since mid-May 2020, out of date. There is no evidence of any kind, let alone on affidavit, to support the granting of an adjournment of the hearing today of which Mr Kelly has been well aware and I refuse to do so. 19 During the course of argument today, I indicated that, because the proceeding is still unresolved against the second to fifth defendants, who received some of the moneys realised in the sale, it would not be appropriate to make orders now against Mr Kelly that could possibly give rise to inconsistent judgments in the same proceeding about the same subject matter relating to Hanwood's claims to repayment of those moneys or compensation in respect of their allegedly improper disbursement in 2015. 20 As a result, Hanwood now seeks only judgment based on Mr Kelly's causing Hanwood, in the period between 19 March 2015 and 6 June 2015, to pay away a total of $2,425,350 that it claims in par 24 of the statement of claim. The allegations in the statement of claim 21 Relevantly, the statement of claim alleged that: Hanwood was incorporated on 14 May 1990, had been deregistered by the Australian Securities and Investments Commission (ASIC) on 22 November 2017 and was reinstated on 5 August 2019; Mr Kelly had former qualifications as an accountant but had been disqualified from practising as one, and had been recorded as a director and secretary of Hanwood in the period between 3 December 1998 and 8 October 2018, during which time he acted in that capacity but did not make any substantial financial contribution to Hanwood and allowed it to be deregistered by failing to pay statutory fees to ASIC; the second and fourth defendants were experts in environmental planning issues and that their companies, the third and fifth defendants, had received moneys under a property consultancy agreement that Hanwood had entered into with them; Hanwood purchased the Rothbury property in the early 1990s as unimproved, non-arable land covered primarily in shrub and bush and as at 16 July 2013, that property was wholly unencumbered, unimproved and undeveloped; Mr Kelly owed duties, as a director, to Hanwood, pursuant to ss 181 and 182 of the Act; on 16 July 2013, Hanwood through both Mr Kelly and Mr Renton executed the consultancy agreement with the second and fourth defendants; Mr Kelly had represented to Mr Renton that: Mr Renton did not need to seek any legal or other advice about Hanwood entering into the consultancy agreement, because Mr Kelly had reviewed it and was comfortable with its content; it was "a standard document"; Mr Kelly had confidence that the consultants would be able to achieve significant outcomes for Hanwood; and his son had been injured and it was necessary for Mr Renton to sign the consultancy agreement urgently, so that Mr Kelly could visit his son in hospital; but for the representations, Mr Renton would not have executed the consultancy agreement; in making the representations, Mr Kelly had improperly used his position as a director of Hanwood by prevailing upon the confidence and trust that Mr Renton reposed in him to secure Mr Renton's consent; Mr Kelly had caused detriment to Hanwood by causing it to enter into the consultancy agreement, on the basis that its terms were uncommercial, onerous and grossly disproportionate to the value of the services for which Hanwood became liable; Mr Kelly breached his duties under s 182(1) and that as a result Hanwood suffered detriment in an amount equal to the difference between the sum ultimately paid to the consultants and the proper value of the services that they actually provided. (As I noted above, it is not appropriate at this point to enter judgment in default against Mr Kelly on those claims because there is a possibility that if the second to fifth defendants are successful in their defence of the proceedings, that may impact on the way in which this part of Hanwood's claim is viewed in respect of Mr Kelly's possible culpability); On about 20 May 2014 Mr Kelly caused Hanwood to lodge with ASIC documents leading to Mr Renton's removal as a director of Hanwood, notwithstanding that Mr Renton had not resigned or given notice of any intention to resign, and had not given Mr Kelly permission or other authority to lodge such a form; at no time before Mr Kelly so acted had there been a board or general meeting of Hanwood at which a resolution for Mr Renton's removal was either considered or voted on; the constitution of Hanwood did not allow one director to remove another; Mr Renton had never given Hanwood written notice of resignation as director; Mr Kelly's purported removal of Mr Renton as a director of Hanwood was unlawful, not for a proper purpose and in breach of Mr Renton's duties under ss 181(1)(a) and 181(2)(a) of the Act; by breaching those duties, Hanwood had suffered loss or damage, consisting of Mr Kelly's diversion of the part of the proceeds of sale of the Rothbury property of $2,673,555.52 that Hanwood had received at Mr Kelly's direction on 18 March 2019 for Mr Kelly's rather than Hanwood's purposes; as pleaded in par 24 that: From that amount, Kelly caused Hanwood to make the following payments, totalling $2,425,350 (sic): (a) Stintari Pty Ltd ($1,090,000) - (i) 19 March 2015 in the sum of $50,000; (ii) 19 March 2015 in the sum of $9,000; (iii) 5 June 2015 in the sum of $931,000; and (iv) 17 April 2015 in the sum of $100,000; (b) others ($835,350) - (i) a payment to a St George term deposit on 19 March 2015 of $700,000; (ii) a payment to TW Staines & Co on 25 March 2015 of $25,000; (iii) a payment to K Hainsworth on 5 June 2015 of $30,033; (iv) a payment to P Hainsworth on 5 June 2015 of $30,033; and (v) a payment to Biba Zupan on 5 June 2015 of $50,284; Mr Kelly was the sole director, secretary and shareholder of the issued ordinary shares in Stintari Pty Ltd, and that at the time that Hanwood made the above payments to Stintari, Hanwood was not a debtor of Stintari, had not traded or done business with it and did not owe the performance of any obligation to it; Mr Kelly had not caused Hanwood to demand that Stintari repay any of the money or caused it to repay the money and Stintari had not done so; if Mr Renton had remained as a director of Hanwood, he would not have allowed those payments to Stintari to have been made from Hanwood's assets; and Mr Kelly breached his statutory duties to Hanwood by improperly using his position as the then sole director of Hanwood to cause or allow it to make payments to Stintari for an improper purpose, or so that he could gain an advantage himself to the detriment of Hanwood, and that Hanwood had suffered detriment of $1,090,000 as a result. 22 However, the statement of claim made no allegation challenging the propriety of the payments of $835,350 referred to in paragraph 24(b) nor did it explain why the two sums in pars 24 (a) and (b) do not add up to a total of $2,425,350 that it asserted Mr Kelly had caused Hanwood to make. 23 Hanwood seeks default judgment against Mr Kelly for the whole of the $2,425,350 referred to in par 24 of the statement of claim. Consideration 24 For the following reasons, I am satisfied that Mr Kelly is in default of doing an act required to be done by the Rules, namely filing a defence, in not attending the hearing today or previously on 28 May 2020 after his solicitors had ceased to act and in failing to defend the proceeding with due diligence (r 5.22(a), (c) and (d)). 25 Where a defendant is in default, r 5.23(2)(b) allows a plaintiff to apply for an order giving judgment against the defendant for a debt or liquidated damages and interest and costs, if appropriate, in a sum fixed by the Court or taxed and r 5.23(2)(c) allows the Court to give judgment against a defendant for relief claimed in the statement of claim if the Court is satisfied that the plaintiff is so entitled. 26 Under r 16.32, a defendant must file a defence within 28 days after service of the statement of claim. Mr Kelly was served with the statement of claim on 6 April 2020 pursuant to the orders made on that day. He was bound to file his defence under r 16.32 on or before 4 May 2020. He has not done so nor has he appeared at a hearing since his solicitors ceased to act on 17 February 2020. He has not defended the proceeding with due, or any, diligence. 27 Where a defendant does not file a defence to a statement of claim, r 16.07(2) provides that allegations in the statement of claim that are not specifically denied (because there is no filed defence) are taken to be admitted. A number of judges of the court have construed r 16.07(2) to provide that where a defendant is in default of an order or the requirement in r 16.32 to file a defence, an applicant or plaintiff can rely on the deemed admissions of all the facts pleaded in the statement of claim on the basis that the defaulting party has admitted matters: Thunder Studios Inc (California) v Kazal (No 9) [2020] FCA 846 at [32] per Rares J. 28 The power to give judgment under r 5.23 is discretionary. The Court needs to be satisfied that each element of the relevant civil wrong is properly and discretely pleaded in the statement of claim: Speedo Holdings BV v Evans (No 2) [2011] FCA 1227 at [24]. Importantly, r 5.23 does not require proof of the claim by evidence but requires only that, on the face of the statement of claim, there is a claim for the relief sought and that claim falls within the Court's jurisdiction. I explained the principles in Searson v Salmon [2014] FCA 748 at [6]–[9] and see too Yeo v Damos Earthmoving Pty Ltd, in the matter of Beachwood Developments Pty Ltd (in liq) [2011] FCA 1129 at [9] per Gordon J. 29 In my opinion, Mr Kelly is in default. He has taken the position that he does not want to appear or make known his address for service in a proper way. He has chosen not to communicate with the parties or put on a defence, as he is entitled to do. But having chosen that course, he should be taken to have admitted the allegations in the statement of claim against him as r 16.07(2) provides. 30 I am satisfied that Mr Kelly has been on notice of the hearing today. He has neither attempted to file nor filed evidence explaining, first, to explain why he cannot appear today or instruct lawyers to do so for him, secondly, or establishing any defence that he might have to the claims against him, thirdly, adequately his current medical condition, if any, by way of affidavit from a medical practitioner as to any incapacities he may have in communicating using electronic means in the circumstances of the current public health pandemic, that is preventing the Court from holding in-person hearings as it ordinarily would do: CLU16 v Minister for Home Affairs [2019] FCA 147 at [11]–[13] per Rares J applying Gulati v Minister for Immigration and Border Protection [2017] FCA 225 at [14] per Bromwich J; Ahmad v Minister for Immigration and Border Protection [2018] FCAFC 199 per Rares, Bromwich and Davies JJ. 31 I have taken into account that Mr Kelly is of an age and may have health issues that render him vulnerable, in particular, to the risks of infection with the COVID-19 disease were he to have to attend at the Court in person. But he does not have to attend the Court in person and was given the opportunity to appear today by audio-visual means but did not do so. In those circumstances, I am satisfied that it is appropriate to proceed with the hearing today. 32 The principles of case management, given effect to in Pt VB of the Federal Court of Australia Act 1976 (Cth), require the Court to achieve a just but timely and cost-effective resolution of the dispute consistently with the interests of justice according to law. Mr Kelly has opted not to participate in the proceeding in a meaningful way since his solicitors ceased to act. He has given no adequate explanation for his conduct. In particular, he has not sought to conduct the proceeding pursuant to his duty under s 37N of the Federal Court Act to further the overarching purpose of the practice and civil procedure rules, namely to ensure that the proceeding is determined as quickly, inexpensively and efficiently as possible so as to arrive at a just resolution of the dispute. I explained the applicable principles in this respect, in Thunder Studios Inc (California) v Kazal (No 5) [2017] FCA 1572 [48]–[52]. 33 Mr Renton made an unsworn affidavit on 18 June 2020 on which Hanwood relied. In that affidavit, he asserted that he was not aware of Mr Kelly taking steps to remove himself (Mr Renton) and another director, a Mr Terrett, as directors of Hanwood until 22 May 2015. Mr Renton acknowledged that he had received $500,000 on 25 March 2015 from Mr Kelly who told him "Hanwood has been sold". I infer is likely to have been sourced from the $700,000 referred to in par 24(b)(i) of the statement of claim. 34 There is no allegation in the statement of claim as to the circumstances or the lack of a proper basis for the payments referred to in par 24(b) or the basis on which it can be said that Hanwood made payments totalling $2,425,350. I am not prepared to make any orders based on those allegations on the material before me. 35 However, I am satisfied, based on the other properly and discretely pleaded allegations in the statement of claim, that Mr Kelly has admitted that: he caused Hanwood to make the payments totalling $1,090,000 to Stintari referred to in par 24(a) in the period between 19 March 2015 to 5 June 2015 without any proper basis; he is personally liable as a director for breaches of his fiduciary and statutory duties, as alleged, in that respect; and he had no basis on which to lodge with ASIC the notice of Mr Renton's resignation as a director of Hanwood and Mr Kelly acted improperly within the meaning of s 182(1)(a) in removing Mr Renton as a director of Hanwood on or about 20 May 2014. 36 I am satisfied that a partial judgment in respect of $1,090,000 should be entered for Hanwood together with pre-judgment interest of $308,967.62 on its components calculated from the dates of payment alleged in par 24(a) of the statement of claim up to today. I will also make a declaration to the effect that Mr Kelly contravened s 182(1)(a) by causing Mr Renton's removal as a director of Hanwood, on which Mr Renton may be able to persuade ASIC to re-register him as a director. Conclusion 37 For these reasons, I will enter a partial judgment, pursuant to r 5.23, that Mr Kelly pay Hanwood $1,398,967.62 inclusive of interest, and I will make a declaration recording that Mr Kelly contravened s 182(1)(a) of the Corporations Act by removing Mr Renton as a director of Hanwood and causing ASIC to register, falsely, that Mr Renton had resigned that office. Mr Kelly must pay the costs of the application for default judgment. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 7 July 2020 SCHEDULE OF PARTIES NSD 1053 of 2019 Defendants KERRY GLEN NICHOLS Fourth Defendant K G NICHOLS HOLDINGS PTY LTD ACN 113 936 646 Fifth Defendant AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Sixth Defendant