Federal Court of Australia Kelly, in the matter of Halifax Investment Services Pty Ltd (in liquidation) (No 10) [2020] FCA 1146 File number: NSD 2191 of 2018 Judgment of: GLEESON J Date of judgment: 13 August 2020 Catchwords: PRACTICE AND PROCEDURE – application for joinder of eighth and ninth defendants - where applicants are majority shareholders of the third plaintiff – application granted Legislation: Corporations Act 2001 (Cth) s 981A Federal Court (Corporations) Rules 2000 r 2.13 Federal Court Rules 2011 r 1.33 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 15 Date of hearing: 31 July 2020 Counsel for the Plaintiffs: A Leopold SC, E Holmes and C Trahanas Solicitor for the Plaintiffs: K&L Gates Counsel for the First Defendant: E Hyde Solicitor for the First Defendant: Maddocks Counsel for the Second Defendant: J Gooley Solicitor for the Second Defendant: Turks Legal Counsel for the Third Defendant: V Whittaker SC and C Mitchell Solicitor for the Third Defendant: Murdoch Clarke Counsel for the Fourth Defendant: B Hancock Solicitor for the Fourth Defendant: Gilbert + Tobin Counsel for the Fifth Defendant: S Munro Solicitor for the Fifth Defendant: Anderson Lloyd Counsel for the Sixth and Seventh Defendants: E Smith Solicitor for the Sixth and Seventh Defendants: Tailored Legal Solutions Limited Counsel for the Eighth and Ninth Defendants: M Pesman SC Solicitor for the Eighth and Ninth Defendants: Baker McKenzie ORDERS NSD 2191 of 2018 IN THE MATTER OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) BETWEEN: MORGAN JOHN KELLY AND PHILIP ALEXANDER QUINLAN AS JOINT AND SEVERAL LIQUIDATORS OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) First and Second Plaintiffs HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) Third Plaintiff AND: CHOO BOON LOO First Defendant ELYSIUM BUSINESS SYSTEMS PTY LTD (ACN 110 669 282) Second Defendant JASON PAUL HINGSTON (and others named in the Schedule) Third Defendant order made by: GLEESON J DATE OF ORDER: 13 August 2020 THE COURT ORDERS THAT: 1. Jeffrey John Worboys and Hong Kong Capital Holdings Pty Ltd be joined as eighth and ninth defendants subject to the condition that they first provide security for the costs of the plaintiffs and the first to seventh defendants by reason of their joinder in an amount of $50,000.00 and in such form as may be agreed between the first and second plaintiffs and Jeffrey John Worboys and Hong Kong Capital Holdings Pty Ltd or, failing such agreement, in a form acceptable to the Registrar of the Court. 2. The costs of the interlocutory process filed 27 July 2020 be costs in the cause. 3. Leave be granted to the plaintiffs to apply for the provision by the eighth and ninth defendants of additional security for costs on three days' notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 By interlocutory process filed 27 July 2020, Jeffrey John Worboys and Hong Kong Capital Holdings Pty Ltd (HKCH) applied to be added as the eighth and ninth defendants to the proceeding. Mr Worboys and HKCH are the majority shareholders in the third plaintiff (Halifax AU). Together they own 81.7% of the issued capital. 2 The application was supported by two affidavits of the solicitor for Mr Worboys and HKCH, William Fuggle, affirmed 27 July 2020 and 30 July 2020, and an accompanying exhibit marked "WRF-1". 3 In simple terms, Mr Worboys and HKCH seek to argue that Halifax AU's investors have only contractual rights against Halifax AU, not any beneficial interest in any hedge or other assets. Further, they seek to argue that Halifax AU's obligations "should be represented by the "mark to market valuation" of the positions at 23rd of November 2018. Therefore, this and only this valuation at the time of Administration should form the basis for distribution to creditors and respective dollar amounts". The argument includes a contention that Subdiv A of Pt 7.8, Div 2 of the Corporations Act 2001 (Cth) has no relevant operation because monies paid to Halifax AU by the investors were "paid to acquire, or acquire an increased interest in, a financial product from the licensee" within the meaning of s 981A(2)(c). 4 On behalf of Mr Worboys and HKCH, Mr Pesman SC conceded that their application is made late, but contended that the resulting inconvenience is minimal where they do not propose to adduce evidence and the service of evidence is not complete. Mr Fuggle's evidence was to the effect that the prospect of any surplus for shareholders has only arisen as the value of what the liquidators refer to as "client equity balances" has increased. 5 The application was opposed by the first and second plaintiffs (liquidators) on the basis that the proposed joinder has the capacity to waste time and costs, given the lack of merit to the points sought to be raised. If the joinder application is to be granted, it should be on condition that Mr Worboys and HKCH provide adequate security for the costs that will be incurred in dealing with matters arising from the joinder. The liquidators estimated that an amount well in excess of $100,000 would be incurred by all active parties as a result of the proposed joinder. 6 The first defendant expressed concern that the funds of the liquidation are not depleted by the proposed joinder but otherwise contended that the application was a matter for the Court. None of the second, third and fifth defendants sought to be heard. The fourth, sixth and seventh defendants opposed the joinder and substantially relied on the liquidators' submissions. On behalf of the fourth defendant, Mr Hancock of counsel submitted that the Australian Securities and Investments Commission (ASIC) may wish to be heard on the question, sought to be raised by Mr Worboys and HKCH, of the operation of Pt 7.8 of the Corporations Act 2001 (Cth) and expressed concern that an intervention by ASIC may endanger the November 2020 hearing date. On behalf of the sixth and seventh defendants, Ms Smith of counsel submitted that, in the event of a joinder, the issues sought to be raised should be determined in advance of the November 2020 hearing if practicable. 7 While not accepting that the usual preconditions to a grant of security for costs are met, Mr Worboys and HKCH are prepared to proffer an amount of $50,000 by way of security for any adverse costs made against them in the proceeding as a pre-condition of them being joined as defendants. That offer is "subject to agreement as to the details of the form of security to be provided and any later application that might be made by another party for a higher amount". 8 If permitted to be joined as defendants in the proceedings, Mr Worboys and HKCH do not intend to rely upon any evidence other than the evidence already served in the proceedings; and their intention is to limit their involvement to making submissions at the final hearing as to: (a) the characterisation of interests in financial products obtained by clients of Halifax AU when trading on the various trading platforms offered by Halifax AU; and (b) the beneficial owner of any financial products currently owned by Halifax AU and acquired in connection with client trading. Legal framework 9 Rule 2.13 of the Federal Court (Corporations) Rules 2000 provides relevantly: (3) The Court may order that a person who is, or who claims to be, a creditor, contributory or officer of a corporation be added as a defendant to the proceeding. … (5) The Court may: (a) appoint a creditor or contributory to represent all or any class of the creditors or contributories on any question, or in relation to any proceeding, before the Court, at the expense of the corporation; and (b) remove any person so appointed. 10 By r 1.33 of the Federal Court Rules 2011, the Court may make an order subject to any conditions the Court considers appropriate. Consideration 11 Senior counsel for the liquidators, Mr Leopold SC, submitted that even if the exclusion in s 981A(2)(c) has a relevant operation, that does not matter because there was a debtor creditor relationship by which the investors were creditors to the extent of the increased value in their respective accounts. Thus, even if Halifax AU is the beneficial owner of the funds, Halifax AU still owed debts to the investors for any amount reflected in their accounts which were increasing at the same rate as the value of the funds. 12 Regrettably, this submission is not so obviously correct that I can accept it without further analysis. Although not attractive, on the limited information currently available, I accept that the contentions sought to be put by Mr Worboys and HKCH may have legal merit. 13 The liquidators and the defendants did not contend that they would be prejudiced by the joinder, if adequate security for costs is provided. I am not concerned that the hearing will be endangered by an application by ASIC to intervene in the proceeding because I would expect ASIC to have sufficient capacity to participate within the current timetable, if it does wish to take a role. 14 In the circumstances, I consider that it is in the interests of justice to permit Mr Worboys and HKCH to be joined to the proceeding on the condition that they provide adequate security for the costs of their participation in the proceeding. In the first instance, I will order provision of security for costs in the sum of $50,000 and grant leave to the liquidators to make an application for an increase in that security if appropriate. In relation to Mr Leopold SC's contention that every defendant has an interest in asserting that the funds are trust funds, I am not presently satisfied that security should be provided for the costs of all defendants to address the case to be put by HKCH although it would be appropriate for each defendant to consider their respective position. 15 The costs of the application should be costs in the cause. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Gleeson. Associate: Dated: 13 August 2020 SCHEDULE OF PARTIES NSD 2191 of 2018 Defendants Fourth Defendant: ATLAS ASSET MANAGEMENT PTY LTD (ACN 607 442 679) Fifth Defendant: FIONA MCMULLIN Sixth Defendant: ANDREW PHILLIP WHITEHEAD AND MARLENE WHITEHEAD IN THEIR CAPACITY AS TRUSTEES OF THE BEELINE TRUSTD Seventh Defendant: ANDREW PHILLIP WHITEHEAD Eighth Defendant JEFFREY JOHN WORBOYS Ninth Defendant HONG KONG CAPITAL HOLDINGS PTY LIMITED