Federal Court of Australia Brandenburg v Austral Dutch Kaolin Limited [2024] FCA 1311 File number: QUD 98 of 2023 Judgment of: DERRINGTON J Date of judgment: 9 October 2024 Date of publication of reasons: 13 November 2024 Catchwords: PRACTICE AND PROCEDURE – application for judgment in default – plaintiffs having failed to comply with directions to file evidence – lengthy period of delay – inference that the delay was caused by attempts to settle proceedings – application refused Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) Federal Court Rules 2011 (Cth) Cases cited: Lenijamar Pty Ltd v AGC (Advances) Limited (1990) 27 FCR 388 Professional Administration Service Centres Pty Ltd v Commissioner of Taxation (2012) 295 ALR 52 Wu v Avin Operations Pty Ltd [2006] FCA 36 Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 38 Date of hearing: 9 October 2024 Counsel for the Plaintiffs: Mr D Keane KC with Mr R Tooth Solicitor for the Plaintiffs: Lillas & Loel Lawyers Counsel for the First Defendant: The First Defendant did not appear Counsel for the Second to Fifth Defendants: Mr R Cameron Solicitor for the Second to Fifth Defendants: Colville Johnstone Lawyers ORDERS QUD 98 of 2023 BETWEEN: PAUL JAMES BRANDENBURG First Plaintiff SYDNEY WILLIAM HAYES Second Plaintiff SYDNEY WILLIAM HAYES AND PRUDENCE FIRTH AS TRUSTEES (and others named in the Schedule) Third Plaintiff AND: AUSTRAL DUTCH KAOLIN LIMITED ACN 097 469 139 First Defendant GREGORY PATRICK EDWIN HANNAN Second Defendant HOP2IT AUSTRALASIA PTY LTD ACN 632 727 112 (and others named in the Schedule) Third Defendant order made by: DERRINGTON J DATE OF ORDER: 9 OCTOBER 2024 THE COURT ORDERS THAT: 1. The second to fifth defendants' application filed on 1 October 2024 be dismissed. 2. The plaintiffs pay the second to fifth defendants' costs of the application filed on 1 October 2024, to be taxed and paid forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DERRINGTON J: Introduction 1 By an interlocutory application dated 27 September 2024 and accepted for filing on 1 October 2024, the second to fifth defendants seek orders dismissing the proceedings against them pursuant to r 5.23 of the Federal Court Rules 2011 (Cth) (the Rules) or alternatively s 37P(6) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act). For convenience, the second to fifth defendants will be referred to simply as "the defendants" in these reasons. 2 The fulcrum of the defendants' application is the plaintiffs' alleged non-compliance with orders made by this Court on 18 August 2023, particularly ones requiring them to file and serve their evidence in chief by 17 October 2023, and requiring the proceedings to be mediated before a Registrar of this Court on a date after 14 November 2023 but no later than 30 November 2023. Orders had also been made for the provision of discovery by the parties, which were to be complied with first. There was some delay in completing that process, and it was not completed until January or February 2024. For present purposes, the delay in relation to the completion of discovery is of little relevance. 3 The most significant non-compliance by the plaintiffs is their failure to file and serve affidavits comprising their evidence in chief by 17 October 2023. That had still not occurred as at the date of the hearing of this application, being 9 October 2024. That is a serious non-compliance with the orders of the Court, which also constitutes a contravention of the Rules. 4 Mr Cameron, counsel for the defendants, quite correctly identified that not only was there non-compliance with the orders of the Court, but the plaintiffs had made no attempt to set a new timetable, to reach agreement with the defendants about the performance of the orders of the Court, to approach the Court for orders that the extant orders be vacated pending the parties' attempt to negotiate a settlement, or do anything of that nature. He also correctly submitted that there is an absence of any sufficient explanation for the failure to comply with the Court's orders. To the extent that any explanation can be identified, it requires the drawing of inferences from the materials. It is somewhat beyond comprehension why a Court would be required to do that on an application of this nature. Undoubtedly, it should be able to rely upon express clear statements by the solicitors involved in the proceedings which explain and articulate the cause of the non-compliance. The application to dismiss the proceedings The Court's power to dismiss the proceedings 5 The source of the Court's power to dismiss the proceedings arises, in part, under r 5.22 of the Rules, which provides as follows: 5.22 When a party is in default A party is in default if the party fails to: (a) do an act required to be done, or to do an act in the time required, by these Rules; or (b) comply with an order of the Court; or (c) attend a hearing in the proceeding; or (d) prosecute or defend the proceeding with due diligence. 6 Rule 5.23 in turn provides the following: 5.23 Orders on default (1) If an applicant is in default, a respondent may apply to the Court for an order that: (a) a step in the proceeding be taken within a specified time; or (b) the proceeding be stayed or dismissed for the whole or any part of the relief claimed by the applicant: (i) immediately; or (ii) on conditions specified in the order. … 7 In his helpful written submissions, Mr Cameron set out the observations of the Full Court in Professional Administration Service Centres Pty Ltd v Commissioner of Taxation (2012) 295 ALR 52, 61 – 62 [37] – [42]. There, the Court relied upon the description of the nature and impact of the exercise of powers under r 5.23, as articulated by Wilcox and Gummow JJ in Lenijamar Pty Ltd v AGC (Advances) Limited (1990) 27 FCR 388 as follows: [37] In Lenijamar, Wilcox and Gummow JJ pointed out (at FCR 395; ALR 207) that the power must be exercised against the backdrop of a case management system in which it is expected that parties will observe procedural directions. At FCR 395–6; ALR 208 their Honours said: It is to be noted that the power given by this rule [Order 10.7, now rule 5.23 of the Federal Court Rules] is conditioned on one circumstance only: the failure of a party to comply with an order of the Court directing that party to take a step in the proceeding. There is no requirement of intentional default or contumelious conduct, although the attitude of the applicant to the default and the Court's judgment as to whether or not the applicant genuinely wishes the matter to go to trial within a reasonable period will usually be important factors in weighing the proper exercise of the discretion conferred by the rule. There is no requirement of "inordinate and inexcusable delay" on the part of the applicant or the applicant's lawyers, although any such delay is likely to be a significant matter. There is no requirement of prejudice to the respondent, although the existence of prejudice is also likely to be significant. And it must be remembered that, in almost every case, delay adversely affects the quality of the trial and is an additional burden on the parties. [38] But their Honours immediately went on to say (at FCR 396.4; ALR 208): The observations which we have just made about the scope of O 10, r 7 are not intended to convey the impression that any failure to comply with a procedural direction will appropriately result in the dismissal of the proceeding. On the contrary, the rules must be administered sensibly and with an appreciation both of the fact that some delays are unavoidable, and unpredictable, by even the most conscientious parties and their lawyers, and of the likely serious consequences to an applicant of staying or dismissing a claim; compare the approach taken to non-compliance with time limitations in respect of appeals in Van Reesema v Giameos (1979) 27 ALR 525. We would not wish our observations to cause respondents to apply for dismissal of proceedings simply because there has been a non-compliance with a direction by the applicant, even though it does not cause or indicate a continuing problem in preparing the matter for an early trial. [39] Their Honours stated that it was undesirable to attempt any exhaustive statement of the circumstances under which the power will appropriately be exercised: at FCR 396.6; ALR 208. However, their Honours identified two situations where the use of the power will generally be warranted, namely, (a) where a history of noncompliance indicates an inability or unwillingness to co-operate with the court and the other party in having the matter ready for trial within an acceptable period, and (b) where there is significant continuing default giving rise to undue prejudice and expense to the other party: at FCR 396.7–396.8; ALR 208. [40] Their Honours (at FCR 396.9; ALR 209) stated that although the history of the matter will always be relevant, it is more likely to be decisive in the first of these two situations: Even though the most recent non-compliance may be minor, the cumulative effect of an applicant's defaults may be such as to satisfy the judge that the applicant is either subjectively unwilling to co-operate or, for some reason, is unable to do so. Such a conclusion would not readily be reached; but, where it was, fairness to the respondent would normally require the summary dismissal of the proceeding. [41] In the second situation, their Honours (at FCR 397.1; ALR 209) said: [T]he continuance of the non-compliance is of the essence of this situation. If, when the Court looks at the matter, the direction has already been complied with, the defaulting applicant may be ordered to pay any wasted costs; but it would be difficult to justify the dismissal of the proceeding solely because of that default. [42] The third member of the court in Lenijamar, Pincus J, agreed with Wilcox and Gummow JJ that attempts by the court to prescribe exhaustive criteria and indicate their weight in relation to the exercise of the power granted under O 10 r 7 are not likely to be helpful. At FCR 402.7; ALR 215, his Honour said: In some circumstances, the Court may, in my opinion, take into account such matters as whether the claim or defence of the party in default appears to have substance, whether the case is one in which delay in hearing is likely to be particularly damaging to prospects of correctly deciding the dispute, whether the party applying for dismissal has itself transgressed, whether the party in default has gained some advantage by delay (for example, where it has had the benefit of an interlocutory injunction), whether credible assurances (supported, perhaps, by arrangements to commit the conduct of the matter to another firm or other counsel) have been given as to the prompt carrying out of future steps and whether the delay has been such as to induce the party not in default to think that the matter has probably gone to sleep. 8 Relevantly, their Honours set out (at 62 [44]) a number of criteria which are neither exhaustive nor mandatory, but are often relevant to the exercise of the Court's discretion. They were: (i) the nature of the default involved; (ii) the duration of the default and whether it is continuing; (iii) the circumstances in which the orders, in respect of which default has occurred, were made including whether the orders made accorded with the practice of the court in making orders of that kind; (iv) the circumstances which occurred between the time of making the orders and the order for the dismissal of the proceeding, including whether any attempt was made by the defaulting party to amend or set aside the orders to accommodate or deal with these intervening circumstances; (v) whether the continuing default is occasioning unnecessary delay, expense or other prejudice or unacceptable burden on the respondent; (vi) the attitude of the applicant to the default and the court's judgment as to whether or not the applicant genuinely wishes the matter to go to trial within a reasonable period; (vii) the stage that the proceeding has reached – whether they have only recently been commenced; whether it has been commenced for some time but not advanced due, in whole or in part, to the default; or whether the proceeding is in an advanced state ready or nearly ready for hearing; (viii) the likely disruption to hearing dates or, if not fixed, to setting the matter down for hearing at an early date; (ix) the consequences to the applicant of dismissing the proceeding. 9 The Court's power to dismiss proceedings of this nature must be exercised cautiously. It requires a balancing of the desirability of the expeditious conduct of litigation and the desirability of litigants having a proper opportunity to present their case: see Wu v Avin Operations Pty Ltd [2006] FCA 36 [51]. 10 Although reliance was placed upon s 37P(6) of the Federal Court Act in the alternative to r 5.23, there is perhaps no need to address that power in this case. 11 Before assessing the application for dismissal, it is useful to first consider the nature of the proceedings and the events that have occurred since the making of the extant orders. The nature of the case 12 The action, as currently pleaded, concerns a disputation about the entitlement to shares in the first defendant company, Austral Dutch Kaolin Ltd (Austral Dutch). The current plaintiffs are its directors and/or shareholders, and the defendants are its former directors and/or shareholders, although the exact nature of their positions is subject to some uncertainty. 13 It appears that in September 2021, Mr Gregory Hannan was appointed as the director of Austral Dutch. At around that time, 1200 shares had been issued in it, and the state of the share register identified those who had, or held, the relevant interests. 14 The plaintiffs seek declarations that two additional share issues that were subsequently made by Austral Dutch on 22 October 2021 and 23 August 2022 were invalid and of no effect, such that there ought to be rectification of the company's share register. In particular, they allege that the invalidity of their issue arose because they were not the subject of a proper directors' resolution and were made without the authority or knowledge of the directors or the shareholders. As such, it is said that they were contrary to the Corporations Act 2001 (Cth) (Corporations Act). 15 The plaintiffs further allege that the share issues were made by Mr Hannan and had the consequence that the plaintiffs' shareholding was diluted and Mr Hannan, and companies associated with him, were allotted some additional shares totalling 38 million (which equates to 66.16 per cent of the total shareholding). 16 The plaintiffs also seek orders that the appointment of a director, Mr Arun Ramachandran, on 21 November 2022 was invalid and of no effect. They allege that the appointment was made unilaterally by Mr Hannan and without the authority or knowledge of the other directors of Austral Dutch. Recently occurring circumstances 17 Despite there being delays at the end of 2023 in relation to the completion of discovery, other events have intervened in the progress of the proceedings. 18 The first was the acquisition by the plaintiffs of information in relation to further dealings in the shares of Austral Dutch, and changes to the constitution of the board of directors. In particular, in late January 2024, they became aware that Mr Ramachandran had resigned as a director and other persons, namely Mr Richard Walker, Mr Laurence George, Mr Tony Little and Mr Matthew Fowler were appointed as new directors. All of those persons are allegedly related to the company Panacea International Resources Ltd (Panacea). That company has recently acquired a substantial volume of the shares in Austral Dutch, and by those acquisitions, has secured sufficient voting power to control the membership of the board of directors. 19 The plaintiffs allege that Mr Hannan did not give the plaintiffs, in their capacity as directors, any notice of any meeting of directors held on 18 January 2024, when the new directors were appointed, and that they had no knowledge of the new appointments until late January 2024. It was also at around about this time that they learned that Panacea had allegedly acquired a substantial shareholding in Austral Dutch, paying significant amounts of money for its acquisition. That included acquiring shares from Mr Hannan, Mr Albert Stahr, Mrs Anna Hubertina Stahr and Pensacola Pty Ltd (Pensacola), a company associated with the Stahrs. It appears that around that time, Mr Hannan caused Austral Dutch to enter into two agreements, one with Pensacola, and one with Burnett Resource Management Pty Ltd, an entity associated with Mr Hannan, which conferred rights in relation to the receipt of royalties in respect of subsequent mining activities. 20 After learning of the appointment of the new directors, the plaintiffs threatened to seek injunctions to enjoin them from acting as such. This led to a situation where the plaintiffs, Panacea and the new directors entered into what was described as a "standstill agreement", so that negotiations could take place. Apparently, the plaintiffs sought to negotiate a sale of their shares in Austral Dutch to Panacea. Those negotiations took significant time and continued until 8 September 2024, when the plaintiffs then gave notice that the negotiations had broken down and that they intended to proceed with the joinder of Panacea and new directors to the proceedings. Subsequently, on 10 September 2024, the new directors resigned as directors of Austral Dutch. 21 It is in these circumstances that the matter has come on before the Court. Should the proceedings be dismissed? 22 There is no doubt that the plaintiffs are in default under r 5.22 of the Rules. The only question is whether the Court should exercise its power under r 5.23 of the Rules to dismiss the proceedings. 23 As mentioned, there has been serious delay in the prosecution of the proceedings and no express explanation for that delay has been provided. That is, those responsible for the progress of the litigation did not go on oath to identify their motivation or reason for not complying with the orders of the Court. On an application of this nature, one might expect that a direct explanation is necessary. 24 Despite this, Mr Keane KC, counsel for the plaintiffs, submitted that the explanation for the substantive delay (being the delay following the difficulties with giving discovery), was that the plaintiffs were involved in the negotiations surrounding the corporate machinations which had occurred and of which they had become aware. It was said that, had they successfully negotiated the sale of their shares, the matter would have resolved and the present litigation would have been brought to an end. Whilst that should be accepted, and whilst one can infer that the delay is explained by the objective circumstance that the solicitor's attention would have been drawn to the further negotiation of the commercial arrangements in the hope that the matter would be resolved in that fashion, the fact remains that there was no express statement to that effect. 25 Although it is entirely appropriate for solicitors to attempt to resolve matters short of a trial, it is unfortunate that no attention was paid to the plaintiffs' continuing obligations in relation to the litigation. A number of steps could have been taken to ensure that the litigation was not ignored. That might have included having a directions hearing in which the extant orders could have been vacated so as to give the parties an opportunity to resolve the matter commercially. Had that failed, the matter could have then returned to Court at an appropriate time. Alternatively, consent orders might have been agreed upon, whereby time for compliance with the orders could have been extended to allow the negotiations to continue. In short, it would have been an easy matter to put arrangements in place to accommodate the ongoing negotiations. 26 Ultimately, despite the absence of an express explanation for the delay in compliance or the non-compliance with the orders made, the failures are explicable. Certainly, had the negotiations succeeded, it is more than likely that the matter would have resolved itself without needing to return to Court. However, as events have transpired, consequent upon the further corporate machinations, the dispute has not been narrowed. In fact, it has now been widened as a result of further conduct alleged by the plaintiffs, including the sales of shares to Panacea. The plaintiffs now seek to unwind those transactions and have identified an arguable foundation for that relief. 27 If the matter were to be dismissed at this stage, it would have the consequence that claims which, prima facie, appear to have some merit, would be extinguished without a full hearing. That is a significant factor weighing in favour of not dismissing the proceedings. 28 A further factor advanced by Mr Keane KC was that there was limited prejudice to the defendants were the matter to continue. Whilst there is substance in that submission, some of the shareholders, in particular Mr and Mrs Stahr, are of advanced age and the continued litigation would no doubt impose a burden on them that is much greater than the burden normally imposed upon litigants. 29 Mr Cameron raised another significant factor, being the fact that the amount in dispute in this case is small for litigation in this Court. In particular, the value of the shareholding which is sought to be impugned seems to be approximately half a million dollars. If that is all that is in dispute, it would be difficult to maintain the litigation in this Court without the cost of the litigation far exceeding the amount in dispute. That is something which the Court would be anxious to avoid. On the other hand, the parties are entitled to litigate their rights, even if it means that substantial costs are incurred. However, as Mr Keane KC submitted, a not insubstantial allegation now sought to be made relates to the entry by Mr Hannan into a royalties agreement which could secure to him amounts up to and including $50 million. Whether that claim is worth that amount or anything at all is yet to be determined. However, on its face, Mr Hannan has acquired substantial rights which the plaintiffs allege are unwarranted. 30 It can be added that Mr Hannan has now claimed in correspondence through his solicitors that he is entitled to payments pursuant to a consultancy agreement between himself and Austral Dutch, and that he has already issued invoices under it. In response, the plaintiffs assert that the consultancy agreement should also be set aside. 31 Ultimately, whilst there is some prejudice to Mr and Mrs Stahr in relation to the matter, given that the source of the invalidity is the conduct of Mr Hannan, it is unlikely that the proceedings would impose too great a burden on them, in any event. 32 In the circumstances, whilst the delay was lengthy, it can be explained by reason of the extra-curial activities. The gravamen of the matter really arises from the failure of the solicitors for the plaintiffs to approach the Court in relation to the issue of compliance with those orders. Despite that, it is apparent that the plaintiffs intend to prosecute the proceedings and, indeed, that they do so by proposing an amendment to the originating application to join new parties consequent upon the additional corporate machinations of which they now complain. 33 It has been established that the plaintiffs do genuinely wish for the matter to proceed, and that they are not persisting with it solely for the purposes of gaining some commercial leverage. The detriment to the defendants which might arise from allowing the proceedings to continue is not substantial, and certainly does not outweigh the plaintiffs' loss of their rights if the proceedings were dismissed. Any issue in relation to the burden imposed upon the defendants by reason of the costs of this application can be easily remedied. The Court cannot be satisfied that the power under r 5.23 of the Rules or s 37P of the Federal Court Act ought to be exercised in this case. The defendants' application to dismiss the proceedings should be dismissed. The application for joinder 34 During the course of the hearing, Mr Keane KC invited the Court to make an order for joinder of the additional parties. It is appropriate to do so in the circumstance of this case, as justification has been given for the joinder of the additional parties, being Panacea, Pensacola and Mrs Stahr. Leave should be given to the plaintiffs to file an amended originating process to that effect. Costs 35 The defendants sought their costs in relation to the application for dismissal, and with good reason. The matter languished for approximately one year as a result of the plaintiffs' lack of diligence in prosecuting the proceedings. The matter had to be revived, and that was done by this application. Indeed, one wonders what might have occurred otherwise. 36 In the circumstances, the defendants' costs should be paid by the plaintiffs on the basis that the defendants' application was always necessary to restart the matter. 37 The second question is whether the costs should be taxed immediately or at the end of the matter, in the usual way. That is not an easy question. In the ordinary course, costs are taxed once the proceedings are finalised, so that they cannot be used as a lever by one party against another. Nevertheless, in this case, there is no reason for the Court to have any great confidence that the solicitors for the plaintiffs will advance the matter with any great energy and, as Mr Cameron rightly submitted, the best evidence of what might occur in the future is that which has occurred in the past. For these reasons, there may be a significant period of time before the benefit of the costs order would inure to the second to fifth defendants. This is an appropriate case for the costs to be taxed forthwith. 38 In the result, the orders on the defendants' application should be: (1) The second to fifth defendants' application filed on 1 October 2024 be dismissed. (2) The plaintiffs pay the second to fifth defendants' costs of the application filed on 1 October 2024, to be taxed and paid forthwith. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate: Dated: 13 November 2024 SCHEDULE OF PARTIES QUD 98 of 2023 Plaintiffs Fourth Plaintiff: G VAN DER DRIFT BEHEER B.V. Fifth Plaintiff: GERARDUS PETRUS MARIA VAN DER DRIFT Sixth Plaintiff: NORHOLDING B.V. Defendants Fourth Defendant: RAMACHANDRAN ARUN Fifth Defendant: ALBERT ANDANNA STAHR AS TRUSTEE Sixth Defendant: AUSTRALIAN LIQUID FERTILIZER PTY LTD ACN 645 350 750