New South Wales Supreme Court CITATION : EVERGREEN TOURS PTY LTD v McLAREN [2010] NSWSC 1362 HEARING DATE(S) : 22 November 2010 JUDGMENT DATE : 26 November 2010 JUDGMENT OF : Tamberlin AJ at 1 (1) The defendants be granted leave to withdraw their notice of submitting appearance filed on 14 September 2010. (2) The defendants file and serve a further notice of appearance by 3 December 2010. (3) The matter proceed by way of pleadings. (4) The plaintiffs file and serve a statement of claim by 17 December 2010. DECISION : (5) The defendants file and serve a defence by 4 February 2011. (6) The matter be listed for further directions before the Registrar on 11 February 2011. (7) The defendants pay the plaintiffs' costs of this application except in relation to the Notice to Produce. (8) The plaintiffs' pay the defendants costs of the Notice to Produce. (9) Liberty to apply on 2 days' notice. CATCHWORDS : PROCEDURE – submitting appearance – whether discretion to grant leave to withdraw submitting appearance should be exercised – failure to obtain legal advice as to availability or strength of possible defences – appearance filed in circumstances of lack of funds and wish to avoid costs – whether defendant has an arguable defence – Uniform Civil Procedure Rules 2005 (NSW) rr 6.11(2), 12.5 LEGISLATION CITED : Uniform Civil Procedure Rules 2005, rr 6.9, 6.11, 12,5 CATEGORY : Procedural and other rulings Chan v Zachariah (1984) 154 CLR 178 Firth v John Mowlem and Co Ltd [1978] 3 All ER 331 Garsec v His Majesty the Sultan of Brunei [2007] NSWSC 882 CASES CITED : General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Hilton v Gidley [2009] NSWSC 383 Sahab Holdings Pty Ltd v Registrar General [2009] NSWSC 1143 Somportex Ltd v Philadelphia Chewing Gum Corp [1968] 3 All ER 26 Evergreen Tours Pty Ltd (First Plaintiff) Mia Kate Moroney (Second Plaintiff) PARTIES : Glen Moroney (Third Plaintiff) Hamish McLaren (First Defendant) Burlington Prudential Pty Ltd (Second Defendant) FILE NUMBER(S) : SC 2010/292821 COUNSEL : A Cheshire (Plaintiffs) C Bova (Defendants) SOLICITORS : Turnbull Bowles (Plaintiffs) Ian Harold Congdon (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TAMBERLIN AJ 26 NOVEMBER 2010 2010/292821 EVERGREEN TOURS PTY LTD v HAMISH McLAREN (AKA HAMISH WATSON) JUDGMENT 1 HIS HONOUR: The defendants filed a notice of motion on 1 October 2010 seeking an order pursuant to Part 6, r 6.11(2) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) that they be granted leave to withdraw their Notice of Appearance submitting to the orders of the court, filed on 14 September 2010 and be permitted to file and serve a further notice of appearance by a specified date enabling them to contest the claims of the plaintiffs. Alternatively the defendants rely on the discretion to grant leave to withdraw an appearance under Part 12, r 12.5 of the UCPR. 2 Part 6 of the UCPR is concerned with the entry of an appearance (r 6.9) and r 6.11(1) enables a defendant who intends to take no active part in proceedings to include in the notice of appearance a statement to the effect that the defendant submits to the making of all orders sought, and the giving or entry of judgment in respect of all claims made, save as to costs. 3 In this case the defendants filed an appearance on 14 September 2010 in response to a summons filed by the plaintiffs. 4 Rule 6.11(2) provides that except by the leave of the Court a defendant who has filed a notice of appearance containing a submitting statement may not file a defence or affidavit or take any other step in the proceedings. 5 Part 12, r 12.5 allows a party to withdraw an appearance by leave of the Court. 6 The first defendant, Mr Hamish McLaren, is an investor and sole director of Burlington Prudential Pty Ltd (Burlington), the second defendant. Burlington had an account with Sonray Capital Markets Pty Ltd (Sonray) through which Burlington predominantly traded foreign exchange products, derivatives and futures. The first plaintiff (Evergreen Tours Pty Ltd (Evergreen)) is a company controlled by the third plaintiff Mr Glen Moroney who is a director of Evergreen and the father of Mia Moroney (the second plaintiff). 7 In October 2009 after discussions with Mr McLaren, Mr Glen Moroney agreed to invest moneys with Burlington to be traded on foreign exchange products and futures. The terms of the arrangement included a provision that Burlington would be entitled to a 30% fee on profits. 8 The terms of the arrangement are reflected in two Declarations of Trust dated 15 December 2009 and 5 February 2010 made by Burlington as trustee and Mia Moroney as beneficiary in respect of amounts invested of AUD$100,000 and AUD$500,000 respectively. By clause 2 the beneficial and legal owner of the trust assets is Mia Moroney who transfers the legal interest to Burlington under the terms of a Deed. By clause 5 of the Deed Burlington can accept instructions from the beneficiary verbally or in writing and in the absence of instructions Burlington may act as it sees fit for the sole benefit of the beneficiary who is bound by the acts of Burlington. 9 By clause 6 of the deed Burlington is given a discretion, as trustee and without prior reference to the beneficiary, to make such decisions as it may think fit and the beneficiary is bound by all such decisions without having any recourse against Burlington. This exemption does not operate to protect Burlington for dishonesty or wilful neglect in carrying out duties or delegations under the Deed. Clause 7 provides an indemnity by the beneficiaries to Burlington in respect of any claims arising out of Burlington acting as trustee. 10 On 2 November 2009 Glen Moroney on behalf of Mia Moroney deposited $100,000 into the account of Burlington and on 15 January 2010 an amount $500,000 into those accounts. 11 The plaintiffs allege that despite making demands for payment, the amounts referred to have not been repaid. The defendants' response is that some of the moneys have been lost through trading in the ordinary course and are therefore not repayable with the remainder subject to the control of Administrators Ferrier Hodgson who were appointed to Sonray on 22 June 2010. 12 These proceedings were commenced by Summons on 2 September 2010 seeking declarations that the moneys received by the defendants from the plaintiffs and any assets received from the plaintiffs together with income are held on trust for them. Orders are also sought for transfer of moneys received by the defendants and any assets acquired or income derived from those moneys together with an order for an account. 13 On 6 September 2010 ex parte freezing orders were made against the defendants and these were extended up to and including 15 September 2010 and later extended until further order. On 14 September 2010 Mr McLaren filed an affidavit setting out assets and liabilities of his own and of Burlington. 14 On 14 September 2010 the defendants filed the Notice of Appearance submitting to the orders of the Court, this appearance being the subject of this application. Nine days after the notice of submitting appearance, on 23 September 2010 the solicitor for the defendants informed the plaintiffs' solicitor the defendants now wished to defend the proceeding. 15 In substance, the defendants say that at the time the submitting appearance was filed Mr McLaren, who controls Burlington, was of the opinion that he did not have and could not access funds to defend the Summons and he had not received legal advice as to the merits of the claims in the Summons. Consequently, Mr McLaren decided not to defend the Summons because of lack of funds. A few days later he gave further consideration to the matter and had discussions with his wife and managed to arrange funding. The availability of this funding is the reason why Mr McLaren has decided to seek leave to withdraw the submitting appearance and defend the proceeding. The evidence of Mr McLaren is confirmed by his solicitor, Mr Congdon, who was consulted in relation to Affidavits concerning the freezing of assets applications. Mr Congdon says he did not consider the strength or availability of any possible defence to the Summons because his instructions were limited to compliance with the freezing order and Mr McLaren did not have funding. He advised that in view of the lack of funds and to avoid costs an appearance submitting to the orders of the court, save as to costs, was appropriate. He gave evidence that at no time prior to 14 September 2010 did he consider the merits of the claim against the defendants or any defence that might have been available. Nor did he provide the defendants with any advice as to the merits of the claim brought against them by the plaintiffs or any defence. In light of this Mr McLaren says that there was no deliberate informed choice or election not to contest the proceeding which should foreclose his defence. 16 Mr McLaren was cross-examined and stated that he was unfamiliar with legal process and was confused as to the nature of his legal rights and liabilities. In cross-examination, it appeared that he had previously been bankrupt. I do not accept that he was unfamiliar with legal process. However I do accept that Mr McLaren was unsure of his legal position at the time when the submitting appearance was filed. I also accept his explanation as to his then shortage of funds. LEGAL PRINCIPLES 17 As a general principle the interests of justice require that a defendant with an arguable case should not be shut out from presenting a case unless there are substantial countervailing considerations. 18 There was some debate during the hearing as to whether the appropriate provision for withdrawal of the submitting appearance was under Part 6 or Part 12. Nothing really turns on this issue because I think that in a practical sense the same result can be obtained whichever provision is invoked. After hearing submissions my view is that the more appropriate rule is Part 12, r 12.5 which gives power to grant leave to withdraw an appearance. I note that this was the approach taken by Hislop J in Hilton v Gidley [2009] NSWSC 383 at [18]-[19], cf the approach of Slattery J in Sahab Holdings Pty Ltd v Registrar General [2009] NSWSC 1143 at [78]-[84] in a somewhat different context. The substance of what the applicant seeks to achieve is to withdraw the submitting appearance and enter an appearance which enables the case to be contested. 19 Although there is no general rule for the way in which the discretion to grant leave to withdraw and defend should be exercised some useful guidelines are indicated in the authorities. In Somportex Ltd v Philadelphia Chewing Gum Corp [1968] 3 All ER 26 at 28 and 29 the Court of Appeal observed that generally leave may be granted when an appearance has been entered by accident or mistake but may not be granted in circumstances where a deliberate informed choice has been made after taking legal advice. That was a case involving submission to jurisdiction. This reasoning was applied by McDougall J in Garsec v His Majesty the Sultan of Brunei [2007] NSWSC 882 at [48]-[53]. The grounds for the exercise of the discretion to grant leave are not spelt out and it is a broad discretion but the discretion must be exercised judicially: see Firth v John Mowlem and Co Ltd [1978] 3 All ER 331. Another relevant and important consideration is whether the defendant has an arguable defence within the principles referred to in General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 at 129; Hilton v Gidley at [19]-[31] per Hislop J. SUBMISSIONS AND REASONING 20 The plaintiffs' case is that the defendants held the moneys advanced on trust and owed fiduciary duties to the plaintiffs. They rely on the statement of principle by Deane J in Chan v Zachariah (1984) 154 CLR 178 at 198 concerning the liability of a fiduciary to account for any benefit received by the fiduciary where there exists a significant possibility of a conflict of interest between the fiduciary and the beneficiary. The objective of such an obligation is to prevent the fiduciary being swayed by considerations of personal interest. The Plaintiffs say that is the position here because the evidence indicates that funds have been mixed with other funds including those of Mr McLaren. There is clear evidence of an unauthorised mixing of funds. 21 In this case the plaintiffs submit that the defendants were fiduciaries who wrongly used the plaintiffs' funds for their own personal use including use of a credit card, the purchase of a car and transfers to other entities. They say that the defendants, in breach of their fiduciary duty, bought out their own trading position. They say that clauses 6 and 7 of the Deed on which the defendants rely could not oust the obligation to perform the fiduciary duty not to prefer their own interests or put themselves into a position of conflict. They also say that the actions of the defendants could only be interpreted as constituting dishonesty or wilful neglect within the meaning of clause 6. The factual dispute in this matter relates to the alleged misuse by the plaintiffs of the moneys advanced. 22 The plaintiffs say that the claim defence foreshadowed is unarguable on the evidence they have presented. 23 The defendants dispute that they have wrongly used the moneys and say that the moneys withdrawn on 15 January 2010 were moneys of the defendant because on receiving a promise from Mr Moroney that a further $500,000 would be forthcoming, Burlington took trading positions totalling $671,175 using its own resources and upon receipt of the $500,000 they treated that amount as purchase of positions to the value of $500,000 from the first defendant Mr McLaren. They contend that they were entitled to use the moneys for their own personal purposes. With respect to the $500,000 in trading positions which Burlington had opened, they said the moneys were either lost or remained open as at the appointment of administrators to Sonray on 22 June 2010. 24 The defendants point out that there are no pleadings at this stage and that the issues are not properly defined. They do not know the details of the case sought to be made. The precise allegations against them and the nature and extent of the relief sought have not been spelt out and particulars have not been given. 25 The defendants say they have an arguable case based on the facts and the provisions of the Deed and they dispute the factual basis of the plaintiffs' claims. The practical consequence of refusing leave to withdraw the submitting appearance would be to shut them out from presenting their case when there are serious issues of fact and law and as to remedial measures which need to be ventilated in order to do justice between the parties. They say in effect the matter should not proceed ex parte. 26 In addition, the defendants say that the proceedings are at a very early stage and there is no real prejudice to the defendants if they are allowed to contest the case made against them. They also point to the fact that there are freezing orders in force until further order. They also refer to the fact that once pleadings have been completed it would be open to the plaintiffs to bring a properly informed and mounted application to strike out the defence if they consider this course is available. 27 The defendants also say that their explanation as to the reason for lodgement of the submitting appearance is sufficient, namely that a very short time after the appearance had been lodged they were able to obtain funds and wish to come in to defend. It was only a period of about 10 days before they made their decision as to disputing the claims to the plaintiffs' solicitors. This is not a case where there was advice given as to the merits of the matter and a deliberately informed choice was made. The evidence of the solicitor for the defendants, Mr Congdon, is that he did not advise on the merits of the claim before the submitting appearance was lodged but he advised that in view of the lack of funds and in order to save costs it would be an expedient course. This is not a case where case management considerations assume any importance because of the early stage of the proceeding at which the application is brought. 28 I am not persuaded that having regard to the complexity of the arrangements which involves consideration of the precise arrangements between the parties in relation to dealings in futures and derivatives, and tracing the use of funds, and possible arguments available in relation to the provisions of the Deed, that the defendants do not have at least an arguable case sufficient to prevent them being foreclosed from ventilating their position. I consider that the explanation given for the lodgement of the submitting appearance is adequate and I am not persuaded there is sufficient prejudice to the plaintiffs to warrant refusal of leave. 29 As an alternative, the plaintiffs submit that the defendants should only be allowed to contest the nature and extent of available remedies but should not be permitted to bring evidence or dispute the existence and breach of fiduciary duty and the obligations which flow from it. 30 In the circumstances, I do not consider that such an alternative is acceptable or practicable or would adequately serve the interests of justice. In this case, there should be a full opportunity given to the defendants to present their case. 31 It is obvious from the hearing of this application that this is a matter which requires pleading and I will direct a timetable in relation to this. 32 In respect of costs, the defendants' should pay the plaintiffs' costs because their action in filing the submitting appearance has given rise to the necessity for this application. I think that the plaintiffs' opposition to the application, although unsuccessful, was a reasonable position to take. ORDERS (1) The defendants be granted leave to withdraw their notice of submitting appearance filed on 14 September 2010. (2) The defendants file and serve a further notice of appearance by 3 December 2010. (3) The matter proceed by way of pleadings. (4) The plaintiffs file and serve a statement of claim by 17 December 2010. (5) The defendants file and serve a defence by 4 February 2011. (6) The matter be listed for further directions before the Registrar on 11 February 2011. (7) The defendants pay the plaintiffs' costs of this application except in relation to the Notice to Produce. (8) The plaintiffs' pay the defendants costs of the Notice to Produce. (9) Liberty to apply on 2 days' notice. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.