Tara Communications Group Pty Ltd v Simons Ravden Pty Ltd [2012] NSWSC 862

Supreme Court New South Wales

Medium Neutral Citation: Tara Communications Group Pty Ltd v Simons Ravden Pty Ltd [2012] NSWSC 862 Hearing dates: 3/07/2012 Decision date: 01 August 2012 Before: Fullerton J Decision: 1. Statement of claim brought by the first plaintiff is struck out. 2. Mr Pope to pay the costs of the defendants, including the costs of this motion, from 8 September 2011 on an indemnity basis. Catchwords: PROCEDURE - indemnity costs against plaintiff's solicitor - plaintiff undischarged bankrupt - whether solicitor acting without valid retainer - proceedings not validly instituted Legislation Cited: Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 Cases Cited: Ashrafinia v Ashrafinia; Fakhrabadi v Ashrafinia [2012] NSWSC 500 MultitecFBM (Asia Pacific) Pty Ltd v Han [2008] NSWSC 1339 Wood v Inglis [2008] NSWSC 1147; 68 ACSR 420 Category: Principal judgment Parties: Tara Communications Group Pty Ltd (1st Plaintiff) William Joseph Ryan (2nd Plaintiff) Simons Ravden Pty Ltd (1st Defendant) David Simons (2nd Defendant) Representation: Counsel: M Gunning S Bell Solicitors: Pope & Spinks Websters Solicitors File Number(s): 2011/103443

Judgment 1HER HONOUR: By amended notice of motion dated 4 June 2012 the defendants seek an order that the first plaintiff's statement of claim brought by the first plaintiff be struck out or dismissed pursuant to Rule 13.4 of the Uniform Civil Procedure Rules 2005. The proceedings brought by Mr Ryan, the second plaintiff, were dismissed by consent on 12 August 2011. 2The defendants also seek an order for indemnity costs against Mr Pope, the solicitor for the first plaintiff, on the basis that at the time of filing his notice of appearance in September 2011 he was on notice that Mr Ryan was an undischarged bankrupt and for that reason, being the sole director and shareholder of the company, the proceedings were not validly instituted by the first plaintiff and that he should have refused to act in the proceedings without satisfying himself that he was otherwise properly instructed to act on the company's behalf. 3Mr Gunning of counsel initially announced his appearance for the first plaintiff company however, after issue was taken with his retainer, he confirmed that he was without instructions and that his appearance on the motion was limited to resisting the costs claim against Mr Pope. 4After considering the defendants' thorough and considered submissions in support of the orders under Rule 13.4, and in circumstances where there was no contradictor on the motion, I am satisfied that the statement of claim brought by the first plaintiff should be struck out. There is no evidence to suggest that Mr Ryan's trustee in bankruptcy, if he is the beneficial holder of the shares in the plaintiff company, had any interest in maintaining the proceedings on the company's behalf. 5I turn now to consider whether the defendants have made out their claim for indemnity costs against Mr Pope. 6The defendants relied upon the affidavit of Ian Mitchell dated 7 May 2012 in which he details a chronology of relevant dates. That chronology, supplemented by the evidence led on the motion, is as follows: 16 October 1992 The first plaintiff incorporated (original name was Tara City Mining). 17 December 1992 Mr Ryan entered into bankruptcy. (He has not since been discharged. In August 2011 Mr Pope appeared in proceedings before the Federal Magistrates Court to have the bankruptcy annulled. Those proceedings were dismissed with costs.) 30 May 2001 Mr Ryan: - appointed as sole director of the first plaintiff - appointed as secretary of the first plaintiff It appears he became sole shareholder at this time. November 2006 The first plaintiff alleges in the statement of claim (filed 30 March 2011) that it entered into an agreement with the first defendant which continued until around August 2008. 5 August 2008 The first plaintiff alleges in statement of claim (filed on 30 March 2011) that it entered into a further agreement with the first and second defendants. 16 March 2011 Date of (purported) appointment of Mr Jungklaus as co-director of the first plaintiff. 28 March 2011 Mr Ryan, purporting to act as a director, certifies the appointment off Mr Jungklaus on 16 March 2011. 30 March 2011 Statement of claim filed in the Supreme Court. Mr Ryan swore the verifying affidavit purporting to be the sole director of the first plaintiff. April 2011 Form 404 lodged with ASIC relating to the purported appointment of Mr Jungklaus as co-director of the first plaintiff, signed by Mr Ryan who purported to be a director of the first plaintiff. 10 June 2011 Defence filed. 12 August 2011 Consent orders made dismissing the statement of claim by Mr Ryan as second plaintiff (signed by Mr Ryan's trustee in bankruptcy). 24 August 2011 Mr Pope gave evidence that he was instructed by Mr Jungklaus to act on behalf of the first plaintiff based upon his claim to be a director of the first plaintiff. (In his evidence and under cross-examination Mr Pope maintained the position that he regarded himself to be adequately instructed.) 25 August 2011 Mr Pope appeared in the Federal Magistrates Court on behalf of Mr Ryan seeking an annulment of his bankruptcy. August 2011 Defendants' solicitor served with an unfiled notice of appearance by Mr Pope. 2 - 7 September 2011 Correspondence between the parties: Letter from defendants' solicitor to Pope & Spinks referring to the unfiled notice of appearance and advising that: (a) Because Mr Ryan is and was an undischarged bankrupt by operation of the Corporations Act he was disqualified from managing a corporation and from being a director; and (b) His shares in the company vested in his bankruptcy trustee; and (c) Any appointment of another director (in this case Mr Jungklaus) by Mr Ryan is invalid. They added that, in their view, it followed that: (a) No person had the authority of the first plaintiff to enter into any agreement such as those alleged in the statement of claim; (b) Therefore Mr Pope did have a proper retainer from the first plaintiff; and (c) Indemnity costs would be sought if he continued to act in these circumstances. 7 September 2011 Letter from Pope & Spinks (signed by Mr Pope) advising upon a search of the company register: (a) They have instructions from a director (unnamed) and (b) As such they do not need to look behind their instructions. The defendants' solicitors reply repeating their assertion that any appointment of a director by Mr Ryan is invalid suggesting that further consideration should be given to the basis of their retainer than simply obtaining a company search. Pope & Spinks assert that in their view it is a matter for the Court as to whether a director (presumably Mr Jungklaus) can instruct solicitors and that any personal costs order will be strenuously resisted. 8 September 2011 Notice of appearance filed by Mr James Pope, of Pope & Spinks. 11 October 2011 Application for an annulment of the bankruptcy dismissed. 4 May 2012 Extract Historical Company Search of Tara shows: - Mr Ryan appointed as director of Tara on 30 May 2001. - Mr Ryan ceased as a director of Tara on 30 May 2001. - No directors of Tara were registered for period 30 May 2001 to 16 March 2011 being the period within which the first plaintiff allegedly entered into agreements with the defendants. 7The defendants' application for indemnity costs against Mr Pope is pressed on the basis that despite being notified on 2 September 2011 that their searches confirmed Mr Ryan's status as an undischarged bankrupt, and that in their view something more than a search of the company register was necessary in order to validate Mr Jungklaus' appointment as a director of the first plaintiff company such that he could be a source of instructions for the maintenance of the claim by the first plaintiff, Mr Pope continued to act without a valid retainer, thereby exposing himself to an order for indemnity costs in accordance with applicable principles. In Ashrafinia v Ashrafinia; Fakhrabadi v Ashrafinia [2012] NSWSC 500 at [57], Slattery J referred to the principles as follows: The applicable principles may be concisely stated. The common order or ordinary rule when a solicitor has taken unauthorised steps in litigation, is to require the solicitor to personally pay the costs they have caused the parties to incur up until the order is made: Hawksford v Hawksford [2005] NSWSC 463 at [111] per Campbell J; Hillig v Darkinjung Pty Ltd (No 2) [2008] NSWCA 147 at [47]-[52] per McColl JA (Beazley and Giles JJA agreeing); A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 458 per Young J. However, on sufficient grounds being shown the court may depart from the ordinary rule: A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 458 per Young J; Hillig v Darkinjung Pty Ltd (No 2) [2008] NSWCA 147 at [51]-[52] per McColl JA, Beazley and Giles JJA agreeing. Any costs the subject of a cost order may be on an indemnity basis or on the ordinary basis: A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 460 per Young J. 8Mr Gunning submitted that even if Mr Jungklaus' appointment as a director was invalid (because Mr Ryan had no authority to appoint him) he could nevertheless instruct Mr Pope to maintain the proceedings on the company's behalf. For this reason, so it was submitted, Mr Pope's notice of appearance was of valid effect, the steps he has taken since that time were properly authorised and the application for an indemnity costs should be refused. 9Mr Gunning relied on MultitecFBM (Asia Pacific) Pty Ltd v Han [2008] NSWSC 1339 as authority for the proposition that while s 206A of the Corporations Act provides that an act of a disqualified director is illegal if that act substantially affects the corporation, it does not follow that the act itself is deprived of legal effect. He submitted that paragraphs 34 and 36 of the judgment state that proposition as a matter of law: [33] The defendants' contention therefore seems to be that Mr Coombe, by reason of his conduct allegedly in contravention of s 206A(1)(a) of the Corporations Act lacked lawful authority to retain the solicitors for the purpose of conducting the litigation on the plaintiff's behalf. If I have followed Mr Young correctly, the defendants' alternative contention is that the plaintiff itself, by reason of its own contraventions of s 206A(1)(a) of the Corporations Act, could not validly enter into a retainer with the solicitors. [34] It is not clear to me why, assuming Mr Coombe contravened s 206A(1)(a) by participating in making decisions that affected a substantial part of the plaintiff's business, he would be unable to give instructions on behalf of the plaintiff to solicitors. In Harry s Bagg's at 424, Powell J held that although the statutory prohibition on a disqualified person acting as a director created a criminal offence, it did not render such a person incapable of being validly appointed or acting as a director. [35] By parity of reasoning, if Mr Coombe did contravene s 206A(1)(a), he would be exposed to criminal liability for his actions, but the contravention would not mean that every act by him purportedly on behalf of the plaintiff would be deprived of legal effect. If that were the consequence of his contravention, third parties with no reason to suspect any illegality in their dealings with a corporation, might find themselves without any remedy against the corporation arising out of the dealings. [36] Similarly, it is difficult to see why the plaintiff would be precluded from validly retaining solicitors to commence proceedings against the defendants simply on the basis that it aided, abetted or procured Mr Coombe's contravention of s 206A(1)(a) of the Corporations Act. Even if the very act of authorising Mr Coombe to instruct solicitors constituted aiding and abetting Mr Coombe's breach of s 206A(1)(a), it does not follow that the retainer would be invalid. The case pleaded against the defendants does not rely on any conduct by the plaintiff or Mr Coombe that is said by the defendants to have been unlawful. Whatever the effect of s 206A(1)(a) of the Corporations Act when read together with s 11.2(1) of the Criminal Code, it could not invalidate instructions given by a corporation to solicitors to institute proceedings against third parties, when the proceedings are founded on a cause of action which can be pleaded without reference to any contravention of s 206A(1)(a). 10Counsel for the defendants submitted those paragraphs need to be read in context. In MultitecFBM the challenge to the solicitor's retainer rested on the proposition that Mr Coombes, the disqualified manager, (in this case the person in the position of Mr Ryan) could not validly instruct solicitors to institute and maintain proceedings because to do so involved him or the plaintiffs in a contravention of s 206A of the Corporations Act 2001 (Cth). Counsel emphasised that in the paragraphs preceding those to which Mr Gunning referred, it is clear that his Honour's views in [35] that not every act by a person to whom s 206A refers in contravention of that section would be deprived of legal effect, were expressed in the context of the case with which he was concerned, namely where the disqualified manager was authorised by the company as their agent to retain solicitors and there was nothing to suggest that he was acting outside the scope of his authority in so doing. In any event, as his Honour observed, whatever defects there may have been in the initial retainer, they were cured when the company ratified the retainer through its directors. 11I am satisfied that MultitecFBM it is not authority for the general proposition for which Mr Gunning contended. I am further satisfied that Mr Jungklaus had no authority to instruct Mr Pope to act on the first plaintiff's behalf. Section 201M of the Corporations Act has no application in circumstances where the person whose appointment was invalid (Mr Jungklaus in this case) was appointed by someone who had no authority to do so (being Mr Ryan) (Wood v Inglis [2008] NSWSC 1147; 68 ACSR 420 at [80]-[86]). It follows that I am also satisfied that Mr Pope acted without authority in the steps taken by him in the proceedings as and from 8 September 2011. The only remaining question is whether I should make the indemnity costs order sought in the exercise of discretion. 12No particular submissions were advanced on Mr Pope's behalf bearing on the question of discretion save for the submission that he should not have been deterred from pursuing the interests of the first plaintiff under threat of personal liability if his judgment that his retainer was sound proved to be wrong. That submission would carry force were I satisfied that he made some proper enquiries before taking the entrenched position that he was validly instructed and maintaining that position in his evidence before me. I am not persuaded that he made any, or any sufficient, enquiries to this end such that it could be fairly said that his judgment simply miscarried. In fact I am compelled to the conclusion that he did not make the most obvious enquiries, namely of Mr Ryan, which would inevitably have led to the conclusion that Mr Jungklaus could not instruct him to continue the proceedings until such time as his appointment as director was validated or ratified. I am not prepared to speculate as to the reasons why Mr Pope took that approach. There is no gainsaying his considerable experience as a solicitor in an insolvency practice which makes his conduct on this occasion all the more perplexing. 13The matters of fact bearing upon the exercise of discretion are all weighted in favour of the orders the defendants seek. Mr Pope was well aware of Mr Ryan's incapacity as an undischarged bankrupt when the proceedings, which he assumed carriage of in August 2011, were commenced in March of that year. He gave no evidence as to the enquiries he made as to the status of the proceedings at the time he assumed carriage of them or the matters about which he generally sought instructions and from whom in order to accept the retainer to act on the company's behalf. He gave no evidence that he made any enquiries of Mr Jungklaus' capacity to instruct him as to the matters raised in the statement of claim on the company's behalf upon his receipt of instructions (which I note, was 12 days after the proceedings brought by Mr Ryan against the defendants were dismissed by consent) and what, if any, further enquiries he made before filing the notice of appearance on 8 September 2011. 14At its highest the information he had as to the source of Mr Jungklaus' appointment to the plaintiff company (an appointment purportedly made within a week of the statement of claim being filed in March 2011) was to simply accept his assertion that he was a director. I am prepared to accept that he probably confirmed that by reference to an extract from the ASIC database of the first plaintiff when the matter was raised by the defendants' solicitors although he gave no evidence of that fact. While that extract does nominate Mr Jungklaus as the sole director of the plaintiff company, it gives no historical details bearing upon his appointment. In circumstances where the defendants' solicitors put him on notice of the grounds upon which they considered the validity of his retainer was compromised, he cannot rely upon s 129(2) of the Corporations Act given the operation of section 128(4). Through his counsel he did not contend otherwise. Of course, were he to have asked Mr Ryan (his client in so far as bankruptcy proceedings were concerned and coincidentally the sole shareholder of the plaintiff company and a person who swore the affidavit verifying the statement of claim) about his relationship with Mr Jungklaus and, in particular, whether he was aware of the source of Mr Jungklaus' appointment as director, he would have been immediately put on further enquiry to ensure the appointment was valid. Were he to have learnt that it was not, he might then have taken steps to have either had the appointment ratified or to seek instructions, potentially from Mr Ryan's trustee in bankruptcy, to maintain the proceedings in the name of the company. He gave no evidence as to why he regarded those enquiries as superfluous, irrelevant or inappropriate. 15In these circumstances I am satisfied that there are sound and proper reasons why Mr Pope should pay the costs of the defendants, including the costs of this motion, from 8 September 2011 (the date of filing of the notice of appearance) on an indemnity basis, and I so order.