FEDERAL COURT OF AUSTRALIA

Spalla v St George Motor Finance Ltd (No 7) [2006] FCA 1177

PRACTICE AND PROCEDURE – motion to set aside deed in relation to settlement of proceedings – lack of good faith asserted

INSOLVENCY – liquidator’s duty to act independently in the best interests of the company

Corporations Act 2001 (Cth), ss 181(1), 477(2A), 545(1), 1321

Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 513 referred to

Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 1566 referred to

St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094 referred to

Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466 referred to

Spalla v St George Motor Finance Ltd (No 5) [2004] FCA 1262 referred to

Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 referred to

Beck v Spalla [2005] FCAFC 82 referred to

Rambaldi v Spalla [2005] VSC 162 referred to

Westpac Banking Corporation v Totterdell (1998) 29 ACSR 448 referred to

Re Jay-O-Bees Pty Ltd (In Liquidation); Rosseau Pty Ltd (In Liquidation) v Jay-O-Bees Pty Ltd (In Liquidation) (2004) 50 ACSR 565 referred to

Re Luxtrend Pty Ltd (In Liquidation) (1996) 135 FLR 170; [1997] 2 Qd R 86 referred to

Farrow Finance Co Ltd (In Liquidation) v ANZ Executors and Trustees Company Ltd (1996) 136 FLR 154; [1998] 1 VR 50 referred to

Re Tietyens Investments Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (1999) 31 ACSR 1 referred to

Watson v Foxman (2000) 49 NSWLR 315 referred to

Briginshaw v Briginshaw (1938) 60 CLR 336 referred to

Ex parte Sidebotham; In re Sidebotham (1880) 14 Ch D 458 referred to

Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 referred to

Bridgeport – Advisers & Asset Managers Pty Ltd (2005) 221 ALR 146 referred to

Koowarta v Bjelke-Petersen (1982) 153 CLR 168 referred to

Starmaker (No 51) Pty Ltd v Mawson KLM Holdings Pty Ltd [2005] SASC 313 referred to

Re Hedge (No 2) (2002) 196 ALR 557 referred to

Re Glowbind Pty Ltd (In Liquidation); Takchi v Parbery (2003) 181 FLR 208 referred to

Yeomans v Walker (1986) 5 NSWLR 378 referred to

SBBS v Minister for Immigration and Multicultural and Indigenous Affairs (2002) 194 ALR 749 referred to

Minister for Immigration and Multicultural and Indigenous Affairs v SBAN [2002] FCAFC 431 referred to

Secretary, Department of Education, Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127 referred to

Pledger v Secretary, Department of Family and Community Services [2002] FCA 1576 referred to

Star v Silvia (No 1) (1994) 12 ACLC 600 referred to

Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114 referred to

Cook v Northoak Holdings Pty Ltd (1997) 25 ACSR 517 referred to

Jones v Dunkel (1959) 101 CLR 298 referred to

Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 referred to

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 referred to

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 referred to

Re Club Superstores Australia Pty Ltd (In Liquidation) (1993) 10 ACSR 730 referred to

Re Allebart Pty Ltd (In Liquidation) and the Companies Act [1971] 1 NSWLR 25 referred to

Dew v Richardson [1999] QSC 192 referred to

Kelley v Corston [1998] 3 WLR 246 referred to

ANTHONY PATRICK SPALLA v ST GEORGE MOTOR FINANCE LTD (ACN 007 656 555), ST GEORGE WHOLESALE FINANCE PTY LTD (ACN 001 834 886), ANDREW WILLIAM BECK, ANDREW STEWART HOME, DELOITTE TOUCHE TOHMATSU, SIMON ALEXANDER WALLACE SMITH, ST GEORGE MOTOR WHOLESALE PTY LTD (ACN 007 664 217), GUISEPPE MICHELE RAMBALDI AND IRLMOND PTY LTD (RECEIVER & MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 066 314 870)

VID 631 OF 2005

KENNY J

12 SEPTEMBER 2006

MELBOURNE

THE COURT ORDERS THAT:

1.                  The third further amended notice of motion filed on 18 April 2006 be refused and the proceeding be otherwise dismissed.

2.                  On or before 4 pm on 26 September 2006, the parties file and serve submissions as to the disposition of costs.

3.                  On or before 4 pm on 3 October 2006, the parties file and serve any submissions in reply to submissions filed in accordance with [2] above.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                                             In this proceeding, the applicant, Mr Anthony Patrick Spalla, seeks to set aside a settlement (“the settlement”) entered into by the respondents. The settlement relates to an earlier proceeding, VID 3203 of 2002 (“the primary proceeding”), and a related appeal, VID 83 of 2005 (“the appeal”), involving essentially the same persons. In order to set aside the settlement, he seeks to have a Deed (“the Deed”) also entered into by these persons set aside. He seeks to do so on the basis that Mr Rambaldi, the liquidator of a company formerly controlled by him, executed the Deed in bad faith.

2                                             For the reasons I am about to give, I would dismiss Mr Spalla’s application. He has failed to show that Mr Rambaldi acted in bad faith in executing the Deed. On the contrary, the evidence shows that Mr Rambaldi acted in good faith in his dealings with Mr Spalla and as Irlmond’s liquidator.

PARTIES

3                                             The applicant, Mr Spalla, controlled Irlmond Pty Ltd (“Irlmond”), prior to the appointment of receivers and managers and, ultimately, a liquidator. Irlmond traded in motor cars under the name “Essendon Mitsubishi and North City Daewoo” (“Essendon Mitsubishi”). Mr Spalla also controlled a related company, APS Wholesale Pty Ltd (“APS”), which purchased new cars and acted as the wholesale company for the dealership.

4                                             St George Motor Finance Limited (“St George Motor Finance”) and St George Wholesale Finance Pty Ltd (“St George Wholesale Finance”) (collectively, with St George Motor Wholesale Pty Ltd, referred to as the “St George parties”) provided finance for Irlmond and APS by way of a floor plan.

5                                             On 12 February 1999, the St George parties appointed Mr Andrew William Beck and Mr Andrew Stewart Home, both from Deloitte Touche Tohmatsu (“Deloittes”), to be the receivers and managers of the property of Irlmond and APS. Messrs Beck and Home retired on 8 August 2003. On 23 September 2003, Mr Simon Wallace-Smith, a partner at Deloittes, was appointed receiver and manager of Irlmond and APS in their place. Deloittes and Messrs Beck, Home and Wallace-Smith will be referred to collectively as the “Deloitte parties”.

6                                             Mr Guiseppe Michele Rambaldi, a partner at Pitcher Partners, was appointed liquidator of Irlmond on 7 February 2001. He is sometimes referred to below as “the liquidator”.

HISTORICAL COURT PROCEEDINGS

7                                             In proceeding V 74 of 1999, Mr Spalla contested the appointment of Messrs Beck and Home as receivers and managers of the property of Irlmond and APS. Finkelstein J held that their appointment was lawful: see Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 513 (“Spalla (No 1)”). In his reasons, his Honour addressed the question of whether Irlmond and APS were insolvent at the time receivers were appointed. Mr Spalla contended that the companies were not insolvent at that time. His Honour held, however, that “the fact that the companies were insolvent is an inescapable conclusion from the evidence”: see Spalla (No 1) at [140].

8                                             Mr Spalla appealed against the decision of Finkelstein J to the Full Court. The Full Court, which was constituted by Heerey, Sundberg and Weinberg JJ, upheld his Honour’s decision: see Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 1566 (“Spalla (No 2)”). The Full Court held, amongst other things, that the primary judge was correct to find that Irlmond and APS were insolvent at the time receivers were appointed: see Spalla (No 2) at [61]-[70].

9                                             In proceeding V 7877 of 1999, St George Wholesale Finance unsuccessfully petitioned for a sequestration order against Mr Spalla based on an alleged failure to comply with a bankruptcy notice. The notice claimed that Mr Spalla owed a debt pursuant to the judgment obtained in proceeding V 74 of 1999 before Finkelstein J. Mr Spalla contested the sum specified. In St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094 at [40]-[41], Heerey J concluded that “St George is not sure itself what is really owing under the judgment” and that “this proceeding amounts to an abuse of the procedures provided by the Act”.

10                                          On 14 April 2000, Mr Spalla and Mr Andrew David Bentley Still (an accountant and company secretary of Irlmond and APS until 12 February 1999) were charged with 22 counts of dishonest false accounting in respect of their conduct at Irlmond. There was a trial in the County Court of Victoria. On 10 September 2002, the number of charges was reduced to four. On 19 September 2002 a jury, by direction of Judge Hart, acquitted Mr Spalla and Mr Still. In his ruling, his Honour said “[t]he evidence in support of the proposition that the accused acted only for the purpose of benefiting the company is overwhelming [and there] is no evidence which the Crown can point to which is inconsistent with this proposition”.

11                                          A new proceeding, referred to above as the “primary proceeding”, was filed in the Federal Court on 17 October 2002, shortly after Mr Spalla and Mr Still were acquitted of the criminal charges. Irlmond joined the primary proceeding as an applicant. On 6 May 2005, pursuant to the Deed that is the subject of this proceeding, Irlmond settled all of its claims in the primary proceeding and the appeal. The procedural details and history of the primary proceeding are discussed in more detail in the Court’s factual findings below.

THIS PROCEEDING

12                                          On 18 May 2005, Mr Spalla filed a notice of motion in the primary proceeding seeking to set aside the Deed. He filed an amended notice of motion on 30 May 2005. On 22 June 2005, French J ordered that the notice of motion be treated as an application by way of originating process in a new proceeding. Accordingly, this proceeding was allocated a separate file number (VID 631 of 2005). On 18 April 2006, Mr Spalla filed a third further amended notice of motion with the leave of the Court.

13                                          In his third further amended notice of motion, Mr Spalla seeks the following relief:

“1. An Order that the Deed … is unenforceable against Irlmond …

1.A. An Order that the Deed … was entered into in bad faith and breach of the Litigation Funding Agreement dated 15th March 2002.

1.B. An Order that the Deed … was entered into in bad faith, in breach of [the liquidator’s] duties pursuant to sections 180 (2) (a) & (d) 181 (a) & (b), 182 (a) & (b) and 184 (c) & (d) of the Corporations Act.

2. An Order that the Deed … be set aside on the grounds of it being void ab initio.

2.A. An Order pursuant to section 1324 of the Corporations Act, restraining the [liquidator] from taking any steps to give effect to the Deed …

2.B. An Order on appeal from the decision of the [liquidator] executing the Deed … pursuant to section 1321 and 1321(d) of the Corporations Act, and pursuant to that appeal, orders reversing or modifying such decision.

3. An Order that [the liquidator] is liable for all the costs on an indemnity basis incurred by the Applicant as a result of the execution by [the liquidator] of the Deed …

4.A. An Order permanently restraining the Respondents from acting upon or enforcing the Deed …

5.A. An Order pursuant to section 236 (1) (a) (i) and 236 (2) of the Corporations Act 2001 that the Applicant be granted leave to intervene in proceedings No. 3203 of 2002 and Appeal No. VID 83/05 for the purpose of taking responsibility on behalf of the company for those proceedings and in the company’s name.

5.B. An Order pursuant to section 237 that an application for and granting leave for reasons purpose as defined in section 237 (a), (b), (c) and (d) be granted.

…

8.      An Order for costs on an indemnity basis against [the liquidator] in respect [of] the mediation, preparation and lodgement of all Appeal documents.

9.      Such other relief as the Court may Order.”

14                                          The motion was heard on various dates in March, April, May and July 2006.

EVIDENCE

15                                          Mr Spalla relied on affidavits (and exhibits) sworn on 18 May 2005, 20 June 2005, 5 July 2005, 22 July 2005 and 10 March 2006. Mr Spalla also sought to rely on an affidavit sworn by him on 1 June 2005. For reasons given during the hearing, I excluded that affidavit. Mr Spalla also called Mr Phillip Frank Borden of Home Wilkinson and Lowry (“HWL”) as a witness.

16                                          Both Mr Spalla and Mr Rambaldi gave oral evidence in chief and were cross-examined.

17                                          Mr Rambaldi and Irlmond also relied on an affidavit (and exhibits) sworn by Mr Rambaldi on 27 May 2005 and threeaffidavits sworn by him on 9 September 2005. They also relied on an affidavit sworn by Mr David Raj Vasudevan of Pitcher Partners on 9 September 2005.

18                                          By consent, two unsworn statements of Ms April Arslan of HWL together with exhibits were admitted into evidence. Further, an affidavit sworn by Mr Andrew Jonathan Fisher on 24 September 2003 and an exhibit thereto (both of which were filed in the primary proceeding) were tendered by Mr Spalla without objection. There were a relatively small number of other documents admitted into evidence in the course of the trial.

19                                          The St George parties and the Deloitte parties did not present any evidence.

20                                          Unsurprisingly, given the subject matter of the present dispute, claims for legal professional privilege were raised from time to time. For the most part, they were not pursued or they were waived. Privilege was, however, claimed and pursued with respect to a relatively small group of documents, largely consisting of the written advices of counsel. In relation to these documentary communications, the St George parties and the Deloitte parties voluntarily undertook not to seek access without leave of the Court and not to plead waiver of privilege by reason of events occurring at trial.

21                                          There was also an issue, particularly at the commencement of the trial, as to whether or in what circumstances evidence could be given of what happened at mediation on 29 April 2005. This mediation was central to Mr Spalla’s present application. Ultimately, counsel for Irlmond and Mr Rambaldi specifically stated that they did not wish to take the point that evidence could or could not be adduced of statements at mediation. Mr Spalla presented his case on the basis that any such evidence should be given. The Deloitte parties and the St George parties did not argue for a different approach.

22                                          Section 53B of the Federal Court of Australia Act 1976 (Cth) does not prevent the parties from adopting such a stance in this case, because there was no order made under this provision. Section 53B(a) provides that “[e]vidence of anything said, or of any admission made, at a conference conducted by a mediator in the course of mediating anything referred under section 53A is not admissible … in any court”. Section 53A(1) provides that the Court “may by order refer the proceedings … to a mediator.” At the commencement of the trial, the parties expressed uncertainty as to whether mediation in this case was pursuant to Court order or simply pursuant to agreement between them. A thorough review of the files and relevant transcripts from the primary proceeding and the appeals (VID 3203 of 2002, VID 54 of 2005 and VID 83 of 2005) establishes that the Court in fact made no order referring the proceeding to mediation, although it gave encouragement to the parties to do so.

23                                          On 14 February 2005, Black CJ ordered (in both appeals) that the matters be referred to a judge of the Court for directions concerning possible mediation. The matters subsequently came before North J for directions on 16 March 2005 and 21 March 2005. At the directions hearing on 16 March 2005, his Honour discussed the utility of mediation with the parties, without ordering a referral to mediation. His Honour simply ordered that the matter be stood over for mention, if necessary, on 21 March 2005 and reserved costs. On 21 March 2005, his Honour inquired of the parties whether they had agreed upon the identity of a mediator and, when informed they had not, ordered that the matter be stood down to a date to be fixed and reserved costs. As it happened, the parties ultimately agreed upon the identity of a mediator and proceeded to mediation pursuant to a mediation agreement. None of the parties to this agreement relied on its terms in connection with the evidence given or sought to be given about the mediation or any related matter.

24                                          Further, s 131 of the Evidence Act 1995 (Cth) does not prevent the parties to the present proceeding from giving evidence about the mediation. Subject to s 131(2), s 131(1) prevents parties to litigation from adducing evidence of “a communication … between persons in dispute … in connection with an attempt to negotiate a settlement of the dispute”. Counsel for Mr Rambaldi submitted that s 131 did not in fact apply to communications between Mr Spalla and Mr Rambaldi, because they were not “persons in dispute” for the purposes of s 131(1). I accept this submission. No-one submitted to the contrary. At the time of the mediation, Mr Spalla and Mr Rambaldi were not in dispute. Furthermore, neither of them was in dispute with Mr Borden, Ms Arslan or Mr Bowman.

25                                          Further, neither the Deloitte parties nor the St George parties submit that evidence of communications at the mediation between them and the applicants in the primary proceeding should not be given. Section 131(1) does not prevent evidence being given in this case of communications with the Deloitte parties and the St George parties and Mr Rambaldi, Mr Spalla, Mr Borden, Ms Arslan or Mr Bowman, even if they were parties in dispute for relevant purposes. This is because s 131(2) provides that s 131(1) does not apply if, amongst other things, “the persons in dispute consent to the evidence being adduced in the proceeding concerned”; “the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute”; “the proceeding in which it is sought to adduce the evidence is … a proceeding in which the making of such an agreement is in issue”; or “making the communication … affects a right of a person”: see s 131(2)(a), (e), (f) and (i). In the circumstances of this case, these provisions operate to take out of the reach of s 131(1), evidence of any communication that might otherwise fall within this provision.

26                                          Finally, whatever confidentiality once pertained to the Litigation Funding Agreement, discussed below, was lost by the time of the trial.

FACTUAL FINDINGS

The commencement of the primary proceeding and joinder of Irlmond

27                                          The primary proceeding began on 17 October 2002, when Still & Co filed the original application and statement of claim on behalf of the then applicants. Those applicants were Mr Spalla and his wife, Stella, Mr Still, and Anstella Nominees Pty Ltd (“Anstella”) as the holder of all shares in Irlmond and APS. Irlmond was not one of the original parties to the primary proceeding. The original respondents included St George Motor Finance, St George Wholesale Finance, Messrs Beck and Home, and Deloittes. By their original statement of claim, the applicants alleged that the respondents had given false evidence in the proceeding before Finkelstein J and raised various claims relating to the receivership of Irlmond and APS. The applicants also claimed that the respondents had conspired wrongly to subject Mr Spalla and Mr Still to criminal conspiracy charges.

28                                          Prior to May 2003, Mr Rambaldi retained the firm of Darrer Muir Fleiter to advise him with respect to the primary proceeding and, in particular, as to Irlmond’s prospects if it were to join in the proceeding. On 22 November 2002, Mr Rambaldi sought quotations for insurance litigation funding. In a facsimile dated 3 February 2003, Mr Rambaldi’s solicitors subsequently wrote to Mr Spalla’s solicitors stating that, as liquidator of Irlmond, Mr Rambaldi was not in a position to join in the primary proceeding, or institute his own proceeding, until he had entered into an acceptable funding arrangement, although Mr Rambaldi had “his own legal advice that various claims against the Respondents, or a combination of them are likely to be successful”.

29                                          Throughout February and March 2003, Mr Rambaldi, assisted by Mr Vasudevan negotiated with IMF (Australia) Ltd (“IMF”), represented by Mr Clive Bowman, to secure litigation funding and, in particular, concerning the terms of a litigation funding agreement, which Mr Rambaldi required before agreeing to Irlmond becoming an applicant in the primary proceeding. The contemporaneous correspondence shows that control of the litigation was an important issue. By a letter dated 6 March 2003, IMF specifically noted that it wanted to avoid “Spalla attempting to block, or interfere with, a settlement which Irlmond wishes to pursue”. It reiterated this concern in an email of 29 April 2003. Ultimately, a funding agreement was reached with Insolvency Litigation Fund Pty Ltd (“ILF”), a wholly owned subsidiary of IMF. Before concluding the funding agreement, Mr Spalla retained the services of Mr Borden to act on his behalf in place of Still & Co.

30                                          By motion, notice of which was dated 2 May 2003, Mr Rambaldi applied for leave from the Court to enter into the proposed funding agreement (“proposed funding agreement”), to which the applicants to the primary proceeding and ILF were to be parties. He also sought leave for Irlmond to join the primary proceeding. In his supporting affidavit, he deposed that, in the absence of the funding agreement, Irlmond could not join the proceeding since it would not have the funds to do so.

31                                          The draft funding agreement included the following provisions:

“1.1 Definitions

…

“Irlmond claim” means the claim(s) prosecuted in the Proceeding by Irlmond as referred to in Clause B of this Agreement.

…

“Settlement Offer” means an offer by the Respondents or any one or more of them to settle the Liquidator and/or Irlmond’s claims in the Proceeding or to settle the Liquidator and/or Irlmond’s claims and/or the Spalla Interests claims in the Proceeding;

“Solicitors” means Home Wilkinson Lowry or such other firm of solicitors retained to act for the Liquidator and Irlmond from time to time; and

“Spalla Interests” means Anstella, Anthony Patrick Spalla, Stella Marie Spalla and Andrew David Bentley Still.

“Spalla Interests claim” means the claim(s) prosecuted in the Proceeding by the Spalla Interests as referred to in Clause B of this Agreement.”

…

9. Control of the Proceedings

9.1. The Spalla Interests and the Liquidator agree that the Solicitors shall, after Court approval, conduct the Proceeding on behalf of the Liquidator and the Spalla Interests.

9.2 The Solicitors shall at all times be instructed by the Liquidator in respect of the Irlmond claim and subject to clause 9.3, the Spalla Interests will not interfere with the conduct of the Proceeding by the Liquidator in respect of the Irlmond claim.

9.3 Notwithstanding clauses 9.1 and 9.2, the Liquidator shall not instruct the Solicitors to:-

(a) settle or discontinue the Proceeding as a whole; or

(b) settle, amend, vary, abandon or discontinue any claim made or the relief sought by the Spalla Interests, or any one or more of them;

unless the instruction to the Solicitors is agreed to by both the Spalla Interests and the Liquidator. The provisions of clause 13 shall apply to this clause if the liquidator and the Spalla Interests do not agree to so instruct the solicitors.

9.4 ILF shall not at any time interfere with the conduct of the Proceeding by the Liquidator or the Spalla Interests.

…

13. Arbitration

13.1 On written notice to the other parties, any party hereto may request that an independent third party arbitrator be appointed to adjudicate any matter in dispute and may nominate an Arbitrator …

13.5 The Arbitrator’s written determination shall be binding on the parties …

14. Settlements

14.1 If a Settlement Offer is received from the Respondents or any one or more of them or if the Applicants or any one or more of them wish to make an offer to settle and either:

(a) the Spalla Interests and the Liquidator cannot agree on accepting the terms of the Settlement Offer; or

(b) the Settlement Offer relates only to the Liquidator and/or Irlmond’s claims in the Proceedings and the Spalla Interests disagree with the Liquidator and/or Irlmond’s intention to accept the Settlement Offer and the Liquidator’s/Irlmond’s intention has been communicated to the Spalla Interests in a written document referring to this clause; or

(c)                the Spalla Interests or the Liquidator cannot agree to the terms of an offer to be put to the Respondents to settle the Proceedings.

then any party may:

(i) on written notice to the other parties, request that an independent third party arbitrator be appointed to adjudicate on the Settlement Offer or offer to settle and may nominate an Arbitrator …

(iv) the Arbitrator shall make a written determination on whether the Settlement Offer or offer for settlement is reasonable having regard only to the legal issues involved in the Proceeding; …

(v) the Arbitrator’s written determination shall be binding on the parties; …

14.2 Upon receipt of the Arbitrator’s written determination, the parties shall be authorised to accept or reject the Settlement Offer or to put the offer of settlement and shall instruct the Solicitors, Senior Counsel and Junior Counsel accordingly.”

(Hereafter the expression “Spalla Interests” refers to Anstella, Mr and Mrs Spalla, and Mr Still.)

32                                          At the hearing of the motion on 8 May 2003, Finkelstein J allowed Mr Iain Jones, as counsel for two of the St George parties in their capacity as creditors of Irlmond, to appear and make submissions. Mr Jones argued that the agreement, as then drafted, improperly limited the liquidator’s discretion to settle claims on behalf of Irlmond. Mr Jones noted that clauses 13 and 14 of the proposed funding agreement allowed the Spalla Interests to object to the liquidator accepting a settlement offer made only to Irlmond and, in the event of such an objection, delegated to an arbitrator the decision whether to accept such an offer. Mr Jones claimed that this arrangement was an unlawful restraint on the liquidator’s discretion. His Honour said that it appeared that Mr Jones was correct on this point. Mr Jones also argued that the proposed funding agreement – which allowed ILF to withdraw at any time on seven days’ notice but still take part in a distribution of any recovery – gave ILF a potential windfall if it withdrew shortly after executing the agreement.

33                                          After the hearing of 8 May 2006, the parties to the proposed funding agreement negotiated further, in order to amend it so as to meet the concerns expressed by Finkelstein J. In particular, as part of these further negotiations, the parties considered the issue of control over any settlement offer to Irlmond and the issue of ILF getting a ‘windfall’ if it withdrew its indemnity shortly after executing the agreement. They prepared a new draft funding agreement. On 12 May 2003, Mr Rambaldi filed this new draft in the Court, together with counsel’s supplementary submission in support of the new agreement.

34                                          This supplementary submission stated that the amendments to the proposed funding agreement “address the criticisms made by Mr Jones”. It continued:

“The effect of the amendments is to:

(a) remove any restriction on the power of the liquidator to accept a settlement offer made to the company. No limitations are imposed upon the liquidator at all in this regard;

(b) in the event that ILF terminates its indemnity pursuant to clause 6.2, to restrict the entitlement of ILF to the “Recovery” to simply a reimbursement of monies it has paid pursuant to clause 6.2.”

35                                          The new agreement deleted the former clauses 13 and 14 from the earlier draft. Clause 9, relating to control of the proceedings, was unchanged except “clause 14” was substituted for the words “clause 13” in clause 9.3. A new clause 13 dealt with “Recoveries”. A new clause 14 relevantly read:

“14. Dispute Resolution Procedure

14.1 If at any time, a dispute or difference arises in connection with this Agreement and that dispute or difference has not been able to be resolved by negotiations between the parties then a party may provide the other parties with a written notice addressed to the other parties outlining the dispute or difference, and if capable of remedy, requiring remedy on the expiry of 3 Business Days from receipt of the written notice.

14.2 If the dispute or difference communicated to the other parties by written notice is not remedied or is not capable of remedy, then the parties agree to submit to mediation prior to the institution of Court proceedings utilising the following procedure:-

(a) The parties shall jointly appoint a mediator. If the parties cannot agree on a mediator within 2 Business Days of receipt of the written notice by the other parties, the parties agree that any one or more of the parties may request the President for the time being of the Law Institute of Victoria to nominate a mediator.

(b) The costs and expenses plus any GST payable to the mediator and the costs and expenses of the mediation shall be paid by Anstella.

(c) If a settlement is reached at the mediation, written terms of settlement shall be entered into immediately upon conclusion of the mediation and shall, unless Court approval of the terms of settlement is required, override the terms and conditions of this Agreement. …”

36                                          On 14 May 2003, Finkelstein J delivered reasons for judgment giving approval to Mr Rambaldi as liquidator of Irlmond to enter into the funding agreement in the form attached to his counsel’s supplementary submission of 12 May 2003: see Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466 (“Anstella”). His Honour wrote (at [5]-[8]):

“The initial version of the draft agreement required the liquidator to surrender his power to control the destiny of the action in the event of disagreement between the liquidator and the other applicants concerning the settlement or discontinuance of the action. The draft agreement provided that the liquidator could not instruct his solicitors to settle or discontinue the proceeding without obtaining the consent of the other applicants. If there was a dispute, the matter had to go to arbitration. …

It seemed to me … that the proposal gave rise to a … difficulty, namely whether there are any circumstances under which a liquidator can lawfully give up his statutory powers or duties. There is a view that, while a liquidator may listen to the opinion of others on what steps he should take in a particular situation, in the end he must exercise his own judgment on what is or is not in the best interests of the creditors or contributories. For this reason he cannot give up control of litigation in which his company is a party. This is the view taken by Lightman J in Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80. …

Recognising the potential difficulty he was in, the liquidator sought time to see whether Insolvency Litigation Fund Pty Ltd (“ILF”) (the company providing the funding) could be persuaded to change the terms. This is in fact what occurred. The liquidator was able to negotiate the removal of the restriction on his ability to settle or discontinue the proceeding if Irlmond became a party to the action.”

37                                          On 15 May 2003, the litigation funding agreement (hereafter referred to as “the LFA”) was executed by Mr and Mrs Spalla, Mr Still, Anstella, Mr Rambaldi, Irlmond, and ILF. Other significant provisions of the LFA include:

·        Clause 4(a)(iv) provided that the “Spalla Interests shall pay and shall at all times remain liable to pay all Legal Costs charged by the Solicitors, Senior Counsel and Junior Counsel in respect to … Irlmond and the Liquidator’s participation in and conduct of the Proceeding.” Clause 4.2 required the Spalla Interests to provide the liquidator with a letter confirming that the Spalla Interests have sufficient funds to settle these costs.

·        Pursuant to Clause 5.1, the Spalla Interests agreed to indemnify Irlmond and the liquidator in respect of legal costs claimed by their joint representatives in the proceeding.

·        Clause 6.1 provided that ILF would indemnify the liquidator for any costs for which he becomes personally liable in relation to his and Irlmond’s participation in the primary proceeding. Pursuant to Clause 6.2, “[t]he indemnity provided by ILF to the Liquidator in respect of any Costs Order will not be a continuing indemnity, but may be terminated by ILF, in its absolute discretion by giving 7 days written notice to the Liquidator”. This right of termination was subject to a proviso that ILF would remain liable for any personal costs orders against the liquidator up to the time of termination.

·        Clause 7 related to the appointment of solicitors and counsel and provided that solicitors and junior and senior counsel would be retained to act for the liquidator, Irlmond and the Spalla Interests. In accordance with clause 1.1, the solicitors were to be HWL “or such other firm of solicitors retained to act for the Liquidator and Irlmond from time to time” and senior counsel was to be Peter Hayes QC “or such other lead Counsel retained to act for the Liquidator and Irlmond from time to time”.

·        Clause 15 contained certain warranties, including that the “Spalla Interests warrants [sic] that it [sic] has sufficient financial resources to carry out its [sic] obligations under this Agreement and shall continue to have such financial resources.”

38                                          HWL and the Spalla Interests entered into a costs agreement with respect to the primary proceeding in May 2003. Mr Spalla’s original retainer with HWL required Mr Spalla to pay $80,000 upfront with the balance to be at HWL’s prevailing hourly rates, plus a 20% uplift fee to be paid on the successful outcome of the matter. Mr Spalla was to meet all HWL’s disbursements and counsel fees. Mr Spalla reached a similar “no win, no fee” arrangement with Mr Hayes QC.Mr Spalla paid the initial amount of $80,000 to HWL and funded the litigation in accordance with these agreements. He did not, however, have sufficient funds to meet the costs of the litigation had all of the lawyers’ costs been due at the time they were incurred.

39                                          Mr Rambaldi was aware of Mr Spalla’s costs agreement with HWL and informed HWL that he had no objection to HWL’s costs being calculated and paid on the basis of that agreement. By a letter dated 20 May 2003, Mr Rambaldi confirmed with Mr Borden that Mr Rambaldi and Irlmond retained HWL to act for them with respect to the primary proceeding, although the Spalla Interests would meet HWL’s costs and disbursements. Mr Rambaldi emphasized that Mr Borden was to take instructions from him before making any commitment on his behalf to the Spalla Interests or the respondents. Mr Rambaldi also confirmed with counsel, including Mr Hayes QC, that, although retained by him and Irlmond to act on their behalf, he, Mr Rambaldi, would not be liable for counsels’ fees, which the Spalla Interests were to meet.

40                                          On 25 June 2003, Still & Co, solicitors then acting for the Spalla Interests, wrote to Mr Rambaldi stating that the firm held “sufficient funds in trust to settle the costs as set out in Clause 4.1 of the Funding Agreement”. With the LFA executed, Irlmond began participating in the primary proceeding as an applicant, with the main issue being the terms of any new application and statement of claim. On 15 May 2003, the applicants filed a proposed amended statement of claim that named Irlmond as the fifth applicant. On 16 December 2003, the applicants filed a Further Amended Statement of Claim pursuant to leave granted by Goldberg J on 9 December 2003.

Difficulties in the conduct of the primary proceeding

41                                          By mid 2004, Irlmond and Mr Rambaldi were encountering difficulties in conducting the litigation within the framework agreed with the Spalla Interests and ILF. First, there was an issue as to whether there was a potential conflict of interest between Mr Rambaldi as liquidator of Irlmond and Mr Spalla as a potential debtor of Irlmond. Mr Borden addressed this issue in a facsimile sent on 8 June 2004 to Mr Rambaldi. Minter Ellison, as solicitors for the Deloitte parties, had apparently initiated consideration of the issue by their letter of 27 May 2004. In his letter to Mr Rambaldi, Mr Borden wrote that:

“If Spalla was a debtor of Irlmond, you, as the Liquidator of Irlmond, should be pursuing him along with any other debtors of the company in the interests of the creditors. However the obligation to pursue him would only apply if there were a prospect of recovering some funds. As you know, Spalla is totally without funds and has no assets at all. In my view, the best course to adopt is to continue to co-operate with Spalla in the proceedings so that any assets that are recovered by Irlmond can be used for the benefit of the company’s creditors. Finally, it should be noted that Spalla claims to be a creditor of Irlmond, rather than a debtor.”

The issue of conflict of interest was to return at the mediation on 29 April 2005, which gave rise to the matters currently in dispute.

42                                          It also proved difficult for the applicants to frame a viable statement of claim and the respondents foreshadowed applications for indemnity costs against Mr Rambaldi personally and ILF.

43                                          On 21 May 2004, the Deloitte parties filed a notice of motion seeking to strike out the applicants’ further amended statement of claim. St George Motor Finance and St George Wholesale Finance filed a similar notice of motion on 24 August 2004.

44                                          On 16 July 2004, Minter Ellison sent a letter to HWL regarding the Deloitte parties’ strike out motion. In this letter, Minter Ellison outlined the arguments they would present in support of their motion and said:

“[W]e expect that the liquidator of Irlmond acting reasonably and objectively would or should have grave grounds for concern regarding the viability of Irlmond’s claim. Those concerns should in turn inform a serious concern regarding the consequences of continuing proceedings where it does not appear to us that he is receiving advice independent of Mr Spalla one of the applicants who happens to be maintaining the action and who will benefit from Irlmond’s preparation and prosecution of its claim.

If the liquidator chooses to ignore these warnings so be it, but these risks are a matter that he should bring to the attention of his partners and the litigation funder as he exposes them to a liability for indemnity costs, which could exceed $1 million due to the apparent impecuniosity of the other funders and the size and nature of the litigation in contemplation here and the number of parties involved.”

45                                          On 28 September 2004, French J struck out the applicants’ further amended statement of claim but gave liberty to file and serve, by 21 October 2004, a substituted application and statement of claim: see Spalla v St George Motor Finance Ltd (No 5) [2004] FCA 1262 (“Spalla (No 5)”). His Honour also ordered that the applicants pay the respondents’ costs of their respective motions. Amongst other things, his Honour held that many of the allegations in the further amended statement of claim involved allegations of fact that contradicted the factual findings made by Finkelstein J in proceeding V 74 of 1999. In these respects, the further amended statement of claim could not stand “against the res judicata estoppel and the issue estoppels generated by the judgment in the first proceedings”: see Spalla (No 5) at [4]-[5] and [44].

46                                          The primary proceeding was originally fixed for trial beginning on 19 July 2004. As a result of the various strike-out motions, that date was vacated and the matter was re-listed for hearing in February 2005. On 13 October 2004, HWL advised Mr Spalla (by a letter, which was also copied to Mr Rambaldi) that they would terminate their retainer with Mr Spalla if the February 2005 hearing date were vacated for any reason. Amongst other things, the letter said, “[w]hilst we regret having to take this position, we simply cannot afford the ongoing burden of the case and the impact it is having on the firm overall”.

47                                          Some days later, on 19 October 2004, HWL wrote to Mr Spalla that:

“In line with our obligation to keep you apprised of the costs incurred thus far, we advise that as at 18 October 2004 the total time recorded on this matter is $620,519.50 of which $80,000.00 has been paid leaving an unpaid work in progress of $540,519.50. This does not include any uplifting fee which was outlined in our costs agreement.”

HWL copied this letter to Mr Rambaldi.

48                                          Also on 19 October 2004, Mr Beck sent Mr Bowman a facsimile on Deloittes’ letterhead. In this facsimile, Mr Beck referred, amongst other things, to the order for costs that French J had made on 28 September 2004 against the applicants and in favour of the Deloitte parties. He stated that his solicitors had informed him that the Deloitte parties’ costs were about $50,000 on a party and party basis and that the Deloitte parties sought these costs from ILF “in its capacity as a non-party”. He also wrote that if “the matter proceeds and Irlmond is unsuccessful, we will look to ILF for its entire costs of the matter and we reserve all our rights to seek those costs from ILF, not only on a party and party basis but on an indemnity basis”.

49                                          The next day, on 20 October 2004, Mr Beck sent a facsimile to Mr Rambaldi in similar terms to that sent to Mr Bowman. Mr Beck again referred to the order for costs that French J had made in favour of the Deloitte parties and to the Deloitte parties’ solicitors’ estimate of the amount of these costs. He wrote that the Deloitte parties sought these costs from Mr Rambaldi personally and added that, should the matter proceed and Irlmond fail, the Deloitte parties “will look to you personally for [their] entire costs of the matter … not only on a party and party basis but on an indemnity basis”.

50                                          Pursuant to French J’s orders of 28 September 2004, a third further amended application and a third further amended statement of claim were filed in the primary proceeding on 19 October 2004. This statement of claim named Mr Spalla, Mr Still and Irlmond as the first, second and third applicants. No other applicants were named. The first to fifth and seventh and eighth respondents were the same as those in the present proceeding. The sixth respondent was the Australian Securities and Investments Commission (“ASIC”).

51                                          By the third further amended statement of claim, Irlmond brought numerous claims against the St George parties and the Deloitte parties arising out of the receivership of Irlmond. Against the St George parties, Irlmond claimed breach of mortgagee’s duties, conversion and contravention of s 52 of the Trade Practices Act 1974 (Cth). Against the Deloitte parties, Irlmond claimed breach of receiver’s duties and conversion and sought restitution of the receiver’s fees. Irlmond claimed restitution of the sum of $1.3 million together with other payments against St George Motor Wholesale.

52                                          Also by the third further amended statement of claim, Mr Spalla and Mr Still brought claims against Messrs Beck and Home for malicious prosecution and injurious falsehood. Mr Spalla and Mr Still also brought a claim for malicious prosecution against ASIC.

53                                          On 20 December 2004, French J ordered that most of the statement of claim in the primary proceeding be struck out: see Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 (“Spalla (No 6)”). In essence, his Honour held that most of the statement of claim was an abuse of process because it sought to relitigate issues that had been determined by Finkelstein J in proceeding V 74 of 1999: see Spalla (No 6) at [2]-[3], [71]-[108]. His Honour struck out all of Irlmond’s claims for conversion and breach of duties against the St George and the Deloitte parties.

54                                          The only claim of Irlmond that was not struck out was the claim for $1.3 million against St George Motor Wholesale. That claim related to the application of proceeds of the sale of Essendon Mitsubishi which was a discrete event that post-dated the judgment of Finkelstein J. For this reason, his Honour concluded (at [91]-[92]) that the claim should not be struck out as an attempt to relitigate a matter already determined by Finkelstein J. At [92], however, his Honour expressed doubt as to whether “the impugned payment of $1.3 million” would be shown “to be anything other than a continuation” of practices already approved by Finkelstein J. His Honour did not strike out Mr Spalla’s and Mr Still’s claims for malicious prosecution and injurious falsehood: see Spalla (No 6) at [110]-[116].

The institution of the appeals and reappraisal of the primary proceeding

55                                          On 24 December 2004, Messrs Beck and Home filed a notice of motion seeking leave to appeal from the interlocutory orders of French J allowing Mr Spalla and Mr Still liberty to continue their claims for malicious prosecution and injurious falsehood. This application was given proceeding number VID 54 of 2005. On 31 January 2005, Irlmond also sought leave to appeal from the orders of French J that were unfavourable to it. This application was given proceeding number VID 83 of 2005. These two proceedings (hereafter “the appeals”) were to be heard together.

56                                          With the judgment of French J in December 2004 and the institution of the appeals in January 2005, the primary proceeding entered a new stage and, so far as ILF, Irlmond, Mr Rambaldi and HWL were concerned, led to their reappraisal of the litigation.

57                                          On 13 January 2005, prior to Irlmond filing its appeal, Mr Vasudevan, Mr Bowman and Mr Stephen Foale from ILF, and Mr Borden and Ms April Arslan met at the offices of Pitcher Partners, in order to discuss French J’s judgment. Mr Rambaldi did not attend although, as copies of Mr Vasudevan’s emails of 13 and 23 January 2005 attest, Mr Vasudevan kept him informed. In these emails, Mr Vasudevan reported to Mr Rambaldi that Mr Bowman was concerned about ILF’s exposure to any personal costs liability incurred by Mr Rambaldi or its own liability for costs as a “third party” beneficiary of the action. Mr Vasudevan also reported to Mr Rambaldi that HWL estimated that solicitor/client costs for the respondents would be between $1 million and $2 million. Significantly for present purposes, Mr Vasudevan notified Mr Rambaldi that:

“There may be a possibility that Delloites [sic] may entertain the possibility of settling the matter or ending the matter where each party bears [its] own costs, and in that regard, Borden was prepared to help with the appeal. Spalla will not be a factor in settlement negotiations as if he does not come to the party, then IMF, HWL and the liquidator will drop this matter.”

Mr Vasudevan advised Mr Rambaldi that, after HWL left, Mr Bowman told Mr Vasudevan, that ILF was considering withdrawing its indemnity, although it would not do so until after the appeal was lodged and “if settlement negotiations do not go well”.

58                                          Around this time, a dispute arose between ILF and Pitcher Partners concerning the provision of a written opinion by junior counsel (Mr Ian Martindale) in mid November 2002. In a letter of 17 January 2005, Mr Bowman complained to Mr Rambaldi that ILF had not been provided with this opinion at the time it was given. Mr Bowman claimed that the opinion was significantly different from an opinion of Mr Hayes QC upon which ILF had based its decision to provide Mr Rambaldi with indemnity insurance. Mr Bowman intimated that this failure might be a breach of the LFA and stated that ILF reserved its rights in respect of the matter. Mr Rambaldi defended his position in a letter to Mr Bowman of 24 January 2005 (see below), denying that there had been any breach of the LFA.

59                                          On 21 January 2005, Messrs Rambaldi and Vasudevan attended a further meeting with Messrs Bowman and Foale, during the course of which Mr Bowman and Mr Foale confirmed that ILF was only prepared to maintain ILF’s indemnity insurance for Mr Rambaldi in order that a settlement might be negotiated.

60                                          Also in his letter to Mr Bowman of 24 January 2005, Mr Rambaldi referred to ILF’s advice of 21 January 2005 that it would “withdraw its litigation support … after the appeal” and stated:

“[I]t would not be commercially appropriate to prematurely advise the defendants of any threat or decision to withdraw from the funding agreement until such withdrawal is actually made because this will cause detriment to any settlement negotiations and may be a contributing factor in not achieving your desired outcome of all parties walking away and bearing their own costs.” (Emphasis original)

Mr Rambaldi added:

“Given your decision to withdraw litigation funding, I agree with your comments that we should work closely in an effort to resolve these proceedings in the most favourable manner possible and assure you of our cooperation in this matter.”

61                                          At the trial, there was an issue as to whether HWL were kept abreast of this turn of events. Upon the evidence as outlined below, I am satisfied that, whether or not HWL actually received an emailed copy of Mr Rambaldi’s letter of 24 January 2005, Mr Vasudevan and Mr Rambaldi believed that they had. For present purposes, all that matters is that HWL became apprised of ILF’s attitude with respect to its involvement in the litigation by the end of January 2005. Mr Borden stated in evidence that, as at 21 January 2005, he was not aware that “the desired outcome … was … a walk away offer”, although, in cross-examination, he conceded that he was aware in January 2005 that ILF was actively considering withdrawing its support. What Mr Borden said in cross-examination is borne out in the evidence concerning a meeting on 28 January 2005: see below at [62] – [67].

62                                          A meeting was scheduled for the afternoon of 28 January 2005 at the offices of HWL, for Mr Rambaldi and Mr Vasudevan and ILF’s representatives to meet with HWL’s solicitors. In the course of the morning prior to the meeting, at around 11.33 am, Mr Vasudevan sent an email to Ms Arslan and Mr Borden. The email read as follows:

“Morning all

Just confirming that we will meet at your office at 2.30 today with [ILF]. As dsicussed [sic] yesterday, I’ve attached a copy of our response to [ILF] in relation to the Martindale issue.”

The reference in this email to “our response to IMF in relation to the Martindale issue” was a reference to Mr Rambaldi’s letter to Mr Bowman of 24 January 2005. At around 11.35 am on the same morning, Ms Arslan replied to Mr Vasudevan’s email, saying:

“David I have been in undated [sic] with urgent applications and affidavits that I need to do. Unfortunately I will be absent. I think Phil [Borden] will be there. I have let him know.”

63                                          Ms Arslan’s reply did not indicate that she had not received the attachment to which Mr Vasudevan’s email referred, although her reply does indicate that she was very busy at the time and, in consequence, may have overlooked Mr Vasudevan’s reference to an ‘attached’ ‘response’. Ms Arslan could not recall having received or read Mr Rambaldi’s letter of 24 January 2005 that was supposedly attached to Mr Vasudevan’s 28 January 2005 email. Mr Borden’s evidence was to the effect that he did not receive the letter. Searches at HWL failed to locate any copy of Mr Vasudevan’s email (whether electronic or kept as a print copy). On balance, having regard to the evidence, I accept that Mr Borden and Ms Arslan did not read the letter of 24 January 2005, although I accept that Mr Vasudevan and Mr Rambaldi believed that they had. This belief was reasonable in the circumstances. I also find that Mr Vasudevan sent the email, with its attachment (the letter of 24 January 2005) and received a reply from Ms Arslan. I make no finding as to whether the attachment was actually received by Ms Arslan or Mr Borden. Nothing ultimately turns upon this issue.

64                                          In the afternoon of 28 January 2005, Messrs Rambaldi, Vasudevan, Bowman and Foale met at the offices of HWL with Mr Borden and, for a shorter period, Ms Arslan. For the benefit of Mr Borden and Ms Arslan, Mr Rambaldi explained that ILF intended to withdraw the indemnity insurance to him, although ILF had not determined whether to do so before or after the hearing of the appeals. Also at this meeting, Mr Rambaldi said that, if ILF withdrew, then he would not proceed with the litigation unless Mr Spalla set aside funds for future legal costs, including funds to meet adverse costs orders against the liquidator personally. He estimated that, in order to do so, Mr Spalla would need to set aside $1.5 million.

65                                          There can be no doubt that, by the end of this meeting, Mr Rambaldi, Mr Vasudevan, Mr Borden and Ms Arslan understood ILF’s position and that, so far as ILF was concerned, the principal issue related to the timing of the withdrawal of its indemnity insurance. The very next day after the meeting, Mr Vasudevan sent an email to Mr Rambaldi, Mr Borden and Ms Arslan, which purported to summarise the substance of this meeting. Five days later, on 3 February 2005, Mr Borden emailed his diary notes of the 28 January 2005 meeting to Mr Rambaldi and Mr Vasudevan. Mr Borden’s notes specifically stated:

“Gess [Mr Rambaldi] reported that Clive [Bowman] had advised him that he intended withdrawing the indemnity provided to Gess under the litigation funding agreement. The only question was whether he would withdraw that support before the appeal was heard or after it was heard.”

66                                          There can also be no doubt that Mr Borden knew what Mr Rambaldi’s position would be when ILF withdrew indemnity. Mr Borden’s diary notes clearly stated:

“Gess advised that if the indemnity provided by ILF was withdrawn, he would be unable to proceed in the absence of proper support by which he meant a litigation funder or insurer or other appropriate body who would provide adequate financial support to cover legal costs as they were incurred, to provide an indemnity to him in relation to any adverse costs orders and to provide security for any costs orders that might be made by way of cash or something equivalent. In its estimation about $1.5 million would be needed for this.”

67                                          Further, at this meeting of 28 January 2005, Mr Bowman and Mr Rambaldi differed about when settlement negotiations should be pursued. Mr Bowman was keen to negotiate a settlement with the respondents before the appeal proceedings were heard, whilst Mr Rambaldi wanted to postpone these negotiations until after the hearing. Mr Borden’s diary note makes it clear that he also knew of this difference of opinion.

68                                          On 3 February 2005, Mr Bowman replied to Mr Rambaldi’s letter of 24 January 2005. He reiterated that junior counsel’s opinion “would be relevant to a funder in determining whether or not to offer funding or an indemnity” in respect of the primary proceeding and that Mr Spalla had not, in ILF’s view, honoured his obligations under the LFA to fund the proceedings. Mr Bowman also said that “it [was] not correct that at our meeting on … Friday 21 January, we advised that [ILF] will withdraw its litigation support after the appeal is heard”. Rather, according to Mr Bowman, “[w]e said … that we reserve our rights, to withdraw the indemnity and to refuse indemnity in respect of costs up to the date of … withdrawal”. He added that ILF did “not intend to prematurely advise the defendants of any threat or decision in relation to the indemnity, until such decision is communicated to you” and he agreed that ILF and Mr Rambaldi “should work closely in an effort to resolve the proceedings in the most favourable manner possible”.

69                                          On 11 February 2005, Mr Rambaldi wrote to Mr Spalla care of Mr Borden. He said (in part):

“[ILF] has advised me that it will withdraw from the [LFA] (subject to its rights in the agreement). It has not, however, decided when its withdrawal will take place and is considering whether to do so either before or after the appeal is heard.

When [ILF] withdraws its funding, Irlmond will not be able to proceed with any action to which it is a party … unless satisfactory funding arrangements are in place at the time. In the circumstances, cash held by me in trust is the only arrangement that would be considered satisfactory to me. I estimate … in that regard a minimum amount of no less than $2 million … will need to be paid into my trust account … to ensure that Irlmond does not withdraw from the action upon the withdrawal of [ILF] from the [LFA]. …

Unless I am satisfied that a satisfactory alternative funding arrangement will be in place prior to [ILF] withdrawing from the [LFA], I will be forced to negotiate a settlement with the defendants prior to [ILF] withdrawing its funding arrangement so as to maximise the chances of getting a better return, if any, from the defendants. As you will be aware, any attempts to negotiate with the defendants after [ILF] withdraws from the funding arrangement, would put me in a disadvantageous position as I will be notifying the Court of such withdrawal.

I would be grateful if you could provide me with your advice and evidence that you are able to provide a satisfactory alternative funding arrangement, including the funding amount, within seven days of the date of this letter.”

Mr Spalla did not reply to this letter.

70                                          As already noted, the applications for leave to appeal and the appeals were listed for hearing on 10 and 11 May 2005. The mediation was scheduled for 29 April 2005. A Full Court, which was constituted by Hill, Finn and Kenny JJ, heard argument in proceeding VID 54 of 2005 on 10 May 2005 and, on 13 May 2005, granted leave to appeal and dismissed the appeal: see Beck v Spalla [2005] FCAFC 82. On account of what happened at the mediation on 29 April 2005, proceeding VID 83 of 2005 did not proceed before the Full Court on 10 May 2005.

Events shortly before the mediation

71                                          On 27 April 2005, two days prior to the mediation, Mr Rambaldi and Mr Vasudevan, Mr Foale, Mr Borden and Ms Arslan, and Mr Spalla and Mr Ian Still attended a meeting, to discuss the forthcoming mediation. I accept that a file note of that meeting, which Mr Borden had prepared the following day, accurately records the discussions at that meeting.

72                                          At the meeting of 27 April 2005, Mr Rambaldi repeated that ILF was considering withdrawing its litigation support and that he would be unable to continue with the litigation if it did so. He also said that, if ILF withdrew after the mediation, he would take whatever offer was made, including a walk-away offer. Mr Borden’s file note of the meeting specifically recorded that:

“Gess [Rambaldi] reported that he had been informed that ILF was considering withdrawing its support. He reported that if ILF withdrew its support, he would not be able to proceed any further with the litigation. He requested ILF to advise whether they would continue support past Friday, as he will need to know this when taking on board any offers that might be made. If the support is withdrawn after Friday, Gess advised that he would take whatever offer was made including a walk-away if that was available.”

Mr Rambaldi also asked the solicitors what they thought the Irlmond claim was worth. Mr Borden’s file note records that Ms Arslan “advised that the bottom line was somewhere between $2 [million] and $3 [million] plus interest and costs”.

73                                          Mr Borden also sought to dissuade ILF from withdrawing their litigation support prior to the appeal. He pointed out to Mr Foale that “it made no sense for ILF to withdraw support until after the appeal if the matter did not settle” at the mediation. He argued that the prospect of an order for costs against the liquidator personally was remote because the appeal was brought on reasonable grounds.

74                                          In cross-examination at the trial, Mr Spalla agreed that neither he nor Mr Borden objected to Mr Rambaldi’s statement that he would not be able to proceed any further with the litigation if ILF withdrew its support. Further, he conceded that neither he nor Mr Borden objected to Mr Rambaldi’s statement that he would, in circumstances to which Mr Rambaldi referred, take whatever offer was made, including a walk-away offer.

75                                          After the meeting on 27 April 2005, Mr Borden had at least two telephone conversations with Mr Spalla by telephone. A file note made by Mr Borden of a conversation with Mr Spalla later on 27 April (which I accept as accurate), reads (in part) as follows:

“In so far as the meeting that was held today is concerned, I reiterated to Tony [Spalla] what I had been telling him for some time now – namely that the risk he faces is that ILF will withdraw litigation support for Gess [Rambaldi] – we will then be forced to accept whatever is put, including an offer that each party walk away and bears their own costs. In my view, Gess would be entitled to adopt this course if ILF withdrew its support and Tony would be unable to complain about it. This would bring the Irlmond claim to an end.

…

I pointed out that it was a real possibility that the Irlmond claim would be resolved in this manner although, in my view, ILF should continue its litigation support at least until the appeal stage given the minimal exposure that they had in relation to costs and the maximum benefit that could be obtained if the appeal is successful.”

In a conversation the next day, 28 April 2005, Mr Borden also reminded Mr Spalla that HWL “were withdrawing from the litigation after the hearing of the appeal”.

76                                          By the time of the mediation on 29 April 2005, HWL had about $800,000 of billed time recorded (plus a 20% uplift) on its files for the primary proceeding and the appeals. Thus, under its retainer with Mr Spalla, HWL would have sought to recoup approximately $1 million from any recovery. Mr Hayes QC had already billed over $600,000 of time on the matter. Mr Rambaldi’s firm had expended about $300,000 of fees on the matter. Unless the lawyers and Mr Rambaldi were to take what Mr Borden called a “haircut”, taken together (and including the apportionment due to ILF under the funding agreement), this meant that Irlmond needed to recover about $3 million or more before any money would have been available to unsecured creditors.

The mediation

77                                          The mediation commenced as scheduled at 10:00 am on 29 April 2005 at the Victorian Bar Mediation Centre. Immediately prior to the mediation, Mr Rambaldi and Mr Spalla met outside the venue. Mr Spalla told Mr Rambaldi that he was endeavouring to find a new liquidator. He said that he had engaged a former liquidator to assist him in his search and that he was meeting a potential new liquidator on Monday, 2 May 2005. In cross-examination, Mr Spalla said that he had contacted this potential new liquidator “so that we would have some alternatives in the event of something happening”.

78                                          Present for the applicants at the mediation were Mr Spalla, Mr Gary Spalla (Mr Anthony Spalla’s son), Mr Rambaldi, Mr Borden, Ms Arslan, Mr David Still (the second applicant in the primary proceedings), and Mr Ian Still (Mr David Still’s father and a solicitor with Still & Co). Mr Bowman also attended at the request of Mr Rambaldi. Mr Hayes QC did not attend the mediation. Also attending the mediation were representatives of the ASIC, the St George parties and the Deloitte parties. Messrs Beck and Wallace-Smith and their solicitor represented the Deloitte parties.

79                                          The mediator invited the parties to state their cases, which they did. The parties then proceeded to separate rooms. The mediator met with the applicants and the issue of a walk-away offer was ventilated. As it happened, however, on the morning of the mediation, no-one made any offer.

80                                          At the mediator’s suggestion, later in the morning, Mr Rambaldi met with Messrs Beck and Wallace-Smith without their solicitors being present. In this meeting, Mr Wallace-Smith told Mr Rambaldi that the Deloitte parties had received legal advice that Mr Rambaldi could be held personally liable for costs of approximately $1.3 million. Mr Wallace-Smith also said that the Deloitte parties would not pay any money toward a settlement but he would raise the matter with the St George parties. After this meeting (which lasted 15 to 30 minutes), Mr Rambaldi returned to the applicants’ room.

81                                          I interpolate here that Mr Borden’s evidence was that he did not recall any morning meeting between Mr Rambaldi and the Deloittes representatives. Mr Borden was not involved in this meeting and little of significance transpired at the meeting concerning him. It is, therefore, unremarkable that he did not recall the meeting. Mr Rambaldi was a participant and the conversation with Mr Wallace-Smith touched him personally. He would be more likely than Mr Borden to recall it. I find that the meeting did take place and I accept Mr Rambaldi’s evidence concerning it.

82                                          Mr Rambaldi left the mediation after noon to attend an unrelated creditors’ meeting. He left with Mr Bowman and they stopped briefly at a café. Mr Bowman told Mr Rambaldi that ILF’s board had decided to withdraw its litigation indemnity in his favour. Mr Bowman said that ILF would provide written notice, as required by the LFA, later that day.

83                                          Mr Rambaldi returned to the mediation venue at approximately 1.15 pm. He did not inform those present on the applicants’ side (including Mr Spalla and Mr Borden) that ILF had decided to withdraw its indemnity for him. Shortly after returning, and to the knowledge of Mr Spalla, Mr Borden, Ms Arslan and Mr Bowman, Mr Rambaldi again met with Messrs Beck and Wallace-Smith.

84                                          The evidence of Mr Borden and Mr Spalla was that Mr Bowman joined Mr Rambaldi for this meeting. Mr Rambaldi’s evidence was, however, that Mr Bowman was not present when he again met with Mr Beck and Mr Wallace-Smith. I accept Mr Rambaldi’s evidence on this issue. Although Mr Borden and Mr Spalla said that they saw Mr Bowman leave the applicants’ room at the same time as Mr Rambaldi, this does not establish that Mr Bowman attended the meeting with the Deloitte parties. Further, Mr Rambaldi, who attended the meeting, is more likely to have an accurate recollection of who was present. I reject the proposition advanced by Mr Spalla that Mr Rambaldi specifically asked for Mr Bowman to meet with Mr Beck in Mr Borden’s absence. The source of this proposition is a file note made by Mr Borden in the week after the mediation. However, Mr Borden said, in examination in chief, that Mr Rambaldi did not say that he did not want Mr Borden to come with him. Mr Rambaldi denied that he made any such request. I accept that Mr Rambaldi did not specifically seek to exclude Mr Borden from meetings with the respondents against Mr Borden’s wishes or judgment.

85                                          At this second meeting, Messrs Beck and Wallace-Smith told Mr Rambaldi that neither the St George parties nor the Deloitte parties would offer money to settle the Irlmond claim. They also said that the St George parties’ representatives were already on their way to the airport to catch a flight to Sydney. Mr Rambaldi asked them if they (and the St George parties) would be prepared to make an offer to settle the Irlmond claim on a walk-away basis. The meeting adjourned to allow Mr Wallace-Smith to contact the St George parties regarding Mr Rambaldi’s suggestion.

86                                          Mr Rambaldi subsequently had a discussion with Mr Bowman outside the applicants’ room, in the course of which he told Mr Bowman that he was attempting to get a walk-away offer from the respondents that would remain open for at least the period in which he was still indemnified by ILF. Mr Bowman said that his office would shortly deliver a typed termination notice. Mr Rambaldi briefly returned to the applicants’ room where Mr Spalla and Mr Borden were present. He was called out to meet again with Messrs Beck and Wallace-Smith. As Mr Rambaldi left, Mr Spalla said words to the effect that he should not come to any agreement with the respondents without talking to him first. According to one of his 9 September 2005 affidavits, Mr Rambaldi said words to the effect that he would do his best to try to get an offer from the respondents.

87                                          In addition, according to Mr Borden’s file note of the mediation, which was typed the following week, Mr Rambaldi confirmed that before any offers were accepted, he would bring them back to Mr Spalla for discussion. Mr Rambaldi denied making a statement to this effect. I prefer Mr Rambaldi’s evidence on this point. His evidence was that after Mr Bowman informed him that ILF was going to withdraw his litigation indemnity, he said nothing about the matter to anyone because he wanted time to reflect on what had occurred and, upon this reflection, he formed the view that from this point onwards he had to proceed with the negotiations as liquidator, having primary regard to the interests of Irlmond and its creditors, and, in particular, without reference to Mr Spalla, or Mr Borden (whom he believed was in a position of conflict). For this reason, he did not inform the Spalla Interests or Mr Borden of the forthcoming withdrawal of his indemnity. In this circumstance, it is improbable that he would have given the alleged assurance. It must be borne in mind that this particular file note was not contemporaneous with the meeting and came into existence in the week immediately after the mediation on Friday, 29 April 2005. At best, this part of Mr Borden’s file note indicates what Mr Borden had understood, or wanted to understand, that Mr Rambaldi had said.

88                                          At the subsequent meeting, Messrs Beck and Wallace-Smith told Mr Rambaldi that they had instructions to put a walk-away offer to Irlmond on behalf of both the St George parties and the Deloitte parties. Mr Rambaldi said that he required an offer that would be left open for at least seven days to enable him to consider various factors, including the need to discuss with his partners effectively writing-off approximately $300,000 of time invested in the Irlmond file.

89                                          Mr Rambaldi gave evidence that, as a partner of Pitcher Partners, he had authority to write-off fees. Thus, he did not need to meet with his partners to write-off the $300,000 of time invested in the Irlmond claim. Also, he had been writing-off Irlmond-related fees throughout the litigation. Thus, it was not the case that $300,000 of fees needed to be written-off before the settlement could be executed. Rather, Mr Rambaldi had already written-off approximately $250,000 of fees and $50,000 remained to be written off. Mr Rambaldi gave evidence that he referred to the need to write-off fees mostly as a way of getting the respondents to agree to keep the offer open for the seven days remaining for the indemnity. He testified that he expected that his partners would ultimately adopt his recommendation concerning the Deed. I accept this evidence.

90                                          After Mr Rambaldi left his meeting with Messrs Beck and Wallace-Smith, he met with Mr Bowman in the reception area and, subsequently, with Mr Bowman and the mediator in the mediator’s room, where Mr Rambaldi informed them both about what had happened.

91                                          Some time later in the afternoon, Messrs Beck and Wallace-Smith gave Mr Rambaldi a handwritten draft offer and left him for a short period. Mr Rambaldi reviewed this document in the presence of Mr Bowman and the mediator, and made handwritten amendments. When Messrs Beck and Wallace-Smith returned to the mediator’s room, they discussed the draft offer with Mr Rambaldi. They said that they wished the offer to be open for no longer than three days because their solicitors had advised them that costs would have to be incurred in preparing for the appeal while the offer remained open. Mr Rambaldi said that the issue of the offer being open for seven days and being irrevocable was not negotiable. Messrs Beck and Wallace-Smith left to prepare a further draft of the offer.

92                                          At this point, there is another discrepancy between the evidence of Mr Rambaldi and Mr Borden. Mr Rambaldi said that Mr Borden entered the mediator’s room while Messrs Beck and Wallace-Smith were absent preparing the second draft of the offer. According to Mr Rambaldi, while Mr Borden was in the mediator’s room, Mr Beck returned with a copy of the first draft of the offer; and, at this point, Mr Rambaldi told Mr Borden that he was negotiating a walk-away offer and handed him a copy of the first draft. He said that, upon hearing this information, Mr Borden expressed concern that he had a conflict of interest and indicated that he would prefer not to be involved. Mr Rambaldi maintained that he also told Mr Borden that ILF was withdrawing Mr Rambaldi’s indemnity under the LFA. According to Mr Rambaldi, Mr Borden inquired whether this was being done in writing. Mr Bowman then proceeded to write a notice of withdrawal by hand. Almost the moment this was done, however, the notice, in typed form, arrived from Mr Bowman’s office. This notice was signed by Mr Rambaldi and Mr Bowman, and Mr Rambaldi noted that he had received it at 4.43 pm.

93                                          Mr Borden’s evidence was different. He agreed that he had entered the room where Mr Rambaldi and Mr Bowman were present. He also agreed that Mr Rambaldi told him that ILF was withdrawing Mr Rambaldi’s indemnity. He concurred that he had asked whether the withdrawal was in writing and that, in response, Mr Bowman had written a notice by hand. Mr Borden also said that, shortly thereafter, a typed notice arrived. Mr Borden agreed that Mr Rambaldi told him that he, Mr Rambaldi, was expecting an offer from the Deloitte parties and the St George parties. According to Mr Borden, however, he did not ask Mr Rambaldi about the terms of the offer and Mr Rambaldi did not tell him that he was negotiating a walk-away offer. He said that it did not occur to him to ask Mr Rambaldi about the offer. He did not recall any mention of a walk-away offer; and that, if he had been told about a proposed walk-away offer, he would have recalled it. His evidence was that he assumed that the offer would be an offer of money. Mr Borden conceded that it was his choice not to ask any questions about the nature of the offer. He also chose to leave Mr Rambaldi and Mr Bowman to themselves and return to the applicants’ room. He was not asked to leave.

94                                          Both Mr Rambaldi and Mr Borden agreed that Mr Rambaldi told Mr Borden that ILF had given notice that Mr Rambaldi’s indemnity under the LFA had been withdrawn and that Mr Rambaldi was negotiating an offer of settlement with the Deloitte parties and the St George parties. Even if Mr Rambaldi did not use the expression ‘walk-away’ offer, I reject Mr Borden’s evidence that he did not turn his mind to the possibility that Mr Rambaldi had such an offer in mind. The possibility of a walk-away offer had been raised at the commencement of the mediation. Further, two days’ earlier, Mr Borden had specifically warned Mr Spalla that, if ILF withdrew Mr Rambaldi’s indemnity, Mr Rambaldi would be likely to seek to negotiate a walk-away offer. This was in the context of the meeting of 27 April when Mr Rambaldi had clearly stated to both Mr Borden and Mr Spalla that he would take this course if ILF withdrew his indemnity. Whether or not Mr Rambaldi actually used the words ‘walk-away’ offer, Mr Rambaldi would reasonably have assumed that, once Mr Borden knew that his indemnity had been withdrawn and that he was negotiating an offer from the respondents in respect of the Irlmond claim, that offer was, in all probability, a walk-away offer. If Mr Borden did not make any specific inquiries (as he said), then he did not do so because he knew that the offer being negotiated by Mr Rambaldi was likely to be a ‘walk-away’ offer and he believed that he was likely to be in a clear position of conflict if he asked for and received further details of the offer being negotiated. I reject Mr Borden’s evidence to the contrary.

95                                          Ultimately, it is of limited importance whether Mr Rambaldi told Mr Borden about the walk-away offer at that particular time. Mr Rambaldi’s evidence was that, once Mr Bowman told him that the indemnity would be withdrawn that day, he decided to act independently of Mr Spalla and HWL. This is why, when he returned from the lunch-time creditors’ meeting, he did not inform Mr Borden, Ms Arslan or Mr Spalla that ILF had told him the indemnity was being withdrawn.

96                                          A discrepancy also arose between the evidence of Mr Borden and Mr Spalla. Mr Borden said that, after he saw the written notice of withdrawal, he returned to the applicants’ room and informed Mr Spalla that ILF had withdrawn Mr Rambaldi’s indemnity and an offer was expected. Mr Spalla had no recollection of being told by Mr Borden that Mr Rambaldi’s indemnity had been withdrawn. For reasons explained below, I find that Mr Spalla’s recollection is to be preferred on this issue.

97                                          After Mr Borden had left the mediator’s room, Messrs Beck and Wallace-Smith returned with a further handwritten offer titled “Deed of Settlement”. The parties to the Deed were the Deloitte parties and the St George parties, Irlmond and Mr Rambaldi. The Deed provided that Irlmond would withdraw or discontinue its appeal in VID 83 of 2005. Irlmond also agreed to release the Deloitte parties and the St George parties from all claims in the primary proceeding. The parties agreed to bear their own costs and not to enforce any costs orders in their favour. The Deloitte parties and the St George parties agreed to release Mr Rambaldi, Irlmond and ILF from all claims. The Deed contained the following condition precedent:

“This Deed and its operation will only be subject to and will not otherwise take effect unless on or before 5.00 pm on Friday 6 May 2005 the Liquidator procures his firm’s consent to this Deed and its operation. Its operation is otherwise irrevocable.”

The Deed did not contain any releases for the Spalla Interests. The Deed was signed by Mr Beck, Mr Home, Mr Wallace-Smith, Deloittes, Mr Peter Sinn (as solicitor for the St George parties) and Mr Rambaldi (for himself and Irlmond).

98                                          Between 5.15 pm and 5.30 pm, Messrs Rambaldi and Bowman returned to the applicants’ room where Mr Spalla, Mr Borden and Ms Arslan were present. Mr Rambaldi spoke first and attempted to explain what had happened. At trial, the parties strongly disputed what he said. Mr Rambaldi gave the following evidence:

“When I got into the room I announced that I had been able to obtain a walk-away offer and that the walk-away offer was irrevocable and that it was irrevocable for a seven day period. I advised that the walk-away offer was subject to the agreement of my partners - the consent of my firm, I think I used the term - as to its acceptance. I then attempted to explain the circumstances under which I obtained the walk-away offer. I explained that the - I had been served with a notification from ILF in which it was withdrawing the indemnity arrangement that was in place, and that the notification allowed for a seven day time frame by which the indemnity would then terminate. And I recall that that discussion was only a matter of moments. It certainly took place in less than one minute, and I recall that as I was communicating this information people started to get agitated. I can recall people standing up. I can recall that Mr Spalla then got abusive, and directed all of his abuse to Mr Clive Bowman. He used disparaging comments. I think, from memory, he referred to Mr Bowman acting improperly, or words to that effect. I know the language was quite disparaging.”

99                                          In contrast to this evidence, both Mr Spalla and Mr Borden said that Mr Rambaldi had said, in effect, that he had settled the proceedings. Mr Spalla maintained that Mr Rambaldi told the meeting that he had “entered into a Deed and it can’t be reversed”. It is clear that Mr Spalla formed the impression that a final binding settlement had been reached. Mr Borden also recalled that Mr Rambaldi said that he had entered into a “settlement” rather than an “offer”.

100                                       In written submissions, Mr Spalla argued that the account of Mr Borden was to be preferred to that of Mr Rambaldi because Mr Borden took contemporaneous notes of the meeting. The problem with this argument, from Mr Spalla’s perspective, is that Mr Borden’s notes support Mr Rambaldi’s recollection. Mr Borden’s handwritten notes, which he says were taken as Mr Rambaldi was speaking, say “offer irrevocable 7 days” (emphasis added). The same note stated “conditional on getting consent of partners w/o 300K fees. Need to get partners to consent”. I accept Mr Rambaldi’s account of the meeting. In my view, it is clear that Mr Rambaldi used the term “offer” and explained, as best he could in the circumstances, the terms of the Deed.

101                                       Furthermore, Mr Borden’s handwritten notes of what happened at this time show that Mr Rambaldi stated that ILF had given notice of the cessation of Mr Rambaldi’s indemnity in seven days’ time, and not, as Mr Spalla would have it, cessation forthwith. Mr Borden’s note of what Mr Rambaldi said reads, “Clive [Bowman] issued letter putting me on notice that funding protection will expire w/i 7 days”.

102                                       Mr Spalla and Mr Borden, who were not familiar with the Deed, misunderstood Mr Rambaldi’s explanation. This is not surprising. The explanation was very brief and took place in an emotionally charged atmosphere. Although Mr Spalla forcefully insists that his recollection is correct, the evidence shows that he was highly agitated during this meeting. Accordingly, I find that his memory of what occurred (at least in relation to the exact words said by Mr Rambaldi) is not reliable.

103                                       I also infer, from the fact that Mr Spalla’s anger was directed at Mr Bowman, that Mr Borden had not previously informed Mr Spalla that ILF was withdrawing Mr Rambaldi’s indemnity. I infer from the evidence of Mr Spalla’s reaction that Mr Spalla was surprised by that news. Therefore, I accept Mr Spalla’s evidence that he had been unaware that the indemnity was being withdrawn until that point.

104                                       Mr Spalla left the room after his heated discussion with Mr Bowman. Around the same time, Ms Arslan left the room to make copies of the Deed for those present. Mr Rambaldi said to those remaining that he had no choice but to sign the Deed as the indemnity had been withdrawn in circumstances where the respondents had said they would pursue costs against him personally. Following Mr Rambaldi’s return, this meeting in the applicants’ room lasted only a short time.

105                                       The parties did not further address the events of the mediation until the following Monday, 2 May 2005. On that morning, Mr Hayes QC, Mr Spalla, Mr Ian Still, Mr Borden and Mr Rambaldi attended a conference in Mr Hayes’ chambers. Mr Rambaldi arrived after the other participants. The discussion in Mr Hayes’ chambers became heated and ended when Mr Rambaldi, Mr Spalla, Mr Borden and Mr Ian Still left for the coffee shop at Owen Dixon Chambers.

106                                       In the coffee shop, Mr Rambaldi again attempted to explain the terms of the Deed. He said that the Deed gave Mr Spalla seven days to find another liquidator to take over from him. He reiterated that he had no choice but to execute the Deed. He said that he had a gun pointed to his head in the sense that ILF was withdrawing its indemnity from him and he had limited options with respect to the affairs of the company.

107                                       Mr Borden said that Mr Rambaldi should have negotiated an agreement with the respondents, if that is what he wanted to do, that did not come into effect for seven days to coincide with the lapse of the indemnity. According to his file note, which was made that day, Mr Borden added that, “[i]f he had not been supplied with an alternative litigation funder in that period or if he had not been replaced with another liquidator, the terms of the settlement could then become binding”. Mr Borden suggested that, as the Deed was in operation subject only to Mr Rambaldi’s partners not agreeing to it, there was nothing left for another liquidator to litigate. Mr Rambaldi disagreed, saying that his partners would follow his advice and that, if another liquidator was found, then his partners would not ratify the Deed.

108                                       Later that day, Mr Spalla and Mr Rambaldi met with Mr David Lofthouse, who was an accountant and liquidator with some familiarity with Mr Spalla’s affairs, to discuss the options available to Mr Spalla including the possibility of finding another liquidator. After this meeting, the parties made enquiries to determine if another registered liquidator would accept the appointment as liquidator of Irlmond in Mr Rambaldi’s stead. They were ultimately unable to find anyone willing to take Mr Rambaldi’s place.

109                                       In the late afternoon of 2 May 2005, Mr Rambaldi attended the chambers of Mr Rodney Randall of counsel, to obtain his advice. Mr Randall gave Mr Rambaldi written advice the next day, 3 May 2005, stating, amongst other things that, based on his instructions, he had “no hesitation in endorsing the actions and conduct of the Liquidator” and that it was “open to the partners of Pitcher Partners to ratify the Deed of Settlement”.

110                                       On the same day, 3 May 2005, acting on counsel’s advice, Mr Rambaldi sent a facsimile to Mr Spalla informing him that the decision whether or not to ratify the Deed would be made on Friday 6 May 2005. He wrote that, before his firm made that decision, he would give Mr Spalla the opportunity to do one of three things by 4.00 pm on Thursday, 5 May 2005. These things were:

“1. Deposit a minimum amount of no less that $2million into my trust account in accordance with the terms and conditions set out in my letter of 11 February 2005; or

2. Procure the appointment of a substituted Liquidator; or

3. Obtain approval of the Court for the officers of Irlmond to conduct the litigation on its behalf.” (Emphasis original)

In re-examination, Mr Spalla said that he “simply wasn’t interested in giving [Mr Rambaldi] $2 million for anything”. This left the second and third options, both of which were pursued.

111                                       From 3 May to 6 May 2005, there was an exchange of correspondence between the parties and their lawyers. On 4 May 2005, Still & Co. sent Mr Rambaldi two letters by facsimile. The first letter was said to be written on behalf of David Still and the second, on behalf of all the Spalla Interests. This latter letter demanded that Mr Rambaldi have the Deed cancelled, adding:

“In accordance with the provisions of Clause 14 of the [LFA] I am instructed to advise you that a dispute has arisen between my clients and you in relation to your conduct at a Mediation Conference on Friday 29th April 2005, whereby you have, in my clients’ view committed a flagrant breach of the terms of the [LFA] by executing a Deed of Settlement … with the respondents ….

[In default of you cancelling the Deed] our clients require the dispute resolution procedure provided in Clause 14 of the [LFA] to be implemented.”

112                                       At approximately 6.00 pm on 4 May 2005, Mr Rambaldi telephoned Mr Spalla. He advised Mr Spalla that an application would be made to the Supreme Court of Victoria for the appointment of an alternative liquidator or for Irlmond’s officers to take control of the conduct of Irlmond’s claim. Mr Spalla expressed a preference for the latter of these options.

113                                       On 5 May 2005, solicitors acting for Mr Rambaldi, Frenkel Partners, replied by facsimile to Still & Co.’s letters of 4 May 2005. After noting that the Spalla Interests had not addressed the options in Mr Rambaldi’s letter of 3 May 2005 to Mr Spalla, the letter advised that an application would be made to the Supreme Court to seek the Court’s guidance on the conduct of the litigation and that this application was likely to be heard the following morning. Still & Co. replied the same day, also by facsimile, advising that they could not accept service and that Michael Brereton & Co. would be acting for the Spalla Interests.

114                                       On 5 May 2006, Mr Rambaldi filed an application, pursuant to s 511 of the Corporations Act 2001 (Cth) (“the Act”), in the Supreme Court of Victoria. The application sought an order that the “officers of Irlmond … be authorised to conduct the litigation [namely the primary proceeding and the related appeals] on behalf of the Company”. In a supporting affidavit, Mr Rambaldi outlined the background to the application and exhibited various documents including the LFA, memoranda from Mr Hayes QC of 3 and 4 May 2005, and Mr Randall’s memorandum of 3 May 2005.

115                                       The application was heard by Hansen J on 6 May 2005. Mr Randall appeared for Mr Rambaldi. Mr Spalla appeared in person. Mr Randall said that, although Mr Rambaldi had come to Court to put the option of allowing the officers of Irlmond to take over the litigation, “his preference is that the court declines to make the orders”. Mr Spalla spoke also. He expressed disapproval of how Mr Rambaldi had acted in signing the Deed and said that he wished to take control of the litigation. At the conclusion of the hearing, his Honour declined to make the orders sought and gave reasons: see Rambaldi v Spalla [2005] VSC 162 (“Rambaldi”).

116                                       Hansen J found that he had insufficient information to form a view on the likelihood of success of Irlmond on appeal or at trial: Rambaldi at [19]. Therefore, he was unable to determine if it was in the best interests of the company to continue with the litigation. He noted that Mr Spalla had not made any “proposal by which the position of the company in relation to the adverse costs orders which are to be released under the settlement could be secured, that is to say if authority was given to Mr Spalla to continue with the proceeding, that the company would be no worse off than it would be in that respect under the settlement”: Rambaldi at [20]. Similarly, his Honour noted that he had no “assurance beyond that stated by Mr Spalla, as to how the company’s ongoing costs are to be paid”: Rambaldi at [20].

117                                       Later that day (but before 5.00 pm), Mr Rambaldi procured the consent of his partners to the Deed.

118                                       Before turning to the parties’ submissions, I note that Mr Borden properly conceded that he could not recollect the precise words used at the mediation or in pre-mediation conferences and that, in general, his file notes are likely to be more reliable than his present recollection. I accept this and further I accept that Mr Borden’s handwritten notes, which were made at the time of the mediation, are even more reliable than his typed notes of the mediation.

119                                       It will be apparent from the foregoing that, in general, where there is conflict, I have preferred the evidence of Mr Rambaldi, whom I found a credible witness, to the evidence of Mr Spalla and Mr Borden.

120                                       In relation to the events of the mediation, Mr Spalla contended that I should prefer the evidence of Mr Borden over the evidence of Mr Rambaldi because Mr Borden kept a contemporaneous file note, while Mr Rambaldi did not, and because Mr Rambaldi was a party, while Mr Borden was not. The circumstances from which the litigation arises do not, however, support the proposition that, in contrast to Mr Rambaldi, Mr Borden can be regarded as a neutral third party. Further, as already noted, the typed file note upon which Mr Spalla placed much weight was not made until some time in the week after the mediation, when the controversy between Mr Spalla and Mr Rambaldi was evident. In some respects, as the forgoing account shows, Mr Borden was an unsatisfactory witness.

121                                       I accept that Mr Spalla gave his evidence honestly, without any intention to mislead the Court. As the foregoing account shows, however, Mr Spalla has been intensely and emotionally involved in this and related proceedings for some time now. Some of the events about which he gave evidence were emotionally-charged so far as he was concerned. On account of this, and his strong commitment to pursuing his grievances in this and related litigation, he has drawn conclusions from what he has seen or thought he heard that have not always proved reliable.

SUBMISSIONS

The Applicant’s Submissions

122                                       Mr Spalla relied on s1321 of the Corporations Act 2001 (Cth) (“the Act”) as a basis for his application. That section allows a “person aggrieved by any act ... or decision” of a liquidator to appeal to the Court in respect of the act or decision. The Court can “confirm, reverse or modify the act or decision”. Citing Westpac Banking Corporation v Totterdell (1998) 29 ACSR 448 (“Westpac v Totterdell”),Mr Spalla submitted that he had standing to bring an appeal under this section as a creditor of Irlmond, of which he was also the sole director. Mr Spalla also maintained that he had standing as an applicant and the funder in the primary proceeding. He also pointed out that he and his wife were the owners and controllers of Anstella, which in turn held all the issued shares in Irlmond. Mr Spalla identified “the decision of Mr Rambaldi to execute the Deed of Settlement on 29 April 2005 and subsequently seek and obtain the ratification of the Deed by his partners on 6 May 2005” as the subject of the appeal.

123                                       Under r 14.1(2) of the Federal Court (Corporations) Rules (“the Rules”)any appeal under s 1321 of an act, omission or decision of a liquidator must be filed within “21 days after the date of the act, omission or decision appealed against”. Mr Spalla argued that his appeal was not out of time because, even though his initial notice of motion did not refer to s 1321 of the Act, this proceeding was initiated within 21 days of the execution of the Deed. In the alternative, Mr Spalla sought an extension of time to bring an appeal under s 1321. He argued that an extension of time was appropriate because his initial notice of motion put Mr Rambaldi and other interested parties on notice of the nature of Mr Spalla’s complaints against him.

124                                       Mr Spalla also sought to rely on s 536 and s 1324 of the Act. As I accept that s 1321 is an appropriate vehicle for Mr Spalla’s challenge to the Deed, it is unnecessary to discuss these sections of the Act further.

125                                       Mr Spalla conceded that, where an appeal under s 1321 of the Act is against a liquidator’s discretionary decision or a decision involving business judgment, the Court would not reverse the liquidator’s decision unless it was satisfied that the liquidator acted unreasonably or in bad faith: see Re Jay-O-Bees Pty Ltd (In Liquidation); Rosseau Pty Ltd (In Liquidation) v Jay-O-Bees Pty Ltd (In Liquidation) (2004) 50 ACSR 565 (“Jay-O-Bees”) at 575 per Campbell J. Mr Spalla submitted that there were many grounds for concluding that Mr Rambaldi acted in bad faith by executing the Deed. As he raised so many grounds, Mr Spalla’s submissions were somewhat diffuse. In what follows, I attempt to outline his main arguments.

126                                       Perhaps foremost among Mr Spalla’s arguments is his claim that Mr Rambaldi acted in breach of the LFA. Additionally, he argues that, by his conduct, Mr Rambaldi breached his obligations under the Act, including under s 180. In particular, in breach of the LFA, Mr Spalla alleges that Mr Rambaldi breached clauses 9.1, 9.3, 14 and 21 of the LFA. Under clause 9.1, HWL were to “conduct the Proceeding on behalf of the Liquidator and the Spalla Interests”. In Mr Spalla’s view, Mr Rambaldi breached clause 9.1 by negotiating the terms of the Deed without consulting his solicitors.

127                                       Under clause 9.3, the Liquidator was not permitted to instruct the solicitors to settle the “proceedings as a whole” or to “settle, amend, vary, abandon or discontinue any claim made or the relief sought by the Spalla Interests” without consent of the Spalla Interests. Mr Spalla argued that the words “any claim made” included the claim made on behalf of and in the name of Irlmond.

128                                       Further, Mr Spalla argued that Mr Rambaldi breached clause 9.3 by settling the “Spalla Interest claim” (as defined in the LFA). In support of this contention, Mr Spalla argued that the “Spalla Interest claim” and the “Irlmond claim”, as defined in the LFA, are indivisible. He said that, in essence, there was only “one claim” in the primary proceeding. If these claims are indivisible then, according to Mr Spalla, Mr Rambaldi could not settle the Irlmond claim without Mr Spalla’s consent.

129                                       The LFA defined “Spalla Interests claim” as “the claim(s) being prosecuted in the Proceeding by the Spalla Interests as referred to in Clause B of this Agreement.” Mr Spalla noted that clause B states that the Spalla Interests “have prosecuted the Proceeding” by, among other things, filing an amended statement of claim naming APS and Irlmond as the fifth and sixth applicants. In Mr Spalla’s view, this shows that the Spalla Interests should be taken to be ‘prosecuting’ those claims brought by Irlmond.

130                                       Mr Spalla also emphasised that the primary proceeding was commenced solely by the Spalla Interests and that Irlmond joined the proceeding later. In Mr Spalla’s view, this showed that Irlmond’s claims in the proceeding were also claims prosecuted by the Spalla Interests.

131                                       Mr Spalla submitted that Mr Rambaldi also breached the LFA by refusing to participate in mediation. As already noted, on 4 May 2005, solicitors acting for Mr Spalla and Mr Still wrote to Mr Rambaldi advising him that their clients believed that a dispute had arisen under the LFA and they required “the dispute resolution procedure provided in Clause 14 of the Agreement to be implemented”. Mr Spalla claims that, pursuant to clauses 9.3 and 14, Mr Rambaldi was required to submit to mediation upon receiving such a notice. In support of this contention, Mr Spalla referred to an e-mail sent by Mr Bowman to Mr Vasudevan on 12 May 2003, which, amongst other things, asked whether the amendment to Clause 9.3, which was effected following the hearing before Finkelstein J on 8 May 2006, “nevertheless mean that any dispute in relation to settlement can be dealt with under the procedure in new Clause 14.1” and an e-mail sent by Mr Vasudevan to Mr Borden on the same morning, in which Mr Vasudevan said, amongst other things, that he agreed with ILF’s suggestion that “there should be a dispute resolution procedure in place with Clause 9.3” and that “[t]he new Clause 14 should apply”.

132                                       Mr Spalla claimed that these purported breaches of the LFA showed that Mr Rambaldi acted in bad faith. Especially, so he argued, because Mr Rambaldi knowingly breached the LFA. Mr Spalla claimed that Mr Rambaldi was familiar with the LFA and his obligations under that agreement. He also emphasised that he had reminded Mr Rambaldi of his obligations under the LFA immediately before Mr Rambaldi left the applicants’ room at the mediation centre to negotiate the Deed with the Deloitte parties and St George parties. Further, according to Mr Spalla, Mr Rambaldi told Mr Spalla that he would not settle the proceeding without consulting with him. Mr Spalla argued that, in these circumstances, any breach of the LFA was deliberate and strong evidence of bad faith.

133                                       Mr Spalla also contended that there was a “secret variation” of the LFA by Mr Bowman and Mr Rambaldi. Clause 21 of the LFA provided that any amendment or variation of the LFA was not valid unless it was in writing and signed by all the parties to the agreement. In Mr Spalla’s view, Mr Bowman breached this provision at the meeting of 21 January 2005 when he varied the agreement so that ILF was only indemnifying Mr Rambaldi to enable settlement of the proceeding. Mr Spalla claimed that this “variation” of the agreement was kept secret by Mr Rambaldi who did not inform Mr Borden that Mr Bowman’s “desired outcome” was a walk-away settlement. Mr Spalla claimed that this “secret variation occurred in the context of Mr Bowman threatening by letter dated 17 January, 2005 not to honour the indemnity for any adverse costs orders incurred to date”.

134                                       Mr Spalla submitted that Mr Rambaldi behaved dishonestly on 29 April 2005. In particular, Mr Spalla claimed that Mr Rambaldi deceived him, Mr Borden and Ms Arslan by not informing them, when he returned after the lunch break, of the fact that his indemnity was to be withdrawn and that he would attempt to procure a walk-away offer. Mr Spalla argued that Mr Rambaldi was obligated to inform the other applicants and their joint solicitors of what had occurred and of his intentions. By not informing them, so Mr Spalla submitted, Mr Rambaldi gave them a false impression of what was occurring during the afternoon’s negotiations.

135                                       Mr Spalla claimed that Mr Rambaldi acted dishonestly by not honouring his promise to consult with Mr Spalla before settling Irlmond’s claims. Central to this submission is Mr Spalla’s contention that Mr Rambaldi settled Irlmond’s claims on 29 April 2005 when he signed the Deed. In Mr Spalla’s view, the Deed was not an offer of settlement from the respondents to Irlmond. Rather, Mr Spalla claims that the plain language of the Deed shows that it was a final settlement.

136                                       Further, Mr Spalla argued that the Court should draw an inference against Mr Rambaldi on the ground that Mr Rambaldi failed to call other witnesses (such as Messrs Beck and Wallace-Smith) who were present when the terms of Deed were negotiated. Mr Spalla argued that the Court should infer that, had such witnesses been called, their evidence would not have supported Mr Rambaldi’s contention that the Deed was entered into on the understanding that it was an offer of settlement. Mr Spalla also contended that the Court should infer that, had Mr Bowman been called, his evidence would not have assisted Mr Rambaldi’s contention that he was not part of the settlement discussions. I have dealt with this latter submission above.

137                                       Mr Spalla submitted that Mr Rambaldi could not delegate his statutory power to settle the proceeding in the best interests of the company. Mr Spalla argued that this means that the Deed’s condition precedent (which made the Deed’s operation conditional on the consent of Mr Rambaldi’s partners) could not be seen as a delegation to the firm of Mr Rambaldi’s power to settle the proceedings. Mr Spalla concluded that, by signing the Deed, Mr Rambaldi “has settled the proceeding and has merely left the issue of his partners [sic] consent as a condition that must be fulfilled before the deed can take effect.”

138                                       As further evidence of Mr Rambaldi’s purported dishonesty, Mr Spalla noted that Mr Rambaldi told the Deloitte parties, falsely, that he required the consent of his partners to write-off fees. Mr Spalla claimed that, in light of these purported acts of dishonesty, the Court should prefer his and Mr Borden’s evidence over that of Mr Rambaldi.

139                                       Mr Spalla argued that, after the Deed had been signed, Mr Rambaldi did not make a good faith effort to assist him in procuring another liquidator or to have the conduct of Irlmond’s claim transferred to him as a director. Mr Spalla said that the s 511 application before the Supreme Court was a “sham” because Mr Rambaldi did not provide the Court with information as to the merits of Irlmond’s claims and did not support the application. Further, Mr Spalla submitted that, even if he had been authorised to conduct the litigation or a new liquidator had been found, Mr Rambaldi’s partners would have considered whether to ratify the Deed based on “their view of prospects of fee recovery and exposure of the firm and Mr Rambaldi to adverse costs orders” rather than on their view of the best interests of Irlmond’s creditors. Thus, according to Mr Spalla, there was no reason to think that the litigation would have continued even if he had complied with one of the three options outlined in Mr Rambaldi’s letter of 3 May 2005.

140                                       In support of a claim that Mr Rambaldi acted unreasonably and in bad faith, Mr Spalla argued that the Deed settled a good and valuable claim and provided no benefit to Irlmond’s creditors at all. In Mr Spalla’s view, the Deed only benefited Mr Rambaldi. Mr Spalla noted that Mr Rambaldi had endorsed Irlmond’s claims in the primary proceeding on many occasions. Mr Spalla submitted that, as late as the morning of the mediation, Mr Rambaldi had said that Irlmond had a good claim. Further, Mr Spalla emphasised that Irlmond’s claim (as set out in the third further amended statement of claim) was based on a report by Banks Group Services that estimated Irlmond’s current and long-term assets on the date of appointment of receivers (12 February 1999) to be over $10 million. Mr Spalla said that it had been the view of the applicants, including Mr Rambaldi, that Irlmond was entitled to millions of dollars from the respondents in the primary proceeding. He noted that Mr Rambaldi had received advice from HWL and Mr Hayes QC supporting this view. Mr Spalla argued that, as Irlmond had no assets other than its prospects of success in the primary proceeding, the creditors of Irlmond got nothing from the terms of settlement outlined in the Deed. In his view, this showed that Mr Rambaldi was only concerned with his own interests when he signed the Deed.

141                                       Mr Spalla submitted that Mr Rambaldi signed the Deed under the influence of improper pressure applied by the Deloitte parties and Mr Bowman. Mr Spalla noted that the Deloitte parties repeatedly told Mr Rambaldi that they would seek costs from him personally. Mr Spalla said that it was wrong for them to do this when Mr Rambaldi was not a party to the proceeding and had acted with good faith on legal advice. Mr Spalla claimed that that the Deed should be set aside because this illegitimate economic pressure caused Mr Rambaldi to sign the Deed under duress.

142                                       Further, Mr Spalla suggested that the Deloitte parties and the St George parties induced Mr Rambaldi to breach the LFA. He said that the Deloitte parties had seen a copy of a redacted version of the LFA and thus knew about the LFA when they negotiated the Deed with Mr Rambaldi. He claimed that the Deloitte parties and the St George parties knew that their dealings with Mr Rambaldi were inconsistent with Mr Rambaldi’s duties under the LFA. Therefore, in Mr Spalla’s view, they were guilty of intentional interference with contract.

143                                       Mr Spalla also argued that Mr Rambaldi breached s 477(2A) of the Act by compromising a debt for an amount over $20,000 without approval of the Court, or of the committee of inspection or creditors in general meeting. This submission was based on a misunderstanding as to what constitutes a “debt” under the relevant section: see Re Luxtrend Pty Ltd (In Liquidation) (1996) 135 FLR 170 at 171-172; [1997] 2 Qd R 86 at 87-89 per Moynihan J; Farrow Finance Co Ltd (In Liquidation) v ANZ Executors and Trustees Company Ltd (1996) 136 FLR 154 at 179-180; [1998] 1 VR 50 at 74 per Hansen J; and Re Tietyens Investments Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (1999) 31 ACSR 1 at 20-22 per Weinberg J. It is unnecessary to discuss it further.

144                                       Finally, Mr Spalla claimed that when the dispute between ILF and Mr Rambaldi emerged in January 2005 there were numerous options available to Mr Rambaldi. In particular, Mr Spalla claimed that, rather than sign the Deed, the liquidator should have resigned and allowed the creditors to appoint a new liquidator pursuant to s 499 of the Act. Alternatively, in Mr Spalla’s submission, Mr Rambaldi could have applied to the Court for his removal upon his personal indemnification ending on 6 May 2005.

The Liquidator’s Submissions

145                                       Although Mr Rambaldi asked the Court to prefer his evidence to that of Mr Spalla in so far as their evidence conflicted, he did not ask the Court to make a negative credibility finding with respect to Mr Spalla. Rather, Mr Rambaldi relied on the principles referred to by McLelland CJ in Watson v Foxman (2000) 49 NSWLR 315 at 319:

“[H]uman memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

Mr Rambaldi said that these considerations were especially apposite in this case where Mr Spalla has a very high degree of personal involvement in the proceedings. Mr Rambaldi noted that Mr Spalla has been caught up in litigation – including the failed criminal prosecution – for many years now. Mr Rambaldi submitted that these difficult circumstances have impacted on Mr Spalla’s ability to consider the issues and events relating to this case in a dispassionate manner. According to Mr Rambaldi, this has lead to Mr Spalla misremembering some conversations such as the meeting at the conclusion of the mediation.

146                                       Mr Rambaldi submitted that, as Mr Spalla alleged bad faith, the Court is not being asked to decide whether Mr Rambaldi achieved the best settlement possible. Mr Rambaldi sought to distinguish bad faith from negligence. With bad faith, he submitted, the enquiry is directed to the actual state of mind of the decision-maker against whom bad faith is alleged. He argued that there is no such thing as constructive bad faith.

147                                       Mr Rambaldi argued that bad faith is a serious allegation and that the Court must reach a comfortable satisfaction that the case is made out in accordance with the Briginshaw test: see Briginshaw v Briginshaw (1938) 60 CLR 336 (“Briginshaw”) at 361-362 per Dixon J. He submitted that, as there is no precise definition of bad faith, whether the case is made out will depend on the particular facts. Mr Rambaldi contested that there were any grounds in this case for concluding that he had acted in bad faith. Mr Spalla had failed, so Mr Rambaldi said, to adduce evidence to satisfy the Court, on the balance of probabilities, that, in entering into the irrevocable offer, Mr Rambaldi was actuated by bad faith.

148                                       Further, counsel for Mr Rambaldi contended that Mr Rambaldi, at all times, acted in good faith. Counsel asked for a positive finding that Mr Rambaldi was acting in good faith when he entered into the offer and recommended to his partners that it should be given effect. A key element of Mr Rambaldi’s submissions was his claim that a liquidator who is not funded or is without indemnity is not expected to continue a proceeding. Accordingly, Mr Rambaldi could not have been expected to continue his involvement in the primary proceeding beyond 6 May 2005. Mr Rambaldi noted that Mr Borden, who was the lawyer of Mr Rambaldi and Mr Spalla jointly, had said that Mr Rambaldi could not be expected to continue the proceedings without an indemnity and would be entitled to accept a walk-away offer in those circumstances.

149                                       Mr Rambaldi argued that, once he was informed on 29 April 2005 that his indemnity was to be withdrawn, he knew that he would not be able to continue with the litigation after 6 May 2005 and he behaved reasonably to protect the interests of creditors in those circumstances. He said that he procured an offer at the mediation that would stay open for seven days, thereby providing an opportunity for options for continuing the litigation to be explored. He claimed that he procured his partners’ consent to the Deed only after no reasonable way to continue the litigation was found. He said that his conduct was consistent with the LFA. Mr Spalla was utterly wrong to characterize what he did to preserve Mr Spalla’s position for seven days as a “facade”.

150                                       Needless to say, these submissions are inconsistent with Mr Spalla’s views on the construction of the LFA and the Deed. Mr Rambaldi rejected Mr Spalla’s construction of these documents. With respect to the LFA, Mr Rambaldi argued that it gave him complete autonomy to settle the Irlmond claims. He said that the plain language of the LFA supported this view. Further, he noted that counsel had submitted to Finkelstein J that the revised draft of the LFA removed “any restriction on the power of the liquidator to accept a settlement offer made to the company.”

151                                       Mr Rambaldi emphasised that clause 9.2 of the LFA provided that “subject to clause 9.3, the Spalla Interests will not interfere in the conduct of the Proceeding by the Liquidator in respect of the Irlmond claim.” According to Mr Rambaldi, clause 9.3 related only to decisions to settle the matter as a whole or to settling or discontinuing a claim brought by the Spalla Interests. Mr Rambaldi argued that clause 9.3 did not relate to settlement of the Irlmond claims. Further, he rejected Mr Spalla’s contention that the Irlmond claim and the Spalla Interests claim were indivisible. Mr Rambaldi argued that such a view found no support in the text of the LFA.

152                                       Mr Rambaldi rejected the suggestion that he settled Irlmond’s claims on 29 April 2005. He relied on the plain language of the Deed’s condition precedent. He said that, under the Deed, he was not required to seek his partners’ consent to the terms of settlement. He claimed that, had he not done so, the Deed would have lapsed and the matter would not have settled. In these circumstances, he said it was clear that the Deed was an offer. Further, Mr Rambaldi denied that he told Mr Spalla on 29 April 2005 that he had settled the proceeding. However, he argued that it was not relevant to what was said at the contentious meeting at the end of the mediation because the Deed spoke for itself.

153                                       Mr Rambaldi denied that he had acted dishonestly by not immediately informing Mr Spalla or HWL when he discovered that his indemnity was to be withdrawn. Mr Rambaldi conceded that, when he returned after the lunch break, he did not tell Mr Spalla or Mr Borden about what Mr Bowman had told him. Nevertheless, Mr Rambaldi argued that he was entitled to act independently exercising his judgment as a liquidator. He submitted that there was nothing improper in taking that course. Further, Mr Rambaldi denied breaching an undertaking given at the mediation to Mr Spalla to discuss any offer before settling Irlmond’s claims. Rather, Mr Rambaldi said that he did exactly what he said he would by procuring an offer that remained open for seven days.

154                                       Finally, Mr Rambaldi rejected Mr Spalla’s claim that he entered into a clearly unreasonable settlement that delivered nothing for the creditors of Irlmond. Mr Rambaldi agreed that the settlement did not deliver any monetary return to Irlmond’s creditors. He maintained, however, that it protected Irlmond from potential adverse costs orders should Irlmond be unsuccessful in the appeal and the primary proceeding. Mr Rambaldi suggested that this was a significant benefit to the company. He emphasised that, as a liquidator, he had a responsibility to minimise costs incurred by the company even where the company would not be able to pay such costs. Mr Rambaldi suggested that Mr Spalla failed to appreciate this responsibility.

Submissions of the Deloitte Parties

155                                       The Deloitte parties filed written submissions. Mr Spalla objected to the Deloitte parties being allowed to make submissions on the ground that they did not participate in the hearing or submit any evidence. I allowed the Deloitte parties to file submissions. They are parties to this litigation and, as parties to the Deed, have an interest in the result. They should not be denied an opportunity to be heard simply because they, for whatever reason, declined to submit evidence.

156                                       The Deloitte parties submitted that the conduct of Messrs Beck and Home was not improper and did not cause Mr Rambaldi to enter into the Deed. They noted that Mr Rambaldi testified that he did not consider their conduct improper and that he understood that parties would express their position at its strongest at mediation. They were, so they said, entitled to raise with the liquidator the prospect of his risk of exposure to a personal costs liability. The Deloitte parties also noted that Mr Rambaldi said that it was the removal of the indemnity by ILF, rather than any improper pressure from the respondents, that motivated him in signing the Deed.

157                                       With respect to the claim that they induced Mr Rambaldi to breach the LFA, the Deloitte parties submitted that they only had access to a redacted version of the LFA and that this version did not include the clauses relied upon by Mr Spalla. As, however, this redacted version of the LFA was not in evidence it appears that there is no evidentiary basis for this submission.

158                                       The Deloitte parties rejected Mr Spalla’s claim that there is no third party who has acted in good faith and by reference to the Deed who would be prejudiced by it being set aside. The Deloitte parties submitted that there was no evidence that they had acted in bad faith in telling Mr Rambaldi that they might seek costs against him personally. Given that they did not act in bad faith, they argued, the Court should consider the effect on the Deloitte parties of setting aside the Deed.

CONSIDERATION

Jurisdiction and General Principles

159                                       Mr Spalla has sought to rely on s 1321 of the Act. That section provides as follows:

“A person aggrieved by any act, omission or decision of:

…

(d) a liquidator or provisional liquidator of a company;

may appeal to the Court in respect of the act, omission or decision and the

Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit.”

Mr Spalla claims to be a “person aggrieved” on a number of bases, including as an applicant in the primary proceeding and as a creditor of Irlmond.

160                                       Various statutes have used the expression “person aggrieved” and courts have discussed its meaning in numerous cases: compare the much quoted passage in Ex parte Sidebotham; In re Sidebotham (1880) 14 Ch D 458 at 465-466 per James LJ; Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 (“Northbourne”) at 437-438 per McLelland J; and Bridgeport – Advisers & Asset Managers Pty Ltd (2005) 221 ALR 146 (“Bridgeport”) at 162 per Barrett J. As Gibbs CJ said in Koowarta v Bjelke-Peterson (1982) 153 CLR 168 at 184-185, the meaning of the expression must ultimately depend on the context of the particular statute. Having regard to the circumstances outlined above, I find that Mr Spalla has standing under this provision. None of the respondents contended that he did not.

161                                       I do not base this finding on Mr Spalla’s claim to be a creditor of Irlmond. Mr Spalla’s claim to be a creditor is in tension with the fact that, in this and the primary proceeding, Mr Spalla relied on the report by Banks Group Services, which, amongst other things, estimated directors’ loans to be $1,230,000. The evidence as it stands does not permit me to find whether in fact Mr Spalla was a creditor of Irlmond. As previously noted, some important issues concerning the financial status and dealings of Irlmond have already been found to be subject to res judicata and issue estoppels. This proceeding has focussed on the conduct of Mr Rambaldi, particularly in entering the Deed. I have not been required to make findings about the financial affairs of Irlmond. Nor have I been presented with a proper evidentiary foundation to make such findings. It is unnecessary to decide whether it is sufficient for standing under s 1321 that Mr Spalla claims to be a creditor of Irlmond: compare Starmaker (No 51) Pty Ltd v Mawson KLM Holdings Pty Ltd [2005] SASC 313 at [49]-[51] per Layton J.

162                                       I am satisfied that Mr Spalla has standing because of his role in the primary proceeding. Mr Spalla is a moving party in the primary proceeding, which is the subject of the Deed and settlement, and, under the LFA, he (and others) undertook to pay the legal costs in the primary proceeding of Irlmond and Mr Rambaldi. Even though the Spalla Interest claims were not settled (see below), it is reasonable to assume that the settlement of the Irlmond claim would significantly affect Mr Spalla as a party to the primary proceeding and deprive him of the advantage of Irlmond’s participation. It also affected his rights and obligations under the LFA. Thus, for example, the Deed did not include any release against costs orders in favour of Mr Spalla and the Spalla Interests. Because of this, Mr Spalla claims that the Deed left him exposed to adverse costs orders in relation to Irlmond’s claim in the primary proceeding. Mr Spalla has a “legal grievance”: compare Northbourne at 438. Mr Spalla’s role in the primary proceeding, both as a principal party and under the LFA, is sufficient to give him the standing as a “person aggrieved” under s 1321.

163                                       Under r 14.1 of the Rules, Mr Spalla requires an extension of time to bring an appeal pursuant to s 1321 of the Act. Mr Spalla did not purport to bring an appeal under this section until 18 April 2006 – well outside the 21 day period for which r 14.1(2)(a) provides. The Court has the power to grant an extension of time under r 14.1(3) of the Rules. When deciding whether to grant such an extension, the Court has regard to all the circumstances of the case, including the extent and circumstances of the delay and any potential prejudice to other parties. In this case an extension is warranted. As Mr Spalla submitted, his notice of motion of 18 May 2005 was filed within 21 days of the challenged act and put Mr Rambaldi on notice of the points he wishes to raise in the appeal. In all the circumstances of the case, and in light of this fact and the fact that the respondents have not opposed an extension of time, I would grant the extension Mr Spalla seeks.

164                                       Section 1321 of the Act provides an appropriate vehicle for Mr Spalla’s challenge to Mr Rambaldi’s actions. The section confers jurisdiction in respect of matters arising in liquidations and “provides a species of review into the decisions of … liquidators in the original jurisdiction of the court notwithstanding the reference in the section to an ‘appeal to the court’”: see Re Hedge (No 2) (2002) 196 ALR 557 at 574 per French J. Also, it provides the Court with broad discretion regarding remedies. Therefore, I find it unnecessary to consider any other bases of jurisdiction. Some of these bases, such as s 536 of the Act, would apparently require Mr Spalla to meet a higher threshold before securing the Court’s scrutiny: see Re Glowbind Pty Ltd (In Liquidation); Takchi v Parbery (2003) 181 FLR 208 (“Glowblind”) at 217 per Burchett AJ (noting that an inquiry under s 536 will be appropriate only if the Court “considers that inquiry to be ‘in the public interest’” and “‘it is satisfied that there is a prima facie case’ to justify subjecting the liquidator to it”).

165                                       The decision to accept a settlement on behalf of Irlmond, and the preliminary decision to sign the Deed, were clearly discretionary decisions of the liquidator. They also involved matters of business judgment. It is well settled that where an appeal is brought against such a decision “the court will reverse the liquidator’s decision only when it is satisfied that he was acting unreasonably or in bad faith”: see Jay-O-Bees at 575 and the authorities referred to. This is in contrast to an appeal against a rejection of a proof of debt where the Court hears the issue de novo: see Jay-O-Bees at 575-576. The “general approach … in a case like this is that [the Court] should not interfere with a decision made by the liquidator unless either there is fraud, or it can be said that the discretion has not been exercised bona fide, or it can be said that the liquidator has acted in a way which no reasonable liquidator could have acted”: Bridgeport at 161-162 quoting Yeomans v Walker (1986) 5 NSWLR 378 at 383 per Hodgson J.

166                                       Mr Spalla has attempted to satisfy this standard of review by showing that Mr Rambaldi acted in bad faith in executing the Deed. This is a serious allegation, involving the imputation of moral turpitude. The standard of proof to be applied is proof on the preponderance of probability with due regard to the seriousness of the particular issue being determined. As Dixon J said in Briginshaw at 361-362:

“[W]hen the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. … Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature or consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences.”

An allegation of bad faith is a serious claim affecting reputation and the Court should have regard to this when considering the evidence.

167                                       Section 181(1) of the Act relevantly provides that an officer of a corporation – a term that includes a liquidator (s 9) - must exercise powers and discharge duties in good faith in the best interests of the corporation and for a proper purpose. Whether there has been bad faith will depend on the particular circumstances of the case.

168                                       Want of good faith on a liquidator’s part in the present context and elsewhere in the Act (e.g., in s 181) is not precisely the same as the concept of want of good faith in other areas of the law, as for example, in public law. The Act does not, however, define the concept of “good faith”; and the concepts of good and bad faith in the common law and elsewhere in statute are plainly related to the present matter. Thus, “there are many ways in which bad faith can occur and it is not possible to give a comprehensive definition”: SBBS v Minister for Immigration and Multicultural and Indigenous Affairs (2002) 194 ALR 749 (“SBBS”) at 756 per Tamberlin, Mansfield and Jacobson JJ. The focus of an inquiry concerning an allegation of bad faith is the state of mind of the decision-maker. The Court is not simply evaluating the wisdom of an impugned decision. In Minister for Immigration and Multicultural and Indigenous Affairs v SBAN [2002] FCAFC 431, Heerey and Kiefel JJ said at [8]:

“As with other areas of the law where wrongful intent is in issue, reckless indifference may be the equivalent of intent. But this is not to say that the test is objective. The inquiry is directed to the actual state of mind of the decision-maker. There is no such thing as deemed or constructive bad faith. It is the ultimate decision … which must be shown to have been taken in bad faith.”

Compare also Secretary, Department of Education, Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127 at 130 per Finn J. This means that “mere error or irrationality does not of itself demonstrate lack of good faith … [b]ad faith is not to be found simply because of poor decision-making”: SBBS at 756 [45]. Rather, the circumstances must show dishonesty (or capriciousness) on the part of the decision-maker: compare Pledger v Secretary, Department of Family and Community Services [2002] FCA 1576 at [70]-[78] per Weinberg J. Something is done in “good faith” when done honestly. Something is done in “bad faith” when done dishonestly. These general principles must be applied to each of the purported bases of bad faith as alleged by Mr Spalla.

169                                       In the context of this case, two considerations must be borne steadily in mind. First, s 545(1) of the Act provides that a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property. Secondly (by way of reiteration) the courts are generally “loath to enter into the area where the professional liquidator has made a commercial decision which he considers benefits the stakeholders whom he represents, at least unless something is pointed to which suggests that there are some vitiating factors which entered into the making of the decision”: see Star v Silvia (No 1) (1994) 12 ACLC 600 at 604 per Young J; Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114 at 116 per Young J; Northbourne at 440; Westpac v Totterdell at 453-454 per Ipp J (with whom Pidgeon and White JJ agreed); and Cook v Northoak Holdings Pty Ltd (1997) 25 ACSR 517.

Did Mr Rambaldi Settle Irlmond’s Claims on 29 April 2005?

170                                       I turn first to the preliminary issue of whether, by executing the Deed on 29 April 2005, Mr Rambaldi settled Irlmond’s claims in the appeal and the primary proceeding. This is not a difficult question. The terms of the Deed make it very clear that it was an irrevocable offer from the St George parties and the Deloitte parties to Irlmond.

171                                       Specifically, the condition precedent is unambiguous on this issue. The condition provided that the Deed would not take effect unless Mr Rambaldi procured his partners’ consent to the Deed. I accept Mr Rambaldi’s submission that, under this provision, he was not required to do anything. If Mr Rambaldi had not acted to procure the consent of his partners the Deed would not have come into effect. This makes it clear that the Deed was an offer from the respondents to Irlmond. It was irrevocable only in the sense that the respondents were not able to withdraw their offer for seven days.

172                                       In support of his contention that Mr Rambaldi settled Irlmond’s claim at the mediation, Mr Spalla relied on his own evidence regarding what Mr Rambaldi said at the 5.15 pm meeting on 29 April 2005. This evidence is largely irrelevant to this issue as the Deed speaks for itself. In any event, I have rejected Mr Spalla’s account of that meeting and accepted the evidence of Mr Rambaldi. Mr Rambaldi, as best as he could in the circumstances, attempted to explain that he had procured an offer from the respondents.

173                                       Further, I reject Mr Spalla’s suggestion that I should draw inferences (under the rule in Jones v Dunkel (1959) 101 CLR 298) against Mr Rambaldi because Mr Rambaldi failed to call those with whom he negotiated the terms of Deed. Mr Spalla claimed that there was no explanation for the failure to call these witnesses and that they could have provided evidence as to whether the parties understood the Deed to operate as an offer of settlement. While the surrounding circumstances may be relevant to construction, the terms of the condition precedent are clear. No reasonable observer could have interpreted the Deed as anything other than an offer. The language of the document admits of only one meaning: compare Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 (“ABC v APRA”) at 105-107 per Barwick CJ and 114-115 per Stephen J. The subjective views of the parties to the Deed are not relevant: see Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 (“Pacific Carriers”) at 461-462 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 (“Toll”) at 179 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ. Accordingly, the fact that Mr Rambaldi did not call the other parties to the Deed does not bear on the issue.

174                                       In the afternoon of 29 April 2005, Mr Spalla had asked Mr Rambaldi not to come to an agreement with the respondents without first consulting him. At no time that day, did Mr Rambaldi conclude an agreement with the respondents. Mr Spalla was notified of the respondents’ offer at the close of business that day. At that point, he had seven days in which to satisfy Mr Rambaldi that Irlmond, with Mr Rambaldi as liquidator, should continue to pursue the primary proceeding and the appeals, alternatively, to make some other arrangement that would permit Irlmond to litigate its claims, though without Mr Rambaldi. It is true that it was not for Mr Spalla to decide whether to continue with or terminate Irlmond’s participation in the primary proceeding. This decision was left with Mr Rambaldi, who might or might not act to secure his partners’ consent. This was, however, in keeping with the LFA and the duty of a liquidator to act independently, in the best interests of the company and its creditors: compare Re Club Superstores Australia Pty Ltd (In Liquidation) (1993) 10 ACSR 730 at 734-735 per Thomas J (and the cases there cited); Re Allebart Pty Ltd (In Liquidation) and the Companies Act [1971] 1 NSWLR 25 at 28 per Street J; and AR Keay, McPherson The Law of Company Liquidation (4^th ed, LBC information Services, 1999) at 291. In any event the effect of the offer was made clear at the meeting at the coffee shop on the Monday morning. Mr Rambaldi acted consistently with this in the days prior to 6 May 2005.

The Litigation Funding Agreement

175                                       Mr Spalla claims that Mr Rambaldi knowingly breached the LFA. If this were true, Mr Rambaldi would have knowingly breached a contractual obligation when he executed the Deed. This would be a significant factor supporting the view that Mr Rambaldi acted in bad faith. However, I find that Mr Rambaldi did not breach the LFA. To the contrary, the LFA clearly gave him the authority to act independently when deciding whether to settle on behalf of Irlmond.

176                                       The LFA was a commercial contract. The High Court outlined the principles for construing such contracts in Pacific Carriers and Toll. In Pacific Carriers at 462 the High Court said that the process of construction “requires consideration not only of the text of the documents, but also the surrounding circumstances known to [the parties to the contract], and the purpose and object of the transaction”: Pacific Carriers at 462. This approach was reaffirmed in Toll, where the High Court said at 179:

“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.” (Citations omitted; emphasis added)

177                                       I begin by addressing Mr Spalla’s submission that the Irlmond claim and the Spalla Interests claim (as defined by the LFA) were “indivisible” and that there was only “one claim” in the primary proceeding. This suggestion has fundamental consequences for the construction of the most relevant clauses of the agreement. Specifically, if claims are indivisible then, under clause 9.3, Mr Rambaldi might have been required to seek Mr Spalla’s consent before settling any claims in the primary proceeding. This is because that clause clearly limits the liquidator’s ability to settle the Spalla Interests claim. Considering the background and text of the LFA, however, I find that there is no substance to Mr Spalla’s submission on this issue.

178                                       The Spalla Interests claim is defined as “the claim(s) prosecuted in the Proceeding by the Spalla Interests as referred to in Clause B of this Agreement”. The Irlmond claim is defined in similar terms as “the claim(s) prosecuted in the Proceeding by Irlmond as referred to in Clause B of this Agreement”. Clause B states that the “Spalla Interests have prosecuted the Proceeding by” filing or delivering various statements of claim, including by “delivering a Further Proposed Amended Statement of Claim in the Proceeding … naming Irlmond as the Fifth Applicant”, and filing a notice of motion seeking leave with respect to that proposed pleading.

179                                       These provisions do not lead me to accept that the Spalla Interest claim and the Irlmond claim are indivisible. First, the claims are defined as those “prosecuted by” the relevant parties. The ordinary understanding of a claim “prosecuted by” a party is that of a claim brought in legal proceedings in that party’s name for legal redress of a wrong done to that party. I see no reason to depart from this natural reading of each definition. An examination of the relevant statement of claim in the primary proceeding enables the clear identification of the two different classes of claims, namely, the claims of and by Irlmond, in respect of which it sought relief, and the claims of and by the Spalla Interests, in respect of which they sought relief. Mr Spalla argued that Clause B (to which the definitions refer) effectively states that the Spalla Interests “prosecuted” all of the claims in the primary proceeding. This is not a sensible way to read the reference to Clause B. The reference is simply a device to identify the relevant pleadings. I conclude that the Spalla Interests claim and the Irlmond claim were those claims brought by the respective parties in their own names to redress a wrong done the respective claimants.

180                                       Many provisions of the LFA would be nonsensical if the Spalla Interests claim and the Irlmond claim were indivisible. For example, clauses 9.2, 11 and 12 clearly assume that the Spalla Interest claim and the Irlmond claim were separate claims. Clause 9.2 assumes particular significance in this regard. That clause provided that “subject to clause 9.3, the Spalla Interests will not interfere with the conduct of the Proceeding by the Liquidator in respect of the Irlmond claim”. This would be a startling provision if the Irlmond claim and the Spalla Interest claim, as defined in the LFA, were indivisible as it would have the consequence that Mr Spalla could not interfere in the conduct of the malicious prosecution claim brought in his name (a claim that had nothing to do with Irlmond and that Mr Spalla continues to prosecute in the primary proceeding).

181                                       Mr Spalla contended that clause 9.3 prohibited the Liquidator from settling “any claim” unilaterally. This argument takes the words “any claim” out of context. Clause 9.3(b) refers to “any claim made or the relief sought by the Spalla Interests” (emphasis mine). In context, the words undoubtedly refer to claims brought by the Spalla Interests. Overall, it is clear that clauses 9.2 and 9.3, when read together, create a regime whereby Mr Rambaldi had complete autonomy with respect to claims brought by Irlmond but was required to seek the consent of the Spalla Interests before settling the entire proceeding (including those claims brought by the Spalla Interests) or settling, amending or discontinuing any claims brought by the Spalla Interests.

182                                       For these reasons, I conclude that Mr Rambaldi was not required to participate in mediation after he received the letter from Still & Co. of 4 May 2005 demanding that he do so. Clause 9.3 required mediation (pursuant to the procedure outlined in clause 14) where the parties could not agree with respect to settlement of the proceeding as a whole or claims brought by the Spalla Interests. However, mediation was not required with respect to the settlement of Irlmond’s claims.

183                                       The circumstances surrounding the creation of the LFA strongly support this view. Of particular significance are the submissions made to Finkelstein J on 12 May 2003 that the new draft of the LFA “remove[d] any restriction on the power of the liquidator to accept a settlement offer made to the company” and that “[n]o limitations are imposed upon the liquidator at all in this regard” (emphasis mine). These submissions were made by counsel for the liquidator in circumstances where the Spalla Interests were also supporting the application and had an opportunity to be heard on these issues. Effectively, all the applicants in the primary proceeding represented to the Court that the LFA placed no restrictions whatsoever on the liquidator to settle Irlmond’s claim. This is a strong indication that this is how they understood the terms of the LFA.

184                                       Mr Spalla now contradicts the representations made to Finkelstein J by arguing that the LFA required the liquidator both to consult with him prior to settling Irlmond’s claim and required the liquidator to participate in mediation if agreement could not be reached. Leaving aside issues of estoppel, I would not conclude that the parties to the LFA intended the terms of that agreement to mean something other than what was suggested to the Court without a very strong showing from Mr Spalla. No such showing has been made. In fact, there is no reason to interpret the LFA in a manner inconsistent with the 12 May 2003 submissions to Finkelstein J.

185                                       Mr Spalla relied on the email exchange outlined at [131] above. This exchange does not support Mr Spalla’s interpretation of the contract. In that exchange, Mr Bowman and Mr Vasudevan agree that clause 14 will apply to disputes concerning settlement that arise under clause 9.3. As previously noted, however, clause 9.3(b) only relates to disputes that involve a claim brought by the Spalla Interests. Clause 9.3(a) relates to “the Proceedings as a whole”, which would, of course, include the Spalla Interests claim. Neither clause applies to the claim(s) brought by Irlmond alone.

186                                       The final issue to consider with respect to the LFA is whether the LFA required Mr Rambaldi to consult with his solicitors before settling the Irlmond claim. Mr Spalla relied on clause 9.2 which provides that “[t]he Solicitors shall at all times be instructed by the Liquidator in respect of the Irlmond claim” for his contention that Mr Rambaldi was obligated to consult HWL before executing the Deed. Clause 9.2 does not support Mr Spalla’s submission. Rather, that clause (which appears in a section of the LFA entitled “Control of the Proceedings”) concerns who has control over the Irlmond claim. Its significance is that the liquidator, rather than the Spalla Interests, has the control over the Irlmond claim and has authority to instruct the solicitors concerning that claim. It is a general principle that parties are entitled to communicate with opposing parties and settle their cases without consulting their solicitors. There is nothing in the LFA that derogates from this general principle. I also note that Mr Borden did not form the view that Mr Rambaldi was required to consult with him prior to executing the Deed. Further, once Mr Bowman informed Mr Rambaldi that ILF was going to give notice that afternoon withdrawing his indemnity, Mr Rambaldi reasonably took the view that Mr Borden was in a position of conflict and unable to advise him properly.

187                                       Overall, I conclude that there was no breach of the LFA. The LFA gave Mr Rambaldi autonomy over the settlement of the Irlmond claim and he was entitled to execute the Deed without first consulting with Mr Spalla or HWL. Also, he was not required to mediate a dispute concerning a settlement that covered only the Irlmond claim. As I have found no breach of the LFA, the issue of inducement to breach does not arise.

Was Undue Pressure Placed On The Liquidator?

188                                       Mr Spalla argued that Mr Rambaldi executed the Deed under duress. The evidence does not support this conclusion. Although Mr Rambaldi did make occasional references to having a “gun to his head”, his evidence was that this was a reference to his indemnity being withdrawn and his having limited options with respect to the affairs of Irlmond. I accept this evidence. I have already found that ILF withdrew the indemnity under the LFA by giving notice in accordance with the LFA.

189                                       Clearly, Mr Rambaldi’s conduct was heavily influenced by the prospect that his indemnity was being terminated in seven days time. It was not unreasonable for Mr Rambaldi to be influenced by this. I accept his submission that he could not be expected to continue his involvement in the litigation after his indemnity was terminated. Thus, on 29 April 2005, he knew that he would need to withdraw from the litigation by 6 May 2005. Faced with this prospect, he chose to procure an offer that protected Irlmond from adverse costs orders. Although he may have had other options, this was a reasonable decision in the circumstances: see below for further discussion of the reasonableness of the terms of the Deed at [203]-[208].

190                                       I do not find that the St George parties or the Deloitte parties acted improperly at the mediation. It may be accepted that they stated their case very strongly. But, as Mr Rambaldi himself noted, this is hardly unusual behaviour at mediation. Whether or not they would ultimately have been successful in a claim for costs against Mr Rambaldi personally, they did not place improper pressure on Mr Rambaldi by suggesting that they might seek such costs. Although a lay person, Mr Rambaldi was a sophisticated actor with prior experience with litigation and access to legal advice. Mr Rambaldi could – and did – seek advice as to the likelihood of being liable personally for costs. He received advice that it was unlikely that he would have to pay such costs. He knew, nonetheless, that it was open to the respondents to seek such costs and that they had stated that they would do so. In this circumstance, he was entitled to bear this consideration in mind and not to rule it out of account as a possibility.

191                                       I also address Mr Spalla’s suggestion that Mr Bowman placed undue influence on Mr Rambaldi by improperly “varying” the LFA. Mr Spalla noted that the LFA could not be varied except in writing by all the parties. He claims that, from about January 2005, Mr Bowman and Mr Rambaldi agreed that the ILF would only indemnify the liquidator for the purposes of allowing him to settle the action. I do not find that Mr Rambaldi and Mr Bowman “varied” the LFA, as Mr Spalla would have it. Although Mr Bowman frequently mentioned that ILF might withdraw from the LFA, this was not illegitimate as ILF was entitled unilaterally to withdraw from the agreement under clause 6.2. The evidence shows that ILF became increasingly dissatisfied with the manner in which the primary proceeding was being conducted and Mr Bowman, on its behalf, stated to Mr Rambaldi that it was considering withdrawing its indemnity at some stage. This evidence showed a change in circumstances and not a change, or variation, in the agreement.

192                                       Further, I find that ILF’s conduct had no impact on Mr Rambaldi’s conduct of the Irlmond claim until 29 April 2005 when Mr Bowman told him that ILF would provide notice of the indemnity’s termination under clause 6.2 that afternoon. Until then, Mr Rambaldi had continued with the appeal and participated in the mediation pursuant to the advice of his and Mr Spalla’s solicitors. He repeatedly expressed his preference to ILF that it should at least wait until after the appeal was decided before it withdrew his indemnity. It was only after ILF provided the notice of termination pursuant to the LFA that Mr Rambaldi procured a walk-away offer from the respondents. In these circumstances, I find that Mr Rambaldi did not act under duress and was not influenced by any improper pressure.

Did The Liquidator Act Dishonestly?

193                                       Mr Spalla contended that Mr Rambaldi acted in bad faith because he acted dishonestly. This is a serious accusation to make and I reject it.

194                                       First, Mr Spalla argued that Mr Rambaldi “deceived” him and Mr Borden by not informing them, after lunch on 29 April 2005, that ILF was withdrawing the indemnity. I have already found that, under the LFA, Mr Rambaldi had control of the conduct of the Irlmond claim and that he was not required by the LFA to inform Mr Spalla or Mr Borden of what he had been told or that he intended to procure a walk-away offer. Further, it is important to recall that under clause 9.2 the Spalla Interests were not to interfere with Mr Rambaldi’s conduct of the Irlmond claim. Therefore, Mr Spalla can have no complaint that Mr Rambaldi decided to act independently of him when procuring an offer.

195                                       Mr Spalla’s case was, in part, that Mr Rambaldi deliberately excluded Mr Borden from his meetings with Messrs Beck and Wallace-Smith and did not inform Mr Borden of the withdrawal of his indemnity and the forthcoming offer when he knew one was imminent. These propositions are, however, contrary to the facts as I have found them to be. Furthermore, in assessing Mr Rambaldi’s conduct on the afternoon of 29 April 2005, it must be recalled that Mr Rambaldi had already put Mr Spalla (and Mr Borden) on notice that he would accept a walk-away offer if ILF withdrew his indemnity and Mr Borden had acknowledged that this course was properly open to him. Further, as already noted, Mr Rambaldi believed (as was by then the case) that Mr Borden was in a position of conflict and could no longer advise him properly.

196                                       Mr Spalla also said that Mr Rambaldi deceived him when, before meeting with the respondents on the afternoon of 29 April 2005, Mr Rambaldi told Mr Spalla that he would discuss any offer with Mr Spalla before accepting the offer on behalf of Irlmond. Although he was not required under the LFA to make such a promise, Mr Rambaldi acknowledged that he told Mr Spalla that he would confer with him before settling Irlmond’s claim. Mr Spalla alleges that Mr Rambaldi broke this promise because he settled the proceeding on the afternoon of 29 April 2005. I have already found that Mr Rambaldi did not settle Irlmond’s claim at the mediation. Rather, he procured an irrevocable offer from the respondents. Consistent with his earlier representation, he did discuss this offer with Mr Spalla prior to settling Irlmond’s claim.

197                                       Mr Spalla also suggested that Mr Rambaldi was fabricating his claim that the condition precedent, which required the offer remain irrevocably open for seven days, was included for his, Mr Spalla’s, benefit. Mr Spalla said that Mr Rambaldi had said nothing of the sort and that this was just recent invention on Mr Rambaldi’s part. I reject this suggestion. I accept that Mr Rambaldi was prevented from explaining himself adequately in the evening of 29 April 2005, by reason of the general hubbub and confusion that prevailed. He plainly did explain himself in these terms on the first occasion that it was reasonably practicable for him to do so, in the coffee shop the following Monday morning.

198                                       Finally, Mr Spalla referred to Mr Rambaldi’s discussions at the mediation with the respondents. Mr Rambaldi said that, to ensure that the offer stayed open for seven days, he told the respondents, inaccurately, that he required the consent of his partners to write-off fees. I find no fault in Mr Rambaldi’s conduct here. Mr Rambaldi was in a difficult situation. The period of grace he sought to negotiate did not benefit him personally but it was of potential benefit to Irlmond (and to Mr Spalla). He sought to protect the interests of Irlmond by negotiating an offer that stayed open while his indemnity remained. At the same time, he did not want the respondents to know that his indemnity was being withdrawn. He reasonably considered that that would have been a disaster for Irlmond and that no offer of any kind would have been forthcoming had the respondents known this fact. Accordingly, he gave an excuse for why he wished the offer to stay open for seven days. He reasonably believed that it would not have assisted Irlmond had he applied to Court at this stage because in so doing Irlmond’s and its liquidator’s position would have been disclosed. In his letter to Mr Spalla of 11 February 2005, he had already expressed a similar view. Seen in context, Mr Rambaldi’s conduct in this regard was not out of the ordinary.

Events After The Mediation

199                                       Mr Spalla did not complain that the seven days’ period of grace was too short for his purposes. Rather, Mr Spalla argued that the liquidator’s conduct in the week after 29 April 2005 was a “sham” intended only to “cover his tracks”. I reject this contention. I find that Mr Rambaldi made a good faith effort to assist Mr Spalla to locate another liquidator or find some other reasonable way of continuing the litigation on behalf of Irlmond.

200                                       It is notable that, well prior to the mediation, Mr Spalla was on notice that ILF might withdraw the indemnity before the appeal was heard. Just before the mediation began, Mr Spalla and Mr Rambaldi discussed obtaining another liquidator and the possibility that ILF might withdraw Mr Rambaldi’s indemnity. Two days before the mediation, Mr Rambaldi had specifically drawn Mr Spalla’s attention and the attention of the others at the meeting that day to this possibility. Further, Mr Spalla was informed by both Mr Rambaldi at this meeting and Mr Borden subsequently that the liquidator would be forced to negotiate a settlement if this occurred. Indeed they specifically alluded to a walk-away offer. Even earlier, on 11 February 2005, Mr Rambaldi wrote to Mr Spalla informing him that, if ILF withdrew his indemnity, he would only be able to continue prosecuting Irlmond’s claims if Mr Spalla deposited $2 million in his trust account. Mr Spalla did not reply to that letter. At trial he said that he did not have the requested funds. Indeed, the matter of ILF withdrawing its support had been raised as early as January 2005 as a real possibility. Plainly enough, by the time of the mediation, Mr Spalla knew or ought to have known that Mr Rambaldi might not be able to continue with the litigation. Consistent with this, he was searching for a new liquidator even before the mediation.

201                                       After the mediation, Mr Rambaldi informed Mr Spalla that he had three options to consider before the Deed was ratified. These options were: (1) depositing $2 million in Mr Rambaldi’s trust account; (2) procuring the appointment of a substitute liquidator; or (3) obtaining the approval of the Court for the officers of Irlmond to conduct the litigation on its behalf. Because of Mr Spalla’s lack of funds, the first option was unavailable. Mr Spalla, with Mr Rambaldi’s help, tried to procure the appointment of a substitute liquidator but one could not be found. In cross-examination, Mr Spalla agreed that Mr Rambaldi co-operated with him in attempting to find another liquidator. Finally, Mr Rambaldi made an application to the Supreme Court of Victoria to give Mr Spalla the opportunity to argue that he should be given leave to conduct the litigation as a director of Irlmond.

202                                       On legal advice, Mr Spalla did not make an application to take over the carriage of the primary proceeding for Irlmond. Having sought his own independent legal advice, Mr Rambaldi did apply to the Supreme Court. Mr Spalla claims that the application to the Supreme Court was not made in good faith because Mr Rambaldi did not support it. Mr Rambaldi explained that he did not support the orders sought by the application because he did not believe that Mr Spalla was an appropriate person to have conduct of the Irlmond claim in the primary proceeding. He explained that, in his view, Mr Spalla was too emotionally involved with the litigation and might not be able to bring sufficient objectivity to the commercial decisions associated with managing litigation on behalf of a company in liquidation. This does not show that Mr Rambaldi brought the application in bad faith. As liquidator of Irlmond, Mr Rambaldi was required to advise the Court of his position in relation to the application. Although he did not support the application, by bringing it he gave Mr Spalla the opportunity to seek an order giving him authority to conduct the litigation. As Hansen J explain in Rambaldi at [18]:

“[D]oubtless out of some thought for the other interests involved, [Mr Rambaldi] has brought this application which may be thought to have been designed to draw Mr Spalla to seek authority to conduct the litigation under the guise of the originating process. As I have said, Mr Spalla takes the opportunity to seek that authority. He wishes to be able to conduct the litigation and, as discussed with counsel, I could make such an order under s.511(1)(b) of the Act if, in my view, it was otherwise appropriate to do so.”

Similarly, I do not find that the application was brought in bad faith. I find that it was filed in a good faith attempt to seek the guidance of the Court and to allow Mr Spalla an opportunity to put his case to the Court. Overall, I find no reason to conclude that Mr Rambaldi acted in bad faith in the week before the Deed was ratified.

Was Settlement So Unreasonable As To Evidence Bad Faith?

203                                       Finally, I turn to the issue of whether the settlement was so unfavourable for Irlmond that it evidences that Mr Rambaldi acted in bad faith. Absent any other evidence of bad faith, the question must be whether or not, in executing the Deed and ultimately settling Irlmond’s claim, Mr Rambaldi acted in a way that no reasonable liquidator could have acted: compare Bridgeport at 161-162. In this context, it must be borne in mind that courts are especially reluctant to second-guess settlement decisions. Public policy favours settlement. As Chesterman J said in Dew v Richardson [1999] QSC 192 at [42], settlement helps “reduce the level of disharmony in society and conserve the resources both of litigants themselves and the community which funds the courts.” Others have seen the virtue of settlement in promoting certainty that permits litigants to deal with their affairs in an orderly way looking to the future. For example, in Kelley v Corston [1998] 3 WLR 246 at 259, Judge LJ said:

“Every lawyer in practice and every judge knows that there is no such thing as the case which is bound to succeed. Experience shows that cases with the brightest prospects of success somehow fail and it is difficult to underestimate the value of the certainty provided by a settlement as opposed to the continuing risks of litigation through to judgment”.

204                                       Mr Spalla’s submission on this issue was largely based on his claim that the creditors of Irlmond got no benefit from the settlement. Mr Spalla argued that, as Irlmond had no funds to pay adverse costs orders, they got no advantage from a settlement that simply protected Irlmond from adverse costs. This submission is based on a fundamental misunderstanding of the responsibilities of the liquidator. A liquidator has a responsibility to minimise the costs incurred by the company regardless of whether the company has the funds to pay them. The Deed benefited the company by providing a release from all claims by the respondents, securing the respondents’ undertaking not to enforce any costs orders against it (which according to Mr Borden were considerable) and its liquidator, and precluding liability arising from potential adverse costs orders in the future. Further, the company’s winding-up was permitted to continue unimpeded by the litigation.

205                                       Mr Spalla also contested Irlmond’s insolvency. The fact is, however, that Finkelstein J found that, as at the date of the appointment of the receiver, Irlmond was insolvent. An appeal against his Honour’s judgment was dismissed. The finding that Irlmond was insolvent when it went into receivership is now res judicata and the subject of issue estoppels. In light of Finkelstein J’s finding, it cannot be said that Mr Rambaldi settled a good claim on behalf of a solvent company, as Mr Spalla would have it. Further, the evidence shows that the primary proceeding needed to yield about $3 million before there could be any return to creditors. The evidence also shows that, at the 27 April 2005 meeting, Mr Spalla and the others in attendance were contemplating accepting any offer between $2 and 3 million. Under the LFA, this would only have permitted the lawyers and others involved in the primary proceeding to be paid out.

206                                       Mr Spalla submitted that the liquidator had received legal advice that Irlmond had a good claim and that the appeal was likely to be successful and that, if Irlmond was successful, then it was unlikely to incur significant costs orders. Mr Spalla submitted that it was unreasonable for the liquidator to disregard such advice and act as he did. Leaving aside the issue of whether the liquidator made the best decision open to him (which does not arise for consideration), numerous factors militated in favour of Mr Rambaldi’s decision to execute the Deed. First, at mediation, the respondents told him that they would make no monetary offer and no such offer was forthcoming from them. Secondly, it is fair to say that the applicants were in difficulties in the primary proceeding. Their statement of claim had gone through over ten drafts and had been struck out three times. Bearing in mind the appeals, which were subject to the usual contingencies of litigation, no trial was imminent. Thirdly, legal fees and other costs had reached a point where the company needed approximately $3 million before unsecured creditors would have seen any return from the litigation. Moreover, the applicants’ solicitors, HWL, had stated that they might not continue with the litigation much longer. Fourthly, Mr Spalla did not have sufficient funds to pay legal fees other than on a ‘no win, no fee’ basis. Thus, it might have been very difficult to find alternative experienced solicitors if HWL withdrew. Fifthly, as already noted, Mr Rambaldi’s indemnity was being terminated, with the consequence that he could not continue as liquidator. Mr Rambaldi reasonably believed that it would not have assisted Irlmond if he applied to Court at this stage because in so doing Irlmond’s and its liquidator’s position would have been disclosed and no offer from the respondents would have been forthcoming at all. Sixthly, Mr Rambaldi negotiated a seven day period of grace, which was of potential benefit to Irlmond, because it allowed other options to be considered. Seventhly, Irlmond and its liquidator obtained releases from all claims by the respondents, as well as from costs orders in the respondents’ favour. These factors all support Mr Rambaldi’s decision.

207                                       Ultimately, there were also additional factors militating in favour of Mr Rambaldi procuring his partners’ consent to the Deed on 6 May 2005, thereby settling the matter. Attempts to find a substitute liquidator had failed. Mr Spalla had neither provided the funds for him to continue nor obtained court approval to conduct the Irlmond claim on its behalf. He had independent counsel’s advice as to the propriety of his conduct.

208                                       Again, it is important to note that the question is not whether Mr Rambaldi made the best decision in the circumstances. Rather, the issue is whether he acted so unreasonably that the Court should set aside his actions. In my view, the terms of settlement provide no reason to conclude that Mr Rambaldi acted in bad faith or otherwise acted so unreasonably that the settlement should be set aside.

CONCLUSION

209                                       By his third further amended notice of motion, Mr Spalla sought a variety of orders. In essence, the relief he seeks is that the Deed be set aside and that he be given leave to conduct the primary litigation on behalf of Irlmond. For the foregoing reasons, I have found no ground for setting aside the Deed. Therefore, I need not consider whether Mr Spalla should be given leave to conduct the litigation on behalf of Irlmond. I would order that the third further amended notice of motion be dismissed.

210                                       On the evidence, there is no basis for finding that Mr Rambaldi acted in bad faith in executing the Deed at the end of the mediation on 29 April 2005. On the contrary, the evidence shows that Mr Rambaldi acted in good faith throughout. He honestly believed on reasonable grounds that it was in the best interests of Irlmond and its unsecured creditors to procure the offer, to which the Deed gave rise.

211                                       I propose to hear the parties on costs after they have had an opportunity to consider these reasons.

Associate:

Dated: 12 September 2006