FEDERAL COURT OF AUSTRALIA

Ann Street Mezzanine Pty Ltd (in liq) v Beck [2009] FCA 333

CORPORATIONS – winding up – proof of insolvency – necessary to establish insolvency both when application is filed and at the date of hearing

PRACTICE AND PROCEDURE – cross-claim alleging that a company was solvent – company previously wound up in insolvency – application to strike out cross-claim – issue estoppel – whether prior finding of insolvency creates issue estoppel – parties to proceedings – deemed parties – meaning of privity in interest – whether a shareholder is in privity with his corporation – abuse of process – when an attempt to re-litigate or collaterally attack a finding is an abuse – whether special reasons required

Australian Securities and Investments Commission Act 2001 (Cth), s 8A

Corporations Act 2001 (Cth), s 459A

Federal Court (Corporations) Rules 2000 (Cth), rr 2, 5; sch 3

Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728

Australian Beverage Distributors Pty Ltd v The Redrock Co (2008) 26 ACLC 74

Bismarck Public School District Number One of Burleigh County v Hirsch 136 NW 2d 449 (ND 1965)

Blair & Perpetual Trustee Co Ltd v Curran (Adams’ Will) (1939) 62 CLR 464

Bradford & Bingley Building Society v Seddon Hancock [1999] 1 WLR 1482

Bragg v Oceanus Mutual Underwriting Association (Bermuda) Ltd and CE Health & Co (Marine) Ltd [1982] 2 Lloyd’s Rep 132

Comalco Aluminium Ltd v Ohtsu Tyre & Rubber Company (Aust) Pty Ltd (1983) 8 ACLR 330

Corporate Affairs Commission v Bradley [1974] 1 NSWLR 391

Dallhold Investments Pty Ltd (In liquidation) v Gold Resources Australia Ltd (Provisional liquidator appointed) (1991) 31 FCR 587

Emanuele v Australian Securities Commission (1996) 188 CLR 114

Gasbourne Pty Ltd, Re [1984] VR 801

Hunter v Chief Constable of the West Midlands Police [1982] AC 529

Imobilari Pty Ltd (ACN 091 464 729) v Opes Prime Stockbroking Ltd (in liq) (recs and mgrs apptd) (ACN 086 294 028) (2008) 252 ALR 41

Jordache Enterprises Inc v National Union Fire Insurance Company of Pittsburgh 513 SE 2d 692 (WVa 1998)

Kreager v General Electric Company 497 F 2d 468 (2nd Cir 1974)

Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459

Marine Midland Bank v Slyman 995 F 2d 362 (2nd Cir 1993)

Myers v International Trust Co 236 US 64 (1923)

Nana Ofori Atta II v Nana Abu Bonsra II [1958] AC 95

North Atlantic Distribution Inc v Teamsters Local Union 497 F Supp 2d 315 (DRI 2007)

Palais Cinema Limited, Re [1918] VLR 113

Pennington v Snow 471 P 2d 370 (Alaska, 1970)

Ramsay v Pigram (1968) 118 CLR 271

Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343

Syd Mannix Pty Ltd v Leserv Constructions Pty Ltd [1971] 1 NSWLR 788

Target Holdings Ltd v Redferns (A Firm) [1996] 1 AC 421

Topfelt Pty Limited v State Bank of New South Wales Limited (1993) 47 FCR 226

Trawl Industries of Australia Pty Limited (In liquidation) v Effem Foods Pty Limited (1992) 36 FCR 406; (1993) 43 FCR 510

Wear Engine Works Company, In re (1874-75) LR 10 Ch App 188

Wytcherley v Andrews (1871) LR 2 P&M 327

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484

47 American Jurisprudence 2d Judgments, § 593 (2006)

Restatement (Second) Judgments § 59 (1982)

ANN STREET MEZZANINE PTY LTD (IN LIQUIDATION) v CEDRIC RICHARD PALMER BECK & ORS (In accordance with the attached schedule)

NORMAN PHILLIP CAREY & ORS (In accordance with the attached schedule) v FREEHILLS, AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION and COMMONWEALTH OF AUSTRALIA

VID 485 of 2008

FINKELSTEIN J

9 APRIL 2009

MELBOURNE

REASONS FOR JUDGMENT

1                                             This is another complex action arising out of the collapse of the Westpoint group.  Prior to its collapse the group had been engaged in the purchase and development of residential and retail sites throughout Australia.  To fund its operations the group raised hundreds of millions of dollars from investors.  Most of that money has been lost.  This action attempts to recover some of that loss.  But the action has not progressed very far.  The parties are still in dispute about the pleadings.  The plaintiff, Ann Street Mezzanine Pty Ltd (in liquidation) (Ann Street), seeks to strike out part of the defence delivered by the fourth defendant, Mr Carey, allegedly a former director.  In addition, two cross-respondents, the Australian Securities and Investments Commission (ASIC) and the Commonwealth, apply to have the cross-claims brought against them stuck out.  Interesting issues arise, but before dealing with them some background information is necessary.

2                                             Ann Street was a company in the group.  It was wound up by order of the Federal Court of Australia on the application of ASIC.  This action is being carried on by ASIC in Ann Street’s name in accordance with s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).  The defendants are Ann Street’s alleged former directors and companies associated with Mr Beck, one director.  Put simply, Ann Street’s case is as follows.  It raised in excess of $64 million by the issue of promissory notes.  On about 15 April 2003 Ann Street and Ann Street Brisbane Pty Ltd (ASB), another company in the group, entered into a loan agreement.  The loan agreement contained the following conditions:  (a) Ann Street would lend ASB the money it raised through the issue of the promissory notes; (b) the money was only to be used for a particular development; and (c) ASB would repay the loan on the earlier of the date that ASB had received sufficient proceeds from the sale of the proposed development and 31 December 2005 (the repayment clause).  On about 25 August 2005 the repayment clause was varied such that ASB was only required to repay the loan once it had received sufficient proceeds from the sale of the proposed development. 

3                                             Ann Street did not loan the money raised to ASB.  After payment of certain commissions to promoters and financial advisers, including Mr Beck’s companies, Ann Street paid the balance (approximately $57 million) to Westpoint Corporation Pty Ltd (WPC), another company in the group.  Following the collapse of the group the bulk of the money paid to WPC could not be recovered either from WPC or ASB.  Ann Street’s principal complaint is that in breach of their duties the directors allowed Ann Street to: (a) enter into the loan agreement with ASB which did not have the means to repay the loan; (b) vary the repayment clause; (c) pay commissions to promoters and financial advisers; and (d) pay WPC the money that was raised.  Accordingly, Ann Street says the directors are obliged to make good the loss.  There is also a claim for the recovery of the commissions from Mr Beck’s companies. 

4                                             Turning to the pleadings, it is convenient, first, to deal with ASIC’s attack on the cross-claim.  The cross-claimants are Mr Carey, the major shareholder of the group, two other shareholders of companies in the group, and 31 group members.  The cross-claimants contend that each group company was solvent prior to the commencement by ASIC of its application to wind up two group members, Ann Street and York Street Mezzanine Pty Ltd (York Street).  They allege that the groups’ insolvency was the immediate and inevitable result of the filing of the winding up applications.  Moreover, it is alleged that ASIC’s decision to bring the applications to wind up both York Street and Ann Street was:  (a) made for an improper purpose, namely to “shut down the Westpoint Group”; (b) made following a failure to accord procedural fairness to the affected persons; and (c) arrived at after a failure to take into account relevant considerations and after taking into account irrelevant considerations.  The causes of action pleaded against ASIC are misfeasance in public office and negligence.  Various heads of damages are sought including, by the shareholders, diminution in the value of their shareholding and, by the group companies, loss of the value of their assets and loss of income by reason of the collapse.

5                                             ASIC contends that the pleading should be struck out.  It relies on two grounds:  issue estoppel and abuse of process.  As regards issue estoppel, the short point is that the cross-claimants are precluded from establishing the fundamental plank on which the cross-claim is constructed, namely the solvency of Ann Street and York Street immediately prior to the filing of the winding up applications, as that allegation is inconsistent with the findings of insolvency made by the judge (French J, now the Chief Justice of Australia) when he ordered that the companies be wound up.  The argument is that by reason of the doctrine of issue estoppel the cross-claimants are not permitted to contest the judge’s findings.

6                                             This submission gives rise to the following issues:  (a) what must a court decide on a winding up application based on insolvency; (b) what did the judge in fact decide for purposes of making the orders to wind up Ann Street and York Street; and (c) in what circumstances, if at all, is a person entitled to attack findings in proceedings otherwise than by way of appeal? 

7                                             To deal with the first issue it is necessary to make some reference to the procedure for the winding up of a company.  It has been possible to compulsorily wind up (initially to bankrupt) a company since the Winding Up the Affairs of Joint Stock Companies Act (1844) (7 & 8 Vict c 111).  With the passage of the Winding-Up of Joint Stock Companies Act (1848) (11 & 12 Vict c 45) and the Joint Stock Companies Act (1856) (19 & 20 Vict c 47) the modern procedure was established.  A creditor could petition the court (initially the Chancery Court) for a winding up order on several grounds including the inability of the company to pay its debts.  The petition had to allege facts which justified a winding up order:  In re Wear Engine Works Company (1874-75) LR 10 Ch App 188, 191.  In the case of a creditors petition this meant the petition was required to state the petitioner was a creditor (Re Palais Cinema Limited [1918] VLR 113, 117-118) and give particulars of his debt (In re Wear Engine Works).  By the General Order and Rules of the High Court of Chancery (1862), the petition had to be verified by an affidavit made by the petitioner or, if the petition was presented by a company, by a director, secretary or other principal officer of the company:  r 4.  The affidavit was to be sworn within four days after the presentation of the petition and, provided it followed the prescribed form, was prime facie evidence of the statements in the petition:  r 4.  In other words, the petitioner was required to tender evidence which established the company was insolvent as at the date of the filing of the petition.  If that evidence was not challenged at the hearing it was assumed that the company remained insolvent.  Indeed, unless that assumption was made the court could not wind up the company.

8                                             Proceedings by way of petitions were abandoned some time ago.  In other respects the procedure is the same.  The procedure is now regulated by the Federal Court (Corporations) Rules 2000 (Cth) (which are replicated uniformly across all jurisdictions).  A creditor may make an application to the court to wind up a company in the prescribed form:  r 2.2.  The application must be supported by an affidavit stating the facts in support of the process:  r 2.4.  The affidavit must give particulars of the debt:  r 5.4; sch 3, note 2.

9                                             The result of these procedures is that the creditor is required to establish the insolvency of the company both at the time of filing the application (or under the old procedure the presentation of the petition) and at the hearing.  The leading case is Syd Mannix Pty Ltd v Leserv Constructions Pty Ltd [1971] 1 NSWLR 788; see also Dallhold Investments Pty Ltd (In liquidation) v Gold Resources Australia Ltd (Provisional liquidator appointed) (1991) 31 FCR 587.  In Syd Mannix Jacobs JA (with whom Holmes and Moffitt JJA agreed) said (at 790):  “It seems to me that, particularly when the winding up commences from the presentation of the petition, if a winding-up order be subsequently made, it is necessary that … [the] ground for winding-up … be in existence at the time of presentation”.  I accept this to be one reason for the rule.  But, in any event, the rule is the necessary consequence of the requirement that the creditor is required to verify his application, that is, tender evidence of the company’s inability to pay its debts, at the time the application is filed. 

10                                          Comalco Aluminium Ltd v Ohtsu Tyre & Rubber Company (Aust) Pty Ltd (1983) 8 ACLR 330 is an interesting case.  The creditor sought to establish proof of the company’s insolvency by the company’s failure to comply with a statutory demand.  Then, as now, the relevant legislation provided that if a company failed to comply with the demand within three weeks it was deemed to be unable to pay its debts.  But, the relevant three week period had not expired at the time the petition was presented.  McLelland J said (at 331):  “[T]he fact of failure to comply with a statutory demand within the three week period may be an evidentiary circumstance, relevant to the question of insolvency at a date prior to the expiration of that period [namely, the date of filing]”.   

11                                          My attention has been drawn by Mr Peters SC, counsel for the cross-claimants, to authorities which, on one view, support the proposition that the only point at which insolvency must be established is at the time of the hearing.  The cases are Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 466 (“The question of solvency must be assessed, as the parties agreed, at the date of the hearing”);  Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] (“The question of solvency must be assessed at the date of the hearing”, citing Leslie v Howship Holdings); Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343 at [6] (“It is common ground between the parties that the relevant date at which the question of solvency should be determined is the date of the hearing”, also citing Leslie v Howship Holdings Pty Ltd); Australian Beverage Distributors Pty Ltd v The Redrock Co (2008) 26 ACLC 74 at [146] (“The question for the court [on a winding up application] is whether, at the time of the hearing, Redrock was insolvent”).

12                                          I think Mr Peters makes too much of these cases.  They show that before the discretion to wind up a company will be exercised the creditor must show that the company is insolvent.  I do not, however, read the cases as standing for the additional proposition that that is the only time at which insolvency must be established.  In any event, I would follow Syd Mannix, a decision of an appellate court in preference to cases in which the issue has not been directly considered.  In my view Syd Mannix is correctly decided.

13                                          What I have described to be the obligation of a creditor in a winding up application applies equally to ASIC.  True it is that ASIC is only entitled by leave of the court to bring an application to wind up a company on the ground of insolvency:  Corporations Act 2001 (Cth), s 459P(2)(d).   To obtain leave ASIC must satisfy the court there is a prime facie case of insolvency.  Once leave is obtained ASIC must, like any other applicant, verify by affidavit its winding up application.  So when the court comes to consider an application brought by ASIC, it should have before it evidence of the insolvency of the company when the application was filed.  In the absence of evidence to the contrary, the court will assume that the company remains insolvent at the time of the hearing. 

14                                          This brings me to the second issue, which is to determine what the judge did decide when he made the orders to wind up Ann Street and York Street.  ASIC brought its application to wind up York Street on 22 November 2005.  The application was brought on two grounds:  insolvency (s 459A) and the just and equitable ground (s 461(1)(k)).  It also sought the appointment of a provisional liquidator.  ASIC had not obtained leave to bring the application as required by s 459P but that was merely an irregularity (Emanuele  v Australian Securities Commission (1996) 188 CLR 114) that was, in due course, cured.  The day following the bringing of the application the directors of York Street appointed administrators to the company under s 436A.  That section provides that administrators may be appointed if, in the opinion of the directors, the company is insolvent or is likely to become insolvent at some future time. 

15                                          On 5 December 2005 ASIC filed its application to wind up Ann Street, which was also done without leave.  ASIC relied on the same grounds as it did for York Street.  In that application ASIC also sought the appointment of a provisional liquidator.  On the following day, administrators were appointed to Ann Street and the other companies in the group. 

16                                          The applications for the appointment of a provisional liquidator to York Street and Ann Street were listed for hearing on 20 December 2005.  Each company was represented by counsel (Mr Martin QC with Mr Vaughan) who had been instructed by the administrators.  Also returnable on 20 December 2005, but only for mention, was ASIC’s application to wind up WPC.  Counsel (Mr Donaldson SC with Ms Banks-Smith) appeared for that company.  Mr Donaldson informed the judge that he sought leave to make submissions in the Ann Street and York Street proceedings.  Counsel for ASIC (Mr Colvin SC who appeared with Ms Cahill) indicated that ASIC’s attitude to the foreshadowed intervention would depend upon what was to be argued. 

17                                          The applications then proceeded as follows.  First Mr Colvin put his argument for the appointment of provisional liquidators.  During the course of his submissions the judge suggested it might be appropriate to consider whether the two companies should be wound up rather than proceed into provisional liquidation.  Not surprisingly Mr Colvin did not resist that course.  Nor did Mr Martin.  Indeed, Mr Martin acknowledged that the material filed demonstrated that both companies were insolvent.  In effect, the administrators conceded that the companies should be wound up.

18                                          Mr Donaldson was then invited to make his submissions.  He read an affidavit of Mr Rundle, the chief financial officer of WPC.  In that affidavit Mr Rundle said that WPC had engaged a chartered accountant to review the group and “formulate a possible restructuring plan for the group”.  He implied that such a restructure might provide a better return for creditors.  On this evidence Mr Donaldson submitted that the winding up applications should be adjourned to allow the proposed restructure to be put to creditors.  He made no submission regarding the merits of ASIC’s applications for the winding up of York Street and Ann Street.

19                                          The application to adjourn was opposed by ASIC.  Counsel for the companies was not asked for an opinion.

20                                          At the conclusion of submissions there was a short adjournment.  When the judge returned he delivered his reasons and then ordered that Ann Street and York Street be wound up.  The judge based the winding up orders on each company’s insolvency, expressly declining to rule on the just and equitable ground.  As regards York Street, the judge summarised the evidence that dealt with the company’s financial position as at the date of the filing of the winding up application.  In substance he said that:  (a) York Street was incorporated for the purpose of issuing promissory notes to, and borrowing funds from, members of the public and lending those funds to a company called Scots Church Development Pty Ltd (SCD) to assist in the funding of a property development; (b) as at the date of filing of ASIC’s application York Street had promissory notes on issue for a total of $78 million (in addition to approximately $22 million which was received by the company but not shown in the balance sheet); (c) SCD had a total debt of approximately $69.6 million in addition to approximately $76 million owing to senior lenders for the development of the land; (d) the value of the development as at April 2008 was said to be $119.1 million; and (e) it appeared that SCD did not have sufficient funds to repay York Street.  Then the judge said:  “I am satisfied on the basis of the evidence put before the court by ASIC that [York Street] is insolvent”.  He said that the administrators’ report “lends support to that contention”.  He summarised the relevant parts of that report as follows:  (a) York Street raised in excess of $100 million in promissory note funding; (b) the development project encountered significant delays which led to major cost overruns; (c) realisations from the pre-sales and sales yet to be achieved would not be sufficient to cover the claims of promissory note holders in full; (d) guarantees and indemnities provided by companies in the group were unlikely to be of material value in a winding up scenario; (e) the inter-company loan accounts between SCD and companies in the group were unlikely to have a material recovery value in a winding up scenario; and (f) while there were other potential sources of recovery these were unlikely to have a material impact on the return to creditors.

21                                          The judge then referred to s 440A(3) which provides that a court is not to appoint a provisional liquidator to a company if the company is under administration and the court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than have a provisional liquidator appointed.  He found that, having regard to York Street’s finances, there was “no basis for any satisfaction that the interests of [York Street’s] creditors would be served by its continuance in administration”.  He went on to say that “[n]either ASIC nor the administrators were able to point to any reason why the court should not proceed immediately to a winding-up order”. 

22                                          The judge then turned to Ann Street.  He referred to the evidence filed in support of the application to wind up that company.  In brief the evidence disclosed that:  (a) promissory notes to the value of $37.34 million were to fall due for repayment on 31 December 2005; (b) Ann Street’s only claim at the time was against ASB - it has no other assets from which it could meet payments due to investors when the promissory notes matured (save for the ability to call on guarantees which appeared to have a somewhat speculative chance of recovery);  (c) ASB had paid out all of its funds;  and (d) the main building works had not commenced and there was no prospect of proceeds from the sale of the building being received in the foreseeable future.  On the basis of that evidence the judge said:  “I am satisfied that [Ann Street] is insolvent and that no point would be served by delaying the making of a winding-up order.  I am not satisfied that it is in the interests of the creditors to continue in administration”.

23                                          On a literal reading of the judge’s reasons the finding of insolvency related to the position at the date of the hearing.  Nonetheless it is clear that the evidence upon which the judge based his conclusion of insolvency would require the same finding as regards the solvency of the companies when the respective winding up applications were filed.  At least according to the evidence to which the judge referred, the companies’ financial position did not worsen during the intervening few weeks.   

24                                          The third issue is whether the judge’s finding of insolvency precludes the cross-claimants mounting a claim against ASIC founded on the assertion that York Street and Ann Street were solvent at the time the winding up applications were filed.  The judgment that each of Ann Street and York Street be wound up is a judgment in rem (Topfelt Pty Limited v State Bank of New South Wales Limited (1993) 47 FCR 226, 242) and hence binding on the whole world.  In other words, the status of the companies, (namely that they are in liquidation) cannot be challenged in a collateral (or any other) action.  But the binding effect of the adjudication on the world at large is limited to status.  The judgment is not, special circumstances apart, binding as to the facts upon which it is based, except as between the parties to the winding up proceedings and their privies:  Myers v International Trust Co 236 US 64, 73 (1923).

25                                          The principle that parties and their privies cannot call into question an issue of fact or law that has been resolved between them in litigation is referred to as estoppel by record or issue estoppel.  In Blair & Perpetual Trustee Co Ltd v Curran (Adams’ Will) (1939) 62 CLR 464, 532 Dixon J explained that issue estoppel as to facts is confined to “those ultimate facts which form the ingredients of the cause of action” and “the actual ground upon which the existence of the right was negatived”.  He went on to say that subsidiary or collateral findings are not covered by the estoppel.  The question here is not whether the findings of insolvency are ultimate findings, for they plainly are.   Rather, the question is who is bound by them.  None of the cross-claimants were a party to the winding up proceedings so cannot be bound in that capacity.  Nonetheless, ASIC contends they should be treated as in privity with the parties (Ann Street and York Street) because Mr Carey was not only the major shareholder of the group but also was the ultimate owner of all of the issued share capital of WPC, the company that intervened in the proceedings.  As an alternative argument ASIC contends that the cross-claimants have an identity of interest sufficient to establish privity.   

26                                          I think the cases are against ASIC.  First of all WPC was not a party to the winding up proceeding in any real sense.  In Corporate Affairs Commission v Bradley [1974] 1 NSWLR 391, 396 the court said that a “person accepted as an intervener becomes a party to the proceedings with all the privileges of a party”.  But WPC was not accepted as an intervener that ought to be accorded all the privileges of a party.  First of all, it did not ask for that.  It asserted an interest in the proceedings in its capacity as a contingent creditor:  it was a guarantor of certain of York Street’s obligations.  A contingent creditor is entitled to be heard on a winding up application:  Re Gasbourne Pty Ltd [1984] VR 801, 830.  That does not convert its status to that of a party.  Secondly, WPC only sought an adjournment of the hearing.  It made no submission about the merits of either application.  That is to say, it did not seek, and was not given, leave (if leave was required) to fully participate at the hearing.  On no view could it be said to be a party for purposes of issue estoppel. 

27                                          The issue of privity is more complex.  Ramsay v Pigram (1968) 118 CLR 271 involved a collision between a vehicle driven by a police officer and a second vehicle driven by a member of the public.  The police officer sued the driver for negligence and succeeded.  Later the driver sued the nominal defendant appointed to represent New South Wales.  The nominal defendant pleaded issue estoppel as an answer to the action.  The High Court held that there was no privity of interest between the police officer and the nominal defendant.  Barwick CJ said (at 279) that there were three classes of privies - of blood, of title and of interest.  He went on:  “The basic requirement of a privy in interest is that the privy must claim under or through the person of whom he is said to be a privy”.  Taylor J cited (at 287) the following passage from Taylor’s Treatise on the Law of Evidence, 12th ed (1931) with approval: “In all the instances of privity [in interest] … the privy has claimed, or been liable, under or through the original party …”

28                                          A broader view of privity is taken in the United States.  Courts in that jurisdiction have not adopted a unified definition of “privity”.  Rather, reliance is placed on specific relationships that justify preclusion.  For the most part, the underlying theory is that for a non-party to be precluded he must have had adequate notice of the proceedings, the opportunity to be heard, his rights and interests must have been protected and he must in fact be adequately represented by the parties:  Pennington v Snow 471 P 2d 370, 375-376 (Alaska, 1970).  In other words, a person who is not a party to an action but is so connected with a party by his interest in that litigation, and by his right to participate therein or control the litigation, will be bound by the judgment:  47 American Jurisprudence 2d Judgments, § 593 (2006).

29                                          The United States courts have developed specific rules governing the preclusion of officers and shareholders of companies that are a party to litigation.  For example, where a closely held corporation (i.e. a corporation in which one or a few persons hold substantially the entire ownership) is a party to litigation, its shareholders and directors may be in privy with the corporation and, accordingly, bound by the determination of issues as against the corporation:  see Restatement (Second) Judgments § 59 (1982); Jordache Enterprises Inc v National Union Fire Insurance Company of Pittsburgh 513 SE 2d 692, 707 (WVa 1998) (“[P]rivity … is a broad concept requiring courts to carefully consider all the circumstances of a given case in order to determine whether a nonparty actively participated in or controlled the first litigation or had such an identity of interest with a party to the first litigation that his interests were adequately represented”); North Atlantic Distribution Inc v Teamsters Local Union 497 F Supp 2d 315, 321 (DRI 2007) (“[A]s a rule, privity ‘exists … if a nonparty either substantially controlled a party’s involvement in the initial litigation or, conversely, permitted a party to the initial litigation to function as his de facto representative’” citing Gonzalez v Banco Cent Corp 27 F3d 751, 758 (1st Cir 1994)); Kreager v General Electric Company 497 F 2d 468, 471 (2nd Cir 1974) (“[T]he court correctly concluded that Kreager, as the sole shareholder of Mercu-Ray, was bound by the dismissal of the first action brought in the name of his corporation”); Marine Midland Bank v Slyman 995 F 2d 362, 365 (2nd Cir 1993) (“Privity requires ‘identity of interest through succession to the same property rights involved in the prior litigation’ … As officers, directors, sole shareholders, and guarantors of Accurate, the Slymans’ interests in litigating Accurate’s indebtedness in the Ohio action were sufficiently identical to establish privity”).  

30                                          The United States approach is attractive, it being based on notions of practicality as well as on fundamental fairness: Bismarck Public School District Number One of Burleigh County v Hirsch 136 NW 2d 449, 453 (ND 1965). It is not, however, an approach that can be applied in this jurisdiction.  In Trawl Industries of Australia Pty Limited (In liquidation) v Effem Foods Pty Limited (1992) 36 FCR 406 Gummow J referred to similar United States authorities but observed they were inconsistent with Ramsey v Pigram. He said (at 417):  “[A]ny introduction of doctrines developed in the course of this century in the United States is for the High Court, after reconsideration of Ramsey v Pigram.”  On appeal the Full Court was of the same opinion:  Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (Receivers and Managers Appointed – In liquidation) (1993) 43 FCR 510, 528 (“[T]he state of law in Australia is not consonant with developments of the law, in this respect, in the Unites States of America”).

31                                          Next, ASIC’s abuse of process ground will be considered.  Unlike issue estoppel which requires an identity of parties, an abuse of process may prevent a person from making a collateral attack on a judgment in an action with a different party.  For instance, sometimes a person who has had a full opportunity to present his whole case will not be permitted to reargue the case.  In Hunter v Chief Constable of the West Midlands Police [1982] AC 529 (the Birmingham Bombers case) the accused had been convicted of murder based on alleged confessions made during interviews with the police.  At trial, the accused contested the confession contending they been obtained under duress.  Following a voir dire the confessions were admitted into evidence.  Further, the jury must have rejected the evidence of the accused concerning the assault because they were convicted of murder.  Thereafter Hunter, one of the accused, sued the police for assault.  His action was struck out.  Lord Diplock (with whom the other Law Lords agreed) acknowledged there was no issue estoppel.  Nevertheless, the collateral attack on the jury’s verdict was not permitted because it was an abuse of process in that the proceedings constituted a collateral attack upon a final decision which had been made by a court of competent jurisdiction in previous proceedings in which Hunter had had a full opportunity to contest the decision:  Hunter at 541.

32                                          The basis of the decision in Hunter is that a person is not to be permitted to litigate a second time what has already been decided against him in another case.  The principle cannot be applied here.  This is not a case in which a party seeks to re-litigate an issue that he has already argued and lost.  This is a case where a person is seeking to raise an issue for the first time which has been dealt with in litigation between other parties.  It is an argument that another party (ASIC) has previously argued successfully.  The cross-claimants intend to challenge that finding on substantially different evidence.

33                                          Although Hunter cannot be called in aid, it may still be an abuse of process to mount the cross-claim.  For example, if a person stands by and waits to see the outcome of a case in which he has a distinct interest without making himself a party, he is be bound by the result and is not allowed to re-open the issue in another piece of litigation.  This principal is derived from the speech of Lord Penzance in Wytcherley v Andrews (1871) LR 2 P&M 327, 328; cited with approval in Nana Ofori Atta II v Nana Abu Bonsra II [1958] AC 95, 102.   

34                                          More generally, it may be accepted that any attempt to re-litigate an issue may be an abuse.  But there must be some “special reason” that prevents a person raising an issue that has been decided by another court but by which he is not strictly bound:  Bragg v Oceanus Mutual Underwriting Association (Bermuda) Ltd and CE Health & Co (Marine) Ltd [1982] 2 Lloyd’s Rep 132, 138.  Hence, in Bradford & Bingley Building Society v Seddon Hancock [1999] 1 WLR 1482, 1492 Auld LJ said the mere attempt to re-litigate does not necessarily give rise to an abuse of process.  Some additional element is required, such as a collateral attack on a previous decision as in Hunter, some dishonesty, or successive actions amounting into unjust harassment:  Bradfordat 1493.

35                                          Here there is no special reason.  From the perspective of the cross-claimants, assuming they were accorded standing in the winding up applications to oppose the order sought (a matter of some doubt), nothing was to be gained by challenging insolvency at the date of filing.  By the time the cases were heard, both companies were plainly insolvent.  If the winding up applications had failed for want of proof of insolvency as at the date of filing, it is inevitable that ASIC would have brought further applications to have the companies wound up.  Those applications could not have failed.  Short of issue estoppel or res judicata in the strict sense, there is no policy reason that would prevent a person now contesting an issue that had not been contested in previous litigation because there was then no point in doing so.

36                                          It is now convenient to deal with the cross-claim against the Commonwealth.  The Commonwealth seeks to strike out, or have entered in its favour judgment in respect of, the presently made claim that it is vicariously liable for the acts of ASIC.  The cross-claimants concede that this claim as currently pleaded is defective.  They have, however, formulated amendments to the cross-claim and seek leave to re-plead.  Under the proposed amendments, the cross-claimants wish to pursue a claim under s 8A of the ASIC Act 2001 (Cth).  Section 8A provides that any “financial liabilities of ASIC are taken to be liabilities of the Commonwealth”.  In effect, what the cross-claimants seek is to be able to obtain judgment against the Commonwealth in respect of any damages they may recover in their claims against ASIC. 

37                                          Section 8A was introduced in the following circumstances.  Several statutory authorities, including ASIC, the Australian Prudential Regulation Authority (APRA) and the Corporations and Markets Advisory Committee (CAMAC), conducted their activities independently of the executive in various respects.  These authorities could purchase and dispose of property in their own right and enter into other contracts in furtherance of their functions.  Following the publication in June 2003 of the Review of the Corporate Governance of Statutory Authorities and Office Holders (known as the Uhrig Review), the Commonwealth announced that the management of these authorities would be altered as part of broader exercise to improve transparency and consistency in relation to governance arrangements for statutory authorities and office holders.  One aspect of the Commonwealth’s proposal was to transfer ASIC, APRA and CAMAC from the Commonwealth Authorities and Companies Act 1997 (Cth) to the Financial Management and Accountability Act 1997 (Cth).  The change was brought about by Schedule 1 of the Governance Review Implementation (Treasury Portfolio Agencies) Act 2007 (Cth) with effect from 1 July 2007. 

38                                          Under the new regime, ASIC: (a) holds its assets on behalf of the Commonwealth rather than in its own right; (b) has power to enter into contracts on behalf of the Commonwealth; and (c) retains the power to enter into contracts on its own behalf, but only for regulatory purposes: ASIC Act, s 8; Explanatory Memorandum to the Governance Review Implantation (Treasury Portfolio Agencies) Bill 2007, [2.3] - [2.4].  At the same time the Commonwealth became responsible for meeting ASIC’s liabilities by the new s 8A. 

39                                          The question of construction that arises on the proposed amendments to the cross-claim is whether s 8A, which imposes an obligation on the Commonwealth to make good ASIC’s liabilities, establishes a right in favour of the person to whom ASIC is liable. The answer to the question is not clear.  It is not, however, a question I will permit the cross-claimant to pursue.

40                                          In a practical sense the question is academic. The Commonwealth has made it clear (not that there could be any doubt about it) that if ASIC suffers a judgment at the suit of the cross-claimants, the Commonwealth will stand behind that judgment.  In other words, as one would expect, the cross-claimants will suffer no disadvantage if they are unable to pursue their claim against the Commonwealth.

41                                          Why then do they wish to proceed with the claim?  My suspicion (and it is no more than that) is that they wish to avoid suffering a costs order when their current cross-claim is struck out, as it is conceded it must be.  Whatever be the reasons, in my view no useful purpose is served by allowing the proposed cross-claim to proceed.  To the contrary, it will involve the parties incurring legal costs, for no useful purpose, at least between these parties.  I will refuse leave to amend the cross-claim.   

42                                          This brings me to the dispute between Ann Street and Mr Carey concerning his defence.  Ann street seeks to have struck out those paragraphs (namely paragraphs 74A, 75A, 76A, 77A, 78A, 79A and 99A) which mirror the cross-claim against ASIC and, in which Mr Carey contends that any damage suffered by Ann Street was caused by ASIC and not by any of the defendants.

43                                          Mr Murdoch QC (who appeared with Mr Batt and Mr Archibald) made the short but prima facie powerful point that this part of Mr Carey’s defence is simply not responsive to the claim.  Notwithstanding the force of the submissions, I will not strike out those parts of the defence.  There are two reasons.  First the issues raised by the defence are to be litigated in the claim against ASIC.  It is not uncommon for a strike out application to be refused when it will not change the course of the trial:  Imobilari Pty Ltd (ACN 091 464 729) v Opes Prime Stockbroking Ltd (in liq) (recs and mgrs apptd) (ACN 086 294 028) (2008) 252 ALR 41, 48.  Second, it is possible that Mr Carey may establish that the money paid to WPC was not lost (ie irrecoverable) until the collapse of the group which, according to Mr Carey, was caused by the winding up applications.  In particular, while the evidence may show the directors breached their duties by allowing the funds that had been raised to be paid to WPC, for purposes of determining what damages flow from those breaches regard may had to later events:  Target Holdings Ltd v Redferns (A Firm) [1996] 1 AC 421, 437 (“But the fact that there is an accrued cause of action as soon as the breach is committed does not in my judgment mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred.”); see also Youyang Pty Ltd  v Minter Ellison Morris Fletcher (2003) 212 CLR 484.

44                                          Finally I have to deal with the costs of each application.  The losing party will pay those costs.  Although the Commonwealth asks that its costs be paid on an indemnity basis, and have referred me to all the leading cases, I am not persuaded such an order should be made.  While the cross-claimants’ conceded that they could not support the existing cross-claim, that does not result in indemnity costs.  Further, the potential argument about s 8A, albeit academic, was not without interest. 

45                                          Ann Street should bring in minutes of order to give effect to these reasons. 

Associate:

Dated:              9 April 2009

SCHEDULE OF PARTIES

ORIGINAL PROCEEDING

CROSS-CLAIM