FEDERAL COURT OF AUSTRALIA
NAVEEN DAVID SINGH
XALT PTY LTD ACN 147 571 033 (and others named in the Schedule)
DATE OF ORDER:
THE COURT ORDERS THAT:
2. Costs be reserved.
3. The plaintiff file and serve any final application for leave to amend by 5 November 2019.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
1 The plaintiff, KTC, seeks leave to file and serve a further amended statement of claim. This is opposed by the fourth defendant, the law firm comprising partners trading under the business name Gilbert + Tobin (‘G+T’) and the fifth defendant, Mr Bullock, who was at the times relevant to this litigation, but no longer is, a partner of that firm. Where I refer in these reasons to G+T, it should be taken to include Mr Bullock unless otherwise indicated.
2 The case pleaded against G+T is said to lie under the second limb of the so-called rule in Barnes v Addy (1874) LR 9 Ch App 244 (‘Barnes v Addy’). A previous attempt to plead such a case was struck out by Kunc J in the Supreme Court of New South Wales before that proceeding was transferred to this Court: KTC v David (No 1)  NSWSC 281 (‘KTC (No 1)’). At that time leave to replead was granted. It is the adequacy of that repleading which now falls to be determined.
3 The proposed further amended statement claim was annexed to the interlocutory application filed by KTC on 26 April 2019. Before turning to the particular pleading problems, it is useful to explain the detailed allegations made in it.
Background to the dispute as pleaded
4 In around mid-2008, Charif and Tarek Kazal (‘the Kazals’) entered into a joint venture with the first defendant, Rodric David, in which they would each have respectively a 50% interest. The purpose of the joint venture was to invest in businesses with a particular focus either on businesses located in the United Arab Emirates and/or engaging in waste management and disposal. Mr David was to act as the manager of the joint venture. The joint venture vehicle was to be a Cayman Islands company, Emergent Capital Limited (‘Emergent’). The Kazals held their interest in the joint venture vehicle through their entity, the present plaintiff KTC, and Mr David held his through his entity RAAL Limited (‘RAAL’). KTC alleges that there was a joint venture agreement but this is not alleged to have been in writing. A number of terms are alleged in this agreement including that the Kazals and Mr David would be equally represented on the board of Emergent and that Mr David (and RAAL) would provide services to Emergent as necessary for its day to day operations.
5 It is then alleged that the joint venture vehicle Emergent invested in another joint venture with an Abu Dhabi developer. Ultimately, this investment was conducted through an entity called IPS (International Property Services) Limited. Emergent also invested in a waste management facility at Eastern Creek in Sydney (‘the Waste Facility’). It is alleged by KTC that it was Mr David who managed Emergent’s interests in these two businesses.
6 Originally, the directors of Emergent were Mr David on the one hand and the Kazals on the other. However, the Kazals between them had only one vote. Mr David acted as chairperson and also as chief executive officer. KTC and RAAL held the equity in Emergent in equal shares.
7 Returning then to the Waste Facility, it is alleged that in August 2008 the Kazals and Mr David identified it as a suitable investment. At that time, that business was being conducted by several entities all ultimately owned by Global Renewables Australia Pty Limited (‘GRA’). Its managing director was Mr Singh, the second defendant to this proceeding. The pleading does not spell this out but there appears to have been a business proposal between Mr Singh and Mr David for Emergent and Mr Singh to form an entity to acquire GRA. This entity was known as Global Renewables Limited (‘GRL’). GRL was owned as to 80% by Emergent and as to 20% by Mr Singh’s vehicle, Singh Investments Pty Limited (‘SIL’). GRL acquired all of the shares in GRA on or about 21 January 2009 for $1. Although the pleading does not appear to allege this, there is material which suggests that GRL also took over GRA’s debt to the Commonwealth Bank of Australia.
8 There are then a number of allegations which are not necessary to recite in any detail but whose bottom line may be summarised in this way: the operation of the Waste Facility required funding which was provided by Mr David and RAAL through Emergent. It was Mr David who injected his funds into Emergent in a variety of ways over time. By 13 November 2009, RAAL claimed that Emergent owed it $5.8 million as a result of these advances. At this point there appears to have been some friction between the Kazals and Mr David about the desirability of them putting in some of KTC’s money or, if not, of increasing RAAL’s interest in Emergent to reflect the fact that Mr David was putting his hand in his pocket whereas the Kazals were not. In June 2009, Mr David had caused to be drafted a proposed memorandum of understanding between RAAL and KTC under which some of the money advanced by RAAL to Emergent was to be acknowledged by KTC. More importantly, under the proposed memorandum of understanding KTC would agree to cause Emergent to transfer 80% of its shareholding in GRL to RAAL for consideration of $1, which would then be transferred to KTC if it injected $2 million into Emergent before 1 September 2009. Mr David signed the memorandum on or around 17 June 2009 but the Kazals refused to execute it, eventually making this clear on or around 13 November 2009. Interpolating, at this point, the scene was set for a shareholder dispute between the Kazals and Mr David.
9 The draft memorandum itself had been prepared by G+T who had been retained by GRL. Subsequently, in November 2009, G+T advised RAAL and Emergent (inter alia) on how the proposed memorandum of understanding might otherwise be given effect to since the Kazals would not execute it. It is alleged that this involved the appointment of a Mr Mavromanalakis to the board and the idea of swapping some of RAAL’s debt for equity in Emergent. Mr Mavromanalakis was appointed to the board on 13 November 2009 which was, it might be noted, the same day that the Kazals said they would not execute the proposed memorandum of understanding. On 20 January 2010, RAAL and Emergent executed a loan agreement which recorded advances by RAAL to Emergent of $5,837,009.04. The following day, 21 January 2010, RAAL demanded payment of US$49,000 from Emergent (a much smaller amount) and informed Emergent that if this sum was not paid within seven days then it would accept payment instead in the form of 49,900 shares in Emergent.
10 The Kazals deny being aware of this demand. There was a meeting of the directors of Emergent on 28 January 2010, that is to say, at the exact time the seven-day period in RAAL’s demand expired. The Kazals say that they were not aware that at this meeting there would be under consideration the proposal that Emergent issue 49,900 shares to RAAL in consideration of the satisfaction of Emergent’s indebtedness to RAAL. The only persons at the meeting were, in fact, Mr David and Mr Mavromanalakis and the meeting itself was conducted by telephone. Both voted in favour of the resolution. Consequently, KTC’s interest in Emergent was reduced from 50% to 0.1% and RAAL’s correspondingly increased from 50% to 99.9%. However, because the debt to RAAL was $5,837,009.04, this debt for equity swap—whilst transforming the share register of Emergent—only reduced Emergent’s debt to RAAL by 0.93%. If true, RAAL kept almost all of its debt and obtained almost complete control of the company. It is a transaction which might well cause eyebrows to be raised but, if the allegations be correct, as will be seen, it has done more than that.
11 KTC says that the Kazals became aware of this transaction on 18 March 2010 and that Mr David and Mr Mavromanalakis voted to remove them as directors on 29 March 2010.
12 A large number of transactions are then alleged to have occurred but their detail can be omitted. Their terminus is that the Waste Facility passed through several hands and that Mr Singh made a very large profit. In subsequent proceedings between KTC and RAAL in the Grand Court of the Cayman Islands, it was held that the debt for equity swap brought about by Mr David and RAAL was done in breach of fiduciary duty.
The pleaded claim against G+T
13 As I have said, the claim against G+T is made under the second limb of the rule in Barnes v Addy. KTC alleges, in essence, that G+T knowingly assisted RAAL and Mr David’s breaches of fiduciary duty in providing legal advice to the effect that it would be lawful for Emergent to undertake a debt for equity swap, and in preparing documents necessary to effect the transaction. In the earlier pleading debate which occurred between the parties in the Supreme Court, Kunc J summarised the relevant principles in this way (KTC (No 1) at ):
The adequacy of the pleading against Mr Bullock must be measured by reference to these fundamental propositions in relation to the cause of action alleged:
(1) Where there has been no actual receipt of property, a defendant will be liable to the object of a fiduciary obligation:
(a) If the defendant knowingly procures or induces a breach of the fiduciary duty; or
(b) If the defendant:
(i) assists in;
(ii) a breach of fiduciary duty;
(iii) with knowledge that;
(iv) the breach was a dishonest and fraudulent design;
(2) Because equity looks to conscience, it must be the case that where it is alleged that the defendant procured or induced a breach of fiduciary duty, the defendant must have known that what the defendant was doing was to bring about such a breach …
(3) The “assistance” must be “facultative conduct or activity which is more than mere knowledge or notice of breach of duty” …
(4) “Knowledge” must be at least one of four kinds … :
(a) actual knowledge;
(b) wilfully shutting one’s eyes to the obvious;
(c) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
(d) knowledge of circumstances which would indicate the facts to an honest and reasonable man.
The first three types of knowledge are sometimes referred to as “actual knowledge” and the last as “constructive knowledge”.
(5) Avoiding argument over what is fraud, the fiduciary’s breach of duty must also be dishonest in the sense that it is a transgression of ordinary standards of honest behaviour …
(6) An allegation of knowledge of a dishonest and fraudulent design is a serious matter which must be fully pleaded and particularised and proven by reference to what is still referred to as the Briginshaw standard, now enacted in s 140 of the Evidence Act 1995 (NSW).
14 It was not suggested that this distillation of principle was incorrect. The case does not involve any allegation that G+T procured a breach of fiduciary duty so (1)(a) laid out above may be put aside. It is then necessary to move to (1)(b).
15 One begins with the relevant dishonest and fraudulent designs. For the purpose of the rule in Barnes v Addy KTC alleges that G+T knowingly assisted two of RAAL’s designs and two of Mr David’s. The pleading mechanics of each of these are substantially the same and attention for the purposes of the present pleadings argument may largely be confined to the one the pleader has somewhat inelegantly termed the ‘Second Fraudulent Design of RAAL’. It is defined at ¶99B of the proposed further amended statement of claim to be the allegations contained at ¶¶99(b) and (c). That allegation is this (with the formatting below and elsewhere in these reasons reflecting KTC’s proposed amendments):
99. Further, RAAL
By reason of the conduct referred to in the preceding paragraph, RAAL engaged in a dishonest and fraudulent design whereby it:
(b) obtained the Share Issue to effectively eliminate KTC’s interests in ECL and pass ownership of ECL to RAAL without any proper regard to ECL’s interests insofar as ECL remained a debtor of RAAL in respect of a sum in excess of AUD5.8 million and only 0.93% of RAAL’s debt having been converted to equity;
(c) obtained sole control and asserted total effective beneficial ownership of ECL for the purpose of:
(i) benefitting itself by procuring 99.9% of the value of ECL and any proceeds of the sale of ECL’s shareholding in GRL;
(ii) improving its position in respect of the Unsecured Advances in the absence of any legal entitlement beyond that of an unsecured creditor of ECL.
16 The questions which now arise are broadly concerned with whether it is sufficiently alleged that G+T assisted in a breach of fiduciary duty with knowledge that the breach was a dishonest and fraudulent design, where knowledge means actual knowledge or constructive knowledge (i.e. knowledge of circumstances which would indicate the facts to an honest and reasonable person). G+T raised a number of issues with the proposed amendments, but their objections were not enumerated. KTC attempted to distil those issues to a list of 13, but they fell broadly into two categories: first, knowledge of a dishonest and fraudulent design; and secondly, underlying fiduciary duties.
Pleading of knowledge of a dishonest and fraudulent design
Has KTC pleaded that the breaches of fiduciary duty were part of a dishonest and fraudulent design?
17 G+T submits that the breaches of fiduciary duty pleaded against Mr David and RAAL do not include an allegation that the breaches were part of a dishonest and fraudulent design. This is partly correct. KTC has alleged at ¶99B(b) that the matters in ¶¶99(b) and (c) were such that they ‘transgressed ordinary standards of honest behaviour’. However, whilst it is true that the pleader has in ¶99B defined the allegations in ¶¶99(b) and (c) as the ‘Second Fraudulent Design of RAAL’, nowhere does the pleader actually allege that the design was fraudulent. In that regard, it is worth noting that an allegation that the design was fraudulent is not made merely by including the word ‘Fraudulent’ in the name of a defined term.
18 Accordingly, this is not an actual pleading of a dishonest and fraudulent design. It was said by KTC that it was a question for trial whether this would amount to a dishonest and fraudulent design. I do not agree. The case that KTC is seeking to prove will require it to prove that the breaches of fiduciary duty were part of a dishonest and fraudulent design. This must be explicitly pleaded.
19 It may be said, perhaps, that the standard it posits—that it ‘transgressed ordinary standards of honest behaviour’—amounts to the same thing. However, this is not obvious and the fact is that KTC needs to make the allegation of a dishonest and fraudulent design. I can see no reason why it should be relieved of its obligation to make this central allegation.
20 Accordingly, I will not permit the current form of the pleading in this regard but, all other things being equal, I would think it appropriate to permit KTC one further opportunity to make this central allegation in proper form. I return to the nature of this further opportunity later in these reasons at .
Does the pleading allege that G+T knew that the breaches of fiduciary duty were part of a dishonest and fraudulent design?
21 On the assumption that KTC can, in a fresh attempt, make the allegation that the breaches of fiduciary duty were part of a dishonest and fraudulent design, it would then be necessary for KTC to meet G+T’s further complaint that the current form of the pleading does not allege that G+T had the requisite knowledge of the dishonest and fraudulent designs.
22 At ¶¶139(a) and (b) KTC alleges that G+T knew of two matters which are almost textually identical to the two matters in ¶¶99(b) and (c) (and therefore which do not need to be set out). The effect of this is that without saying it, ¶¶139(a) and (b) do in fact allege knowledge of the concept which is the Second Fraudulent Design of RAAL. This is certainly a clunky way of pleading but that does not make it demurrable. KTC also alleges at ¶139(c) that G+T knew these matters were breaches of fiduciary duty. However, it does not allege that G+T had actual knowledge that the design was dishonest and fraudulent. The problem is that is that the pleader has not used that allegation in the formulation of G+T’s knowledge at ¶¶139(a) and (b). If ¶139 picked up what might ultimately become a corrected form of ¶99B then this problem would not arise but the pleader has not done that. I think this is likely because the pleading shows so few signs of clear thinking that the pleaders have become lost in their own house of mirrors.
23 In its written submissions at ¶52 KTC accepted that this view of the knowledge problem was one at which the Court might arrive and, if it did, indicated its willingness for such an allegation to be added in the form of a proposed ¶139(d) as follows:
the actions taken by both RAAL and David in respect of the matters set out in paragraphs 99(b) and (c) (as to RAAL) and 109(b) and (c) (as to David) transgressed ordinary standards of honesty.
24 On the assumption that the next version of the pleading contains an allegation that the breaches of fiduciary duty were part of a dishonest and fraudulent design I would permit the pleading to go forward only if an allegation that G+T knew of this is made. Conceptually this is not difficult to follow. The proposed form of ¶139(d), without a similarly clear allegation, seems to me to invite further complaint. Later in these reasons, I comment adversely on the quality of the proposed further amended statement of claim from a drafting perspective.
Is the allegation that G+T knew of dishonest and fraudulent design inconsistent with the absence of an allegation that it knew that its advice that the debt for equity swap was lawful was wrong?
25 G+T submits that KTC now wishes to run a case against it for performing the very services they were retained to perform. In particular, G+T submits that KTC now seeks to say that the legal advice which G+T gave was wrong because the share issue allegedly involved a breach of fiduciary duty owed by Mr David (and RAAL) to KTC.
26 This is not quite what the proposed pleading says. Again displaying the pleader’s fetish for defined terms, ¶134 defines the ‘G+T Advice’ in such a way that it includes much which was not advice and, significantly, contains little to no actual allegation about what the advice was. This is a recipe for confusion. The G+T Advice is alleged to have had 13 elements to it. Only ¶¶134(g) and (h) contain an allegation about the actual advice proffered by G+T. They are as follows:
Between 11 November 2009 and about 29 January 2010 pursuant to the GRL Retainer Bullock and G+T provided legal services to David, RAAL, ECL and GRL in relation to a swap of RAAL’s debt in ECL for shares in ECL which culminated in the Resolution and the Share Issue (which advice is set out in paragraph 134 below) (G+T Advice) as follows:
(g) In the course of a meeting in or about November 2009 between David, Mavro and Bullock, Bullock advised that ECL’s indebtedness to RAAL could be converted into a share issue to RAAL.
The meeting was in Sydney at either G+T’s office or ECL’s office.
(h) In the course of a meeting in or about December 2009 between David, Mavro and Bullock, Bullock advised that:
(i) David had to do everything possible to protect ECL so as to protect David’s investment in ECL;
(ii) the only available action to ECL was for RAAL to demand repayment of its loans to ECL and when no payment was made to dilute KTC’s shareholding; and
(iii) that such action was the right thing and the legal thing to do.
The meeting was conducted over pre-dinner drinks and dinner at a pub restaurant in the Surry Hills area of Sydney.
27 It may be accepted that this was advice that the debt for equity was swap was lawful and, I think, by extension that it did not involve Mr David or RAAL in a breach of fiduciary duty. The remaining subparagraphs of ¶134 although defined to be ‘advice’ do not concern advice at all and may be disregarded in the interests of maintaining sanity. The pleading does not directly allege that the advice at ¶¶134(g) and (h) was wrong. However, it does allege at ¶139(c) that G+T did know that the debt for equity swap involved a breach of fiduciary by RAAL. It is an inescapable inference from that proposition that it knew its advice was wrong. One cannot simultaneously believe that advice that a transaction is lawful is correct if one at the very same time knows that the transaction involves a breach of fiduciary duty.
28 G+T is therefore not correct that KTC merely alleges that the advice was wrong. It does not do so. Further, it has no need to do so. Subject to the matters I have dealt with above, it is sufficient that it alleges (in the various ways it has or will) that G+T knew that Mr David and RAAL were acting in breach of fiduciary duty as part of a dishonest and fraudulent design. That is to say, there is a difference between an allegation that advice was wrong and an allegation that the adviser knew in providing the advice that the advice was wrong.
29 Despite the obvious stylistic deficiencies in the pleading, there is no merit in G+T’s point about this.
Does the pleading sufficiently allege that G+T knew that RAAL and Mr David were acting pursuant to a dishonest and fraudulent and design?
30 The relevant paragraphs of the proposed further amended statement of claim are ¶¶137-139(c):
137. By reason of:
(a) the G+T Advice;
(b) the fact that the Draft Letter did not:
(i) include any statement that David or RAAL intended to cause ECL to make the Share Issue in the near future or at all;
(ii) include any statement that a share issue would be made for less than 0.93% of the debt owed by RAAL with the consequence that KTC would own less than 0.1% of the shares in ECL;
(iii) include any statement that Mavro was of the view that if there was not a share issue then ECL would have to be wound up in insolvency;
(iv) include any statement that Mavro supported David in respect of his intention to make the Share Issue,
(c) the fact that Bullock did not inform David that the Draft Letter ought include the matters set out in paragraphs 137(b)(i) to (iv),
Bullock and G+T had actual knowledge of the matters referred to in paragraph 22B(c) to 22E.
138. Further, in providing the G+T Advice Bullock did not advise David to obtain a valuation of shares in ECL and David did not inform Bullock that he relied upon any valuation.
139. By reason of the G+T Advice and the matters referred to in paragraphs, 28A to 28E inclusive, 137 and 138 G+T and Bullock knew:
(a) the Share Issue and the consequence that it effectively eliminated KTC’s interest in ECL and passed ownership of ECL to RAAL without any proper regard to ECL’s interests insofar as ECL remained a debtor of RAAL in respect of a sum in excess of AUD 5.8 (only 0.93% of RAAL’s debt having been converted to equity);
(b) RAAL had obtained sole control and ownership of ECL for the purpose of:
(i) benefitting itself by procuring 99.9% of the value of ELC and any proceeds of the sale of ECL’s shareholding in GRL;
(ii) improving its position in respect of the Unsecured Advances in the absence of any contractual entitlement beyond that of an unsecured creditor;
(c) that the actions taken by both RAAL and David in respect of the matters set out in paragraphs 99(b) and 99(c) (as to RAAL) and 109(b) and (c) (as to David) constituted breaches of fiduciary duty.
(Errors in original.)
31 To an extent, I would accept what I think is the substance of G+T’s point about this which is that none of these matters really go directly to actual knowledge of G+T. For example, the reference to the ‘G+T Advice’ in ¶137(a) is a cross-reference to ¶134 which contains a collection of either anodyne allegations (such as that G+T prepared an action plan to give effect to the memorandum of understanding) or, even less helpfully from KTC’s perspective, to allegations such as that at ¶134(h)(iii) that G+T advised that the transaction was the ‘right thing and the legal thing to do’. It is difficult to see how these allegations can advance a case that G+T knew that Mr David and RAAL were acting in breach of fiduciary duty as is alleged at ¶139(c). A similar point may be made about ¶138: how does the fact that G+T did not advise on obtaining a share valuation directly advance a case that G+T knew about a fraudulent design?
32 But the matter is perhaps not so straightforward as G+T’s submission would suggest. The allegation at ¶138 that G+T did not advise that a valuation of the shares be obtained may be consistent with it emerging at trial that G+T did not obtain a share valuation because it knew what would become clear if it did and this, in turn, may be seen as a species of wilful blindness. Another aspect of it may be that proof of the facts of the transaction reveal a transaction so inappropriate that it should be inferred that Mr Bullock was part of it since no reasonable solicitor could have advised as he did. Another form of this may be this syllogism: only someone who had no idea what they were doing would advise this transaction was lawful; Mr Bullock is not such a person; ergo Mr Bullock must have been fully aware of the inappropriate nature of the transaction.
33 I do not for a moment mean to suggest that this is in fact the case—to be clear I have no view—it is merely to observe that ¶¶137-139 may play out in various ways at trial. I think it is therefore possible that these allegations could sustain the allegations at ¶¶140-141:
140. Alternatively, by reason of the G+T Advice and the matters referred to in paragraphs 28A to 28E inclusive, 137 and 138 G+T and Bullock knew of circumstances that an honest and reasonable person would have taken to have indicated facts constituting the matters set out in paragraph 139.
141. Alternatively, G+T and Bullock wilfully shut their eyes to the matters referred to in paragraphs 139.
34 Consequently, I do not accept G+T’s submission that these paragraphs are not sufficient to make the allegation. Subject to the earlier matters to which I have referred being attended to I do not think that these allegations against G+T should be dismissed summarily before trial. There is something quite striking about these transactions and one’s interest can only be piqued by the fact that G+T is alleged to have advised that it was lawful. There is a trial to be had here.
35 This part of the case as pleaded is not without difficulty but, when all is said and done, the transaction which Mr David and RAAL effected is striking in its obvious impact on the Kazals. One can readily imagine all kinds of possible answers—for example, that it was not fair for Mr David to be funding the whole enterprise without the Kazals contributing some form of capital—but this strikes me as a trial question and not a pleading question.
Has KTC neglected to allege that G+T knew of any or all of the matters in ¶99B(b)(i)-(iv) or that the matters in ¶¶99(b) and (c) were known by G+T to be dishonest?
36 G+T also submits that the pleader has not alleged that G+T had knowledge of any or all of the matters pleaded at ¶99B(b)(i)-(iv). Subparagraph 99B(b) in its entirety is as follows:
(b) says that each of the actions set out in paragraphs 99(b) to (s) inclusive transgressed ordinary standards of honest behaviour insofar:
(i) the acts referred to in paragraphs 99(b) to (g) were carried out:
A. for the purpose of controlling ECL absent any legal right to do so;
B. in the knowledge that they did not materially improve the financial position of, or otherwise benefit, ECL;
C. in the knowledge that RAAL did not intend to enforce payment of the Unsecured Advances at the time because it had no intention that ECL become insolvent or subject to a winding-up;
(ii) by the act referred to in paragraph 99(h) RAAL consciously exploited the fact that it had not informed KTC of the Share Issue;
(iii) the acts referred to in paragraphs 99(i) to (k):
A. were intended to, and did in fact, provide David, RAAL, Singh and SIL with complete control of GRL, and effectively, all equity in GRL, to the exclusion of KTC; and
B. were carried out in the knowledge that KTC was denied any opportunity to participate in the acts or effectively oppose them;
(iv) the acts referred to in paragraphs 99(l) to (s) were intended to, and did in fact, provide control of the sale process in respect of the shares in GRL to the exclusion of KTC;
(v) all of the acts set out in paragraphs 99(b) to (s) were undertaken on the basis of the Share Issue which RAAL caused to be made while conscious that the board of ECL acted under false pretences in passing the Resolution insofar as:
A. David persuaded Mavro to vote in favour of the Resolution on the basis that it would avoid the winding up of ECL because of its inability to pay the Unsecured Advances
B. The G+T advice was provided on the premise that RAAL would cause ECL to be wound up in insolvency by RAAL and Mavro relied on the advice;
C. David and RAAL each knew that RAAL had no intention of enforcing any demand for repayment of the Unsecured Advances in circumstances which would cause ECL to be wound up; and
D. David and RAAL each knew that the Share Issue was not in the best interests of ECL and, therefore KTC.
(Hereinafter, the acts referred to in paragraphs 99(b) to (s) are referred to as the First Fraudulent Design of RAAL, the acts referred to paragraphs 99(b) and (c) are referred to as the Second Fraudulent Design of RAAL and the acts referred to in paragraphs 99(i), (j) and (k) are referred to as the Third Fraudulent Design of RAAL, and all of the said designs are referred to together as the Fraudulent Designs of RAAL).
(Errors in original.)
37 There is nothing in this point. As I have already mentioned only four dishonest and fraudulent designs are alleged as having involved knowing assistance on the part of G+T. Using the Second Fraudulent Design of RAAL as an exemplar for the other three designs, it is apparent that the integers in ¶¶99B and 99 which are relevant to that design have been adequately alleged. Subparagraph 99B(b) defines the Second Fraudulent Design of RAAL to be the acts in ¶¶99(b) and (c). At ¶139(c) it is alleged that G+T knew that the acts in ¶¶99(b) and (c) were breaches of fiduciary duty. There remains the difficulty I have already referred to that the pleader has not alleged that G+T knew that the breaches of fiduciary duty were part of a dishonest and fraudulent design. But if that problem is addressed as I have suggested it might be, I do not see any further pleading problem under this heading, at least conceptually. For completeness, I reject KTC’s submission that the only knowledge it must allege is knowledge that there was a breach. It cited Hasler v Singtel Optus Pty Ltd  NSWCA 266; 87 NSWLR 609 at  per Leeming JA but that paragraph does not say that. In fact, it says quite the opposite.
Is there an anachronism in the pleading of the Third Fraudulent Design of RAAL?
38 The acts constituting the Third Fraudulent Design of RAAL are those set out ¶99(i)-(k) (see ¶99B(b) and the corresponding definition above). Subparagraphs 99(i)-(k) are as follows:
By reason of the conduct referred to in the preceding paragraph, RAAL engaged in a dishonest and fraudulent design whereby it:
(i) caused ECL to execute the Second GRL Shareholders’ Agreement, in which it was agreed that GRL would issue 60 ordinary shares to SIL for no consideration, or consideration which was colourable or illusory and did so accordingly, thereby equalising SIL’s shareholding in GRL with that of ECL;
(j) caused ECL to execute the First Side Deed;
(k) caused ECL to execute the Second Side Deed;
39 So the design alleged concerns the execution of these three agreements. The Second GRL Shareholders Agreement, First Side Deed and the Second Side Deed were all dated 23 April 2010 though the date of execution of each is said to be unknown.
40 G+T notes that all of the acts of assistance alleged against G+T were complete by 28 April 2010. So far there would appear to be no problem. But G+T then submits that the matters which are said to have made this conduct dishonest include the fact that the execution of these documents was intended to provide control of the sale process of the shares in GRL to the exclusion of KTC. This was significant so G+T submitted because there was no sale process until Emergent and SIL determined to sell Emergent’s shareholding in GRL in July 2010.
41 Thus it was said that G+T could not have known in April 2010 about a sale process that only commenced in July 2010. I reject this submission. I see no tension between an intention formed in April to do something dishonest and giving effect to that dishonesty in July. It is not foundered upon a ‘quality of unreality’ as was submitted.
42 A similar point was made about the Fraudulent Designs of David which may be disposed of on the same basis.
Has KTC sufficiently pleaded that the knowledge of Mr Bullock and the employees of G+T was the knowledge of G+T?
43 G+T submits that KTC’s plea that the knowledge of G+T included the knowledge of Mr Bullock and all employees of G+T is insufficient. The relevant paragraphs of the proposed further amended statement of claim are ¶¶142 and 151. Paragraph 142 of the proposed further amended statement of claim alleges:
The knowledge of Bullock and all other employees of G+T was knowledge of G+T.
44 Paragraph 151 alleges:
The knowledge of Bullock and all other employees of G+T of the matters referred to in the preceding paragraph was knowledge of G+T.
45 The preceding paragraph, uneventfully, is ¶150. That paragraph contains an allegation referable to ¶¶126 and 147-149 that Mr Bullock had actual or constructive knowledge that the effect of the Second Shareholders Agreement and the two side deeds were executed in circumstances which involved a breach of fiduciary duty by Mr David and RAAL (and also a breach of trust).
46 On the issue of whether the knowledge of Mr Bullock (or any employee as relevant) is to be attributed to the partners of G+T, the question turns on whether the partners of the firm were agents for each other for the purpose of knowledge. This is a difficult area which should not be resolved on a summary basis. The pleading in relation to the partners may stand for trial. I note the proposed new amendments to ¶19 outlined at ¶58 of KTC’s written submissions which would be appropriate in any further iteration.
Pleading of underlying fiduciary duties
47 G+T further submits that the allegation that Mr David and RAAL owed KTC fiduciary duties cannot stand. I reject this submission for a number of reasons. First, Kunc J has already rejected the same argument in KTC (No 1) at , as well as in KTC v David (No 2)  NSWSC 330 at -, on a pleading which was substantially the same. I do not consider that this issue should be endlessly relitigated. Secondly, the factual matrix for the allegation of what is admittedly a novel fiduciary duty is quite complex. It is simply inappropriate for the existence of such duties to be litigated at a summary level, as has been often enough held: Theseus Exploration NL v Foyster  HCA 41; 126 CLR 507 at 514 per Barwick CJ (‘The jurisdiction to give summary judgment should not be exercised “where a difficult question of law is raised”’); Mercedes Holdings Pty Ltd v Waters (No 3)  FCA 236 at .
48 In KTC (No 1) in permitting a further repleading, Kunc J observed that this would be ‘the final opportunity’ to replead. I am not of course bound by this but it is, so it seems to me, a very relevant matter. Be that as it may and despite G+T’s submissions, it seems to me that in principle leave to replead should be granted. Most of the difficulties involved above are curable. However, I am bound to observe that the current pleading is substandard. Many of the points taken against it are understandably taken because the pleading is in many parts simply incomprehensible. It took me an entire week to understand its arcane obscurities. Further, for KTC to go to trial with such a cumbersome and clumsy piece of pleading will only cause the trial to be that much more complex. As currently pleaded, I would expect confusion to reign and for the case to take at least three times as long as it would if it were properly pleaded. The pleading is below the standard which the Court and the other parties are entitled to expect. I believe this was the point Kunc J was trying to make somewhat more politely in KTC (No 1) at - when his Honour said:
Quite apart from the fact that the dispute between these parties has been going on for some years and has already been the subject of the Cayman Islands proceedings, the Court rejects KTC’s general submission as a matter of principle. Although the old forms of action no longer “stand in the path of justice, clanking their medieval chains” (United Australia Limited v Barclays Bank Limited  AC 1 at 29), compliance with UCPR Part 14 in relation to pleading, in particular the need to plead with precision the material facts relied upon to make out the specific causes of action asserted, must be insisted upon.
The Court resolutely rejects an approach to pleading which entails the indiscriminate recitation of large numbers of facts and detailed but insignificant particulars combined with rolled up conclusions, and which is then defended on the basis that at the end of the hearing at least one of the causes of action alleged can be expected to have been established. The “just, quick and cheap” overriding purpose set out in s 56 of the [Civil Procedure Act 2005 (NSW)] is first and foremost satisfied by a clear and properly thought through pleading.
49 It is apparent that urbanities have not been sufficient to communicate to KTC the point about its pleading. I will be forgiven therefore for having been somewhat blunter than would usually be the case.
50 Rule 16.02 of the Federal Court Rules 2011 (Cth) (‘FCR’) states:
Content of pleadings – general
(1) A pleading must:
(a) be divided into consecutively numbered paragraphs, each, as far as practicable, dealing with a separate matter; and
(b) be as brief as the nature of the case permits; and
(c) identify the issues that the party wants the Court to resolve; and
(d) state the material facts on which a party relies that are necessary to give the opposing party fair notice of the case to be made against that party at trial, but not the evidence by which the material facts are to be proved; and
(e) state the provisions of any statute relied on; and
(f) state the specific relief sought or claimed.
(2) A pleading must not:
(a) contain any scandalous material; or
(b) contain any frivolous or vexatious material; or
(c) be evasive or ambiguous; or
(d) be likely to cause prejudice, embarrassment or delay in the proceeding; or
(e) fail to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or
(f) otherwise be an abuse of the process of the Court.
(3) A pleading may raise a point of law.
(4) A party is not entitled to seek any additional relief to the relief that is claimed in the originating application.
(5) A party may plead a fact or matter that has occurred or arisen since the proceeding started.
51 In its current form, the proposed pleading breaches FCR 16.02(1)(b) (it is at least three times as long as it needs to be), FCR 16.02(1)(c) (it obscures rather that identifies the issues), FCR 16.02(2)(c) (it is incomprehensible) and FCR 16.02(2)(d) (it is certain to cause prejudice and embarrassment).
52 The course I propose to adopt therefore is this. I will dismiss the application to amend in the form proposed but I will give KTC one more chance. And by that I mean final. This is the end of the line; there are no more stops after this one. It seems to me that there is a case in there somewhere struggling to free itself from this pleading. I would encourage those advising KTC to have a long think about the next version and how it is drafted. One view might be that it is beyond repair in its current form. The task at hand is not a complex one for a skilled equity junior.
53 I will dismiss KTC’s interlocutory application. I will reserve the costs at this point. I rejected many of G+T’s points but the very form of the pleading invited them. The issue of costs may be addressed if and when another version emerges. The orders I make are that:
(1) The plaintiff’s interlocutory application of 26 April 2019 be dismissed.
(2) Costs be reserved.
(3) The plaintiff file and serve any final application for leave to amend by 5 November 2019.
NSD 555 of 2019
D T GILBERT & W R SPAIN & C G CONDOLEON & ORS TRADING AS GILBERT + TOBIN ABN 88 775 098 848