Federal Court of Australia

Chopsonion Pty Ltd (Controllers Appointed) v Watts Meat Machinery Pty Ltd [2021] FCA 491

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory orders sought by the respondents in paragraphs 1–6, inclusive, of their Interlocutory application be refused.

2.    Pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) and s 1335 of the Corporations Act 2001 (Cth) the applicant provide security for costs in the amount of $125,000 in relation to this proceeding.

3.    The respondents lodge and serve within 7 days draft minutes of order reflecting the conclusions expressed in these reasons.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BESANKO J:

Introduction

1    This is an interlocutory application brought by the respondents in a proceeding before the Court against the applicant.

2    The applicant in this proceeding is described as Chopsonion Pty Ltd (Controllers Appointed). The respondents are Watts Meat Machinery Pty Ltd and Keith Douglas Watts. At all relevant times, the second respondent was the sole director of the first respondent.

3    Two other participants in the events which are the subject of the claims in this proceeding are James Sharpe and Wendy Kellas-Sharpe. They are married. For convenience, I will refer to them as Mr Sharpe and Ms Sharpe. Mr Sharpe was a director of the applicant. The applicant alleges that at all material times, Ms Sharpe acted as a director of the applicant and that Mr Sharpe was accustomed to act in accordance with her instructions and wishes and, in fact, did so.

4    Richard Willson, MEG Investments Pty Ltd, Red Dog #1 Pty Ltd, Leigh Willson and RJC Willson Nominees Pty Ltd, and John Charlton Rowley are a group of private lenders who, in the case of the transaction which is the subject of this proceeding, had as their agent, Private Funds Management Pty Ltd (PFM). At all relevant times, Annette Joy How was the sole director and secretary of PFM.

5    The applicant alleges that the lenders were appointed controllers of the applicant on 20 October 2016 pursuant to a General Security Agreement (the GSA). Under the GSA, the applicant granted a security interest in favour of the lenders (PPSR Registration No 202004270044803). The public records, that is, the records of the Australian Securities and Investments Commission (ASIC), suggest that it was one of the lenders, Mr Richard Willson, who was appointed the Controller of the applicant on 20 October 2016, although the record also indicates that he was appointed “jointly”. None of the other lenders are named as Controllers in the record.

6    On 21 January 2015, the lenders entered into an agreement in writing with the applicant pursuant to which they agreed to lend the applicant an amount of $1,175,000 on terms that included a term that the amount be repaid within three months and a term that interest be paid on the loan at the rate of 6% per month reducing to 3.5% per month if paid on or before the due date for payment each month. To secure the loan, the applicant granted the lenders the security interest identified in the GSA. The applicant alleges that, pursuant to the agreement, between 22 January 2015 and 22 September 2015 the lenders paid the amount of $1,175,000 to or for the benefit of the applicant.

7    The applicant defaulted in the repayment of the loan to the lenders and the applicant alleges that its liability to the lenders under the loan as at April 2020 was $4,728,776 comprising the principal loan amount of $1,175,000 and interest on the principal amount of $4,553,776, less recoveries of $1,000,000. The applicant also claims it has a further liability to the lenders of $531,000 comprising legal fees, storage fees and receivers’ fees. A counterbalancing item is an amount of $656,000 said to be the cost of equipment. The applicant’s claim against the respondents is for an amount of $4,603,776.

8    The applicant pleads three causes of action against the respondents. Two causes of action are statutory and the third is a cause of action at common law.

9    The first cause of action is a claim to compensate the applicant for damage suffered by it which resulted from a contravention by the respondents of civil penalty provisions in the Corporations Act 2001 (Cth). The cause of action is based on s 1317H of the Corporations Act and contraventions by Mr Sharpe and Ms Sharpe of the duties they owed to the applicant as directors of the applicant under s 181 and s 182 of the Corporations Act. The respondents are said to have been involved in those contraventions by Mr Sharpe and Ms Sharpe within s 79 of the Corporations Act.

10    The common law cause of action is analogous to the first cause of action in that it is a claim by the applicant that the respondents knowingly assisted Mr Sharpe and Ms Sharpe in the breach by them of the fiduciary duties which they owed to the applicant as directors of the applicant.

11    The other statutory cause of action is a claim under s 236 of the Australian Consumer Law (Sch 2 to the Australian Competition and Consumer Act 2010 (Cth) (the ACL)) by the applicant for the amount of loss or damage suffered by it because of the conduct of the respondents in that the respondents contravened s 18 of the ACL or, in the alternative, were involved within s 2 of the ACL in a contravention of s 18 by Mr Sharpe and Ms Sharpe. In the alternative to the claim under s 236, the applicant claims compensation under s 237 of the ACL. The contravention of s 18 is alleged to be conduct in trade or commerce that was misleading or deceptive.

12    The Statement of Claim is a complex document and I do not at this point have the benefit of a Defence. The essence of the allegations in the Statement of Claim is that the loan was sought by the applicant to fund the purchase by it of two small abattoir chains located in New Zealand, one of which was complete and the other of which was 90% complete (the Chains), and the dismantling and removal of the Chains from New Zealand and their transportation to Australia. The essence of the applicant’s case is that in formulating and arranging the loan for this purpose, Mr Sharpe, Ms Sharpe and the second respondent, on his own behalf, and on behalf of the first respondent, engaged in a fraudulent and dishonest design for the following purposes: (1) ensuring that the Chains were sold by the first respondent; (2) inflating the cost of the purchase of the Chains to ensure the purchase of additional plant and equipment for Ms Sharpe and Mr Sharpe or to, or for, their benefit; and (3) the payment of commissions from the first respondent to, or for, the benefit of Mr Sharpe and Ms Sharpe.

13    Paragraph 13 of the Statement of Claim is a key paragraph. It is in the following terms:

13.    The Design was effected by James Sharpe, Wendy Sharpe and Watts (in his own right and for and on behalf of WMM) as follows:

13.1    Prior to 22 January 2015:

13.1.1    WMM procured the purchase of the Chains:

13.1.1.1.    On a date not known to Chopsonion but otherwise known to WMM.

13.1.1.2.    On terms not known to Chopsonion but otherwise known to WMM.

13.1.2    WMM agreed to sell the Chains to Wendy Sharpe and/or James Sharpe on the following terms:

13.1.2.1.    The sale would be for a purchase price of $528,000 (GST Inc).

13.1.2.2.    The Chains would be purchased in the name of Chopsonion.

13.1.2.3.    The Chains would be purchased along with certain other plant and equipment.

13.1.2.4.    Wendy Sharpe and/or James Sharpe would receive commissions from WMM.

Particulars

(a)    The agreement referred to in paragraph [13.1.2] herein and its terms are to be inferred from the matters pleaded in paragraph [4.4] herein.

13.1.3    WMM prepared and subsequently provided the Chains Invoice, WMM Email the Open Letter to Wendy Sharpe in the circumstances pleaded in paragraphs [4.1] to [4.3] herein.

13.1.4    Chopsonion was not trading and had not traded.

13.2    On 5 November 2014, Wendy Sharpe provided the Chains Invoice, WMM Email the Open letter to PFM in the circumstances pleaded in paragraph [4.4] herein.

13.3    Between November 2014 and 22 January 2015, funding for the purchase of the Chains and the Removal costs was procured by Wendy Sharpe for and on behalf of Chopsonion from the Lenders through the agency of PFM in the circumstances pleaded in paragraphs [3] to [10] herein (“the Funding”).

13.4    By email communication dated 21 January 2015, Wendy Sharpe requested that PFM urgently pay WMM the amount of $760,000.00 under the Chains Invoice.

13.5    On or around 22 January 2015, PFM caused the amount of $760,000 to be paid to WMM under the Chains Invoice.

13.6    On or around 22 January 2015, WMM received the amount of $760,000 and:

13.6.1    WMM invoiced Chopsonion as follows:

13.6.1.1.    By WMM Invoice No.1204 dated 22 January 2015 in the amount of $528,000 for two small animal abattoir chains located in New Zealand one of which was complete and one of which was 90% complete (“the Chains”);

13.6.1.2.    By WMM Invoice No.1205 dated 22 January 2015 in the amount of $82,500 for a beef floor located at Yarrawonga, Victoria (“the Beef Floor”);

13.6.1.3.    By WMM Invoice No.1206 dated 22 January 2015 in the amount of $46,200 for a Miller’s Shoulder Puller and Final Pullers and an AEW 900 Breakdown Saw (“the Shoulder Pulling Equipment”).

13.6.1.4.    By WMM Invoice No.1207 dated 22 January 2015 in the amount of $29,007.98 for rent for storage of the Chains in New Zealand.

13.6.2    On or around 23 January 2015, WMM caused commission payments (“the Commissions”) to be made to Wendy Sharpe and/or James Sharpe or to or for their benefit as follows:

13.6.2.1.    A cash payment in the amount of $20,000 on terms known to WMM but not otherwise known to Chopsonion.

13.6.2.2.    An amount of $54,292.02 on terms known to WMM but not otherwise known to Chopsonion.

13.6.3    WMM applied the amount of $760,000 not under the Chains Invoice but under the invoices and in the manner pleaded in paragraphs [13.6.1] and [13.6.2] herein.

13.7    The Chains Invoice was a false invoice:

13.7.1    The sale price for the Chains was recorded as $850,000 (GST Inc) whereas the true price for the purchase of the Chains was $528,000 (GST Inc).

13.7.2    The invoice recorded that a deposit had been paid by Chopsonion to WMM in the amount of $90,000.00 (“the Deposit”) wherein in fact no such deposit had been paid.

13.8    The information contained in the WMM Email was false because it stated that the Deposit had been paid by Chopsonion and received by WMM whereas in fact it had not been so paid or received.

13.9    The Open Letter was deliberately misleading because it inferred the value of the Chains was in the order of $9 million dollars when WMM knew from WMM Invoice No.1204 that the value of the Chains was not $9 million and was substantially less and in the order of $528,000 (GST Inc).

13.10    Wendy Sharpe, James Sharpe and WMM (through Watts) knew the matters pleaded in paragraphs [13.7] to [13.9] herein or ought to have known them:

13.10.1        On account of the matters pleaded in paragraphs [13.1] to [13.16] herein.

13.10.2    Further in the case of WMM because Watts acknowledged these matters in a conversation between Watts and Annette Conn of PFM on 23 September 2016, the contents of which were summarised in an email communication from Conn to Watts dated 26 September 2016.

13.11    Chopsonion defaulted under the Loan Agreement in that it failed to repay the amount outstanding under the Loan Agreement by the Repayment Date.

13.12    The default by Chopsonion under the Loan Agreement as pleaded in paragraph [13.11] herein constituted a default under the terms and conditions of the GSA.

13.13    As at April 2020, the liability of Chopsonion to the Lenders under the Loan Agreement was an amount of $4,728,776 comprised as follows:

13.14    In addition to the amount referred to in paragraph [14] herein, Chopsonion has further liability to the Lenders in the amount of $412,000 for the following:

13.15    Had the Lenders:

13.15.1    Known the matters pleaded in paragraphs [13.7] to [13.9] herein or any of them they would not have provided the Funding, or any of it.

13.5.2    Not provided the Funding, or any of it, then Chopsonion would not have incurred the liability to the Lenders pleaded in paragraphs [13.13] and [13.14] herein.

13.16    Wendy Sharpe, James Sharpe and WWM each acted in the manner pleaded in paragraphs [13.1] to [13.6] herein and/or in the alternative fraudulently and deliberately concealed the truth of the matters pleaded in paragraphs [13.7] to [13.9] herein from the Lenders:

13.16.1    To procure the Funding.

13.16.2    Because they knew or ought to have known that had the Lenders known the matters pleaded in paragraphs [13.7] to [13. 9] herein, they would not have provided the funding or any of it.

14    Two aspects of this paragraph should be noted.

15    First, the paragraphs in which the misrepresentations or deceptions are identified are paragraphs 13.7, 13.8 and 13.9. The Chains Invoice referred to in paragraph 13.7 is an invoice dated 21 July 2014 from the first respondent to the applicant for the Chains in the amount of $850,000, including a deposit which had been paid in the amount of $90,000, and a balance owing of $760,000. The WMM Email referred to in paragraph 13.8 is dated 24 October 2014 and refers to a deposit of $90,000 being paid on 21 July 2014.

16    The Open Letter referred to in paragraph 13.9 is dated 16 October 2014 and it contains the following passage:

The 2 small stock chains are of the highest quality, built by Millers of New Zealand comprising of top grade quality stainless steel to meet the Quality Assurance Standards required for an export facility in New Zealand. The chains meet all requirements necessary for production when installed in an Australian facility. The replacement cost for these chain [sic] to be built in New Zealand and imported to Australia would be in the vicinity of approximately $4,500,000.00 each, plus packaging and shipping costs, the lead time for production would be a minimum of 9 to 12 months.

17    A later invoice for the Chains from the first respondent to the applicant dated 22 January 2015 shows a purchase price of $528,000.

18    Secondly, the causation pleas are contained in paragraph 13.15. The applicant’s causation case is framed in terms of what the lenders would not have done and, following that, what the applicant would not have done. First, it is alleged that had the lenders known the matters in paragraphs 13.7, 13.8 and 13.9 they would not have provided the loan to the applicant and had they not provided the loan, then the applicant would not have incurred the liability.

The Respondents’ Application

19    The respondents seek the following orders:

(1)    Judgment be entered in favour of the respondents pursuant to r 26.01 of the Federal Court Rules 2011 (Cth) (the Rules) on the ground that the applicant has no reasonable prospect of successfully prosecuting the proceeding. Although the respondents did not specifically refer to s 31A(2) of the Federal Court of Australia Act 1976 (Cth), that subsection also gives the Court the power to enter summary judgment. Furthermore, subsection 31A(3) provides that the power in subsection 31A(2) is not restricted to cases which are hopeless or bound to fail. In the alternative, the respondents seek an order that the proceeding be dismissed pursuant to r 16.02 or r 26.01 of the Rules because they are vexatious and, in the further alternative, they seek an order that the Statement of Claim be struck out pursuant to r 16.21 of the Rules because it fails to disclose a reasonable cause of action;

(2)    That the applicant provide security for costs pursuant to r 19.01 of the Rules or s 1335 of the Corporations Act; and

(3)    That the proceeding be transferred from the South Australia District Registry to the New South Wales District Registry pursuant to r 2.02 of the Rules and s 48(1) of the Federal Court of Australia Act.

20    The respondents rely on the following affidavits:

(1)    Two affidavits of the second respondent sworn on 18 September 2020 and 13 October 2020 respectively;

(2)    Affidavit of Henry John Ellard Hart sworn on 13 October 2020. Mr Hart is a company director of John Dee Abattoir;

(3)    Four affidavits of Annette Patricia English sworn on 9 September 2020, 13 October 2020 (18 paragraphs), 13 October 2020 (16 paragraphs) and 12 November 2020 respectively. Ms English is the solicitor for the respondents; and

(4)    Affidavit of Isabella Marie-Ellen Brennan affirmed on 12 November 2020. Ms Brennan is a solicitor who works under the supervision of Ms English.

21    The applicant relies on the following affidavits:

(1)    Affidavit of Ms How sworn on 4 November 2020;

(2)    Affidavit of Luke Rowley sworn on 29 October 2020. Mr Rowley is a solicitor who acts for the applicant and the Controllers/lenders;

(3)    Two affidavits of Travis John Shueard sworn on 29 October 2020 and 30 October 2020 respectively. Mr Shueard is a solicitor who assists Mr Rowley; and

(4)    Affidavit of Phillip Robert Craig affirmed on 24 November 2021. Mr Craig is a solicitor who assists Mr Rowley.

The Application for Summary Judgment or for the Dismissal of the Proceeding or for the Striking Out of the Statement of Claim

22    The arguments advanced by the respondents on the present application do not require me to consider whether all of the lenders were appointed Controllers of the applicant in October 2016 or only Mr Richard Willson. For present purposes, it may be assumed that all of the lenders were appointed Controllers of the applicant. The form lodged with ASIC by Mr Rowley to record the appointment of Controllers to the applicant indicates that the Controllers were appointed, “Controller (other than Receiver, Receiver and Manager or Managing Controller) of the property described in the Schedule to this form”. The property described in the schedule to the form is “All present and after acquired property of Chopsonion Pty Ltd”.

23    The respondents submit that the position of a controller of the property of a company is different from that of a receiver and manager and the roles involve different powers and obligations. They submit that whilst the receiver and manager of company property has the power to bring and defend proceedings in the name of the company by virtue of s 420(2)(k) of the Corporations Act, a controller in the position of the Controllers in this case is not given the power to bring or defend proceedings by statute. It follows, so the respondents submit, that the Controllers have no power to bring this proceeding in the name of the applicant.

24    The respondents also raise a related point which, in fact, is a logically prior point. They submit that that the GSA does not authorise the appointment of a controller or contain provisions for the functions and powers of a controller. They submit that whilst the GSA does contain power for the Secured Party to appoint a receiver or a receiver and manager and provides for the functions and powers of such a person, it does not contain equivalent provisions with respect to a controller.

25    I reject both of these submissions. I think that there is power to appoint a controller, evidence of the appointment of a controller, and power for the controller to bring or defend proceedings in the name of the applicant company.

26    Clause 1.1 of the GSA contains definitions of the terms, “Collateral”, “Controller” and “Receiver” as follows:

“Collateral” means all present and after acquired assets and property (both real and personal), undertaking and rights of the Grantor, whatever and wherever situated, presently or in the future held by the Grantor including (without limitation):

(a)    Capital;

(b)    the benefit of all present and future contracts entered into by the Grantor;

(c)    any property, undertaking or rights held as trustee;

(d)    any personal property of the Grantor as that term is defined in the PPS Act and proceeds of such personal property.

“Controller” means in relation to an entity’s property:

(a)    a receiver or receiver and manager of that property; or

(b)    anyone else who (whether or not as agent for that entity) is in possession, or who has control, of that property for the purposes of enforcing a Security Interest.

“Receiver” means a receiver or receiver and manager appointed by the Secured Party under this deed.

27    The definition of “Controller” in the GSA follows closely the definition of controller in s 9 of the Corporations Act.

28    The exercise of certain powers in the GSA is contingent on an event of default occurring as that phrase is defined in the GSA. It is sufficient to say that an event of default includes a failure to pay any of the secured money when it is payable. There seemed to be a suggestion by the respondents that the applicant does not allege an event of default, but that is not correct. It clearly does so in paragraphs 13.11 and 13.12 of the Statement of Claim (see [13] above).

29    Clause 9.3 identifies the Secured Party’s powers on default. The clause is as follows:

9.3    Secured Party’s powers on default

After an Event of Default occurs, the Secured Party may do one or more of the following in addition to anything else the law allows the Secured Party to do as Secured Party:

(a)    sue the Grantor for the Secured Money;

(b)    appoint one or more Receivers;

(c)    do anything that a Receiver could do under clause 10.5.

30    Clause 10 of the GSA deals with the appointment of a receiver and clause 10.5 sets out the powers the Secured Party may confer on the receiver or the receiver and manager. The powers are set out in 26 paragraphs and they are extensive. They include the following powers:

10.5    Powers of Receiver

In addition to powers conferred by statute, the Secured Party may confer upon a Receiver by written notice to the Receiver at the time of and from time to time after his appointment any powers that the Secured Party thinks fit including, without limitation, the power to:

(a)    enter, take possession of, have access to and make use of the Collateral and receive rents and profits derived from the Collateral;

…

(m)    commence, prosecute, defend, submit to arbitration, settle, compromise or defer in the name of the Grantor or otherwise on any terms and proceedings, claim or dispute in connection with the Collateral or this deed and execute releases or discharges in connection with them;

31    Clause 11.1 of the GSA provides that the Secured Party may exercise any of the powers in clause 10.5. The clause is in the following terms:

11.1    Powers on default

At any time after an Event of Default has occurred, the Secured Party may exercise:

(a)    all rights, powers and remedies conferred on the Secured Party by statute; and

(b)    any of the powers referred to in clause 10.5 each of which will be construed as if the reference to the Receiver is a reference to the Secured Party and a reference to clause 10.5 is a reference to this clause 11.1(b).

32    In my opinion, there is power under the GSA to appoint a controller of the applicant’s property. It is true that there is no clause in the GSA which expressly empowers the Secured Party to appoint a controller, but the term is defined in the GSA and the powers which can be exercised by the Secured Party, that is, the powers in clause 10.5 are undoubtedly powers the exercise of which would bring the donee of the power within paragraph (b) of the definition of controller. I see no reason why the Secured Party under the GSA could not appoint itself or themselves controllers within the definition in the GSA and the definition in the Corporations Act, or, simply by the exercise of the powers in clause 10.5, assume that role. Even if this conclusion be wrong, I cannot see how that would mean that the applicant lacked standing or a cause of action, or both, as distinct from calling into question the precise description of the applicant in this proceeding.

33    In my opinion, there is sufficient evidence of the appointment of the lenders (or at least one of them) as Controllers in the evidence of Mr Rowley and the form lodged with ASIC.

34    In my opinion, the lenders have the power to cause the applicant to bring this proceeding. That power is expressly given to the Secured Party by clauses 9.3, 11.1 and 10.5 of the GSA. I am not aware of any authority to the effect that such power can only be conferred by statute. There was a suggestion by the respondents that a controller could cause a company to bring proceedings if the controller had control of the company and not just the property of the company. No authority was cited for this proposition and in this case it is inconsistent with the definition of “Controller” in the GSA and clauses 11.1 and 10.5.

35    The respondents raised further objections to the Controllers bringing this proceeding in the name of the applicant.

36    First, they submit that the lenders as Controllers only have rights to sell secured property and they contend that secured property must be tangible property. The answer to that submission is that the definition of “Collateral” in the GSA, includes the personal property, undertaking and rights of the applicant whether present or after acquired assets or property and that includes a chose in action. A chose in action is part of all of the present and after acquired property of the applicant. The respondents also submit that the property with respect to which the lenders as Controllers are exercising rights must be, but is not identified in the Statement of Claim. It is not clear to me that there is such a requirement, but even if there is, it seems to me clear enough that the Collateral in respect of which the lenders as Controllers are exercising rights is a right of action that the applicant asserts it has against the respondents.

37    Secondly, the respondents submit that at best, the Statement of Claim identifies a cause of action that the lenders may have against them, not a cause of action that the applicant has against them. The answer to that submission is that the incurring of a liability by a company may be a loss in respect of which the company can seek recovery by legal proceedings. It seems that that is what the applicant is seeking to do in this proceeding. It is seeking to recover a loss that it has incurred by entering into a loan agreement. It has not been able to repay the loan. I accept that some complex legal points may arise depending on the matters raised in the Defence, but, in my opinion, this is not a case in which it can be said at this stage that the applicant, in effect, has no claim. The respondents sought to illustrate their point by reference to an example. They contend that the interest charge is a penalty. They seemed to contend that they can raise that point against the lenders, but not against the applicant. On the arguments presented, I am not able to see why they could not raise that point against the applicant on the basis that they are only liable for loss which in law flows from their conduct. The respondents also sought to rely on the fact that the lenders have brought proceedings against valuers in relation to the transaction in the Supreme Court of South Australia. That does not seem to me to advance matters. A company may sue for a debt it has incurred by the wrongful act of its directors. The creditor may also have grounds for suing the directors and others involved in the incurring of the debt.

38    I move from the respondents’ submissions concerning the Controllers and whether the applicant has title to sue, to a separate and different argument raised by the respondents in support of their claim for summary judgment in the proceeding or dismissal of the proceeding.

39    The respondents submit that they have a clear defence to the applicant’s claim and that that defence is sufficient to justify summary judgment or, in the alternative, the characterisation of the proceeding as vexatious and suitable for dismissal.

40    The defence is said by the respondents to be a promise made to them by the lenders that they would not sue the respondents in relation to the transaction. If that is right, then the applicant does not have a liability to the lenders in respect of which it can seek recovery. There was a good deal of evidence directed towards this issue. Before I summarise it, I make the point that this argument is being advanced before I have clear articulation of the defence in a pleading. This is far from ideal. For example, one of the matters that struck me after I had read the affidavit evidence and the respondents’ outline of written submissions was that there was no clear articulation of when this alleged agreement was made. I will return to this point.

41    The evidence relevant to this issue is as follows.

42    The second respondent states that at some time after Ms Sharpe lost control of the applicant to the lenders, he believes it may have been early 2016, he received a telephone call from Ms How of PFM and had a conversation with her to the following effect:

Ms How:    “Hi Keith, I work on behalf of the group of people that provided finance to Chopsonion Pty Ltd, I need your assistance in selling some of the assets owned by Chopsonion Ply Ltd and Jechbo Ply Ltd.”

Mr Watts:    “What kind of stuff are you selling?”

Ms How:    “There’s two abattoirs, and all the equipment that you helped source.”

43    The second respondent states that following this conversation with Ms How, he received frequent telephone calls from her, on occasions two or three times a day, to discuss the assistance he would provide with respect to the sale of the applicant’s assets and the abattoirs at Inglewood and Collarenebri.

44    In her affidavit, Ms How notes that the Controllers were appointed to the applicant on 20 October 2016 and the conversation deposed to by the second respondent could not have taken place (as the second respondent deposed) in early 2016. Ms How states that to the best of her knowledge, belief and recollection, she did not have any conversation with the second respondent to the effect deposed to by him “as we were regularly in contact and he was aware of my role as the agent for the Lenders”.

45    On or around 12 October 2016, the second respondent received a letter and draft Originating Application and Statement of Claim from Mr Rowley. In his letter, Mr Rowley advised the second respondent that he acted for the lenders. He advised the second respondent that it was the intention of his clients to issue the claim, but prior to doing so, his clients welcomed bona fide settlement discussions. Mr Rowley advised that if he did not hear from the second respondent within 21 days, he would file the claim. The parties named in the draft Originating Application and Statement of Claim are the applicant and each of the lenders as applicants and FG Agri Pty Ltd, the respondents and Mr Anderson (director of FG Agri Pty Ltd) as respondents. The claim is a claim for damages or compensation in the amount, in the case of the applicant, of $3,565,688.46 and, in the case of the lenders, of $1,784,132.05. The claim relates to the purchase of the Chains and the finance provided by the lenders to the applicant. It is alleged that the sale agreement between the applicant and the first respondent was a sham transaction.

46    The second respondent states that in or around the month of October 2016, he received frequent telephone calls from Mr Rowley, the principal solicitor of Charlton Rowley, in relation to the draft Statement of Claim. He does not recall exactly when these calls began, but he recalls that Mr Rowley called him often. His evidence is that Mr Rowley attempted to pressure him to agree to a settlement in relation to the draft Statement of Claim, and that he struggled to understand why as he did not know how there could be a basis for a claim against him. The second respondent states that towards the end of October 2016, he received a telephone call from Mr Rowley and that during the conversation, Mr Rowley said words to the following effect:

“… you need to pay 1 million dollars to cover the shortfall from Wendy Sharpe. FG Agri have already paid 1 million dollars by way of settlement for the chains.”

47    The second respondent states that he was concerned that a law firm was pursuing him for the applicant’s debts and that he felt pressured as he did not know much about the law and had not been involved in a legal action before. He states that on one occasion between 12 October 2016 and 20 October 2016, Mr Rowley called him in reference to the draft Statement of Claim. He cannot recall the exact details of the conversation. However, Mr Rowley sent him a follow up email on or about 20 October 2016 which confirmed the conversation and that the draft Statement of Claim would be withdrawn on the basis that he would assist in the sale of the abattoirs and the applicant’s assets. The second respondent produces Mr Rowley’s email dated 20 October 2016. That email contains the following passage:

I refer to our earlier telephone conversation:

…

5.    I confirm that you are authorised on behalf of the Lenders to list and sell any of that equipment and remit the sales proceeds to the Lenders (or the Lenders will invoice any purchaser directly — whatever suits). That equipment need not be listed as “for or on behalf of controllers” — it can just be listed for sale.

…

7.    Finally, [Ms How] is in control of two abattoirs which are for sale. One owned by Chopsonion Pty Ltd and the other by Jechbo Pty Ltd. Both of which you are familiar with. You may speak to her about the sale of those assets. If they are sold through you or with your assistance, I am sure you would be remunerated accordingly.

8.    Finally, the Lenders withdraw the letter sent to you on 12 October 2016 and the accompanying draft claim.

48    The second respondent states that he could not understand in 2016, and still cannot understand, why Charlton Rowley pursued him on behalf of the lenders as the “shortfall” that the lenders allegedly sustained had nothing to do with him. As far as he was concerned, during the original purchase of the Chains and his involvement with that purchase, it was not his business to know who the lenders were or to interact with them because his services were being provided, and only provided, to the applicant. He had no involvement with the applicant’s loan agreement with the lenders and had no involvement in the negotiation, creation, execution or subsequent lending of the money under the loan agreement.

49    Mr Rowley’s evidence is that the purpose of his email of 20 October 2016 was to provide sufficient notice to the second respondent of any claims that the lenders might have against him and to give him an opportunity to mitigate their loss. Mr Rowley states that the purpose of his email was not to make representations or give any undertakings to the second respondent to the effect now asserted by him. Mr Rowley states that he did not release or discharge the second respondent from any claims that the lenders might have against him, including the claims which are the subject of this proceeding. He makes the point that as noted in the email and, in the course of the lenders’ appointment as Controllers of the applicant, steps were required to be taken to sell the Chains and the abattoirs which had been proffered as security to obtain finance from the lenders. In the course of assisting the lenders to enforce their security, he communicated to the second respondent that he was permitted to sell the assets of the applicant in his possession and liaise with Ms How in her role as an agent of the lenders in relation to the sale of the Chains and the abattoirs.

50    The second respondent states that in or about mid-October 2016, he had a telephone conversation with Ms How to the following effect:

Ms How:    “Keith, we have the two abattoirs that need to be sold and we need your assistance to sell them.”

 Mr Watts:    “What commission will I receive from that?”

 Ms How:    “We will sort something out when they are sold.”

Mr Watts:    “If I do that for you then you need to stop making all these claims for money from me. No more processes.”

 Ms How:    “Yes of course, there will be no further action against you.”

51    The second respondent states that at the time of this conversation he was sitting near the workshop of the John Dee Abattoir at Warwick, Queensland with Mr Hart, who is the son of the owner of that abattoir. Mr Hart was able to hear his conversation with Ms How as he was sitting next to the second respondent at the time and the second respondent put Ms How on speaker phone to hear her more clearly. The second respondent believes that Ms How asked him to assist with the sale of the abattoirs because she knew that he had expertise in the area of meat processing and was in the business of selling equipment and property in the industry. On 18 October 2016, the second respondent received an email from Ms How. That email (uncorrected) included the following passage:

Can you keep in touch and If you sell any of that equipment, can you please remit the proceeds of sale to us in satisfaction of the amount outstanding under the charges (but we would be grateful if you advised us of any sales in advance of settlement). I chat to you every couple of days so I think I would know anyway.

I have spoken to the lenders would consider entering into arrangements with you to avoid the need for litigation. I am happy to discuss this with you. It is in your interests to assist us maximise the value for these assets and we appreciate your cooperation to date.

Now go, sell the chains and all the equipment, don’t forget about the Abattoirs and then we will all be happy again.

52    The second respondent states that he has been involved in many abattoir equipment sales and typically he would receive at least a 15% commission on the sale. He states that the amount of his commission was not specifically discussed further than the assurance that he would be remunerated for his assistance and released from any other claims. He states that relying on Ms How’s undertaking, he proceeded to assist Ms How with the sale of the abattoirs by finding and introducing Adam Farrell, the prospective buyer. The Inglewood Abattoir was sold to Mr Farrell for approximately $320,000. The second respondent states that he only received a commission of $3,000 for the sale of Inglewood which was 1% of the proceeds. The abattoir at Collarenebri was also sold to Mr Farrell following his introduction for approximately $300,000. The second respondent did not receive any commission for that sale.

53    Mr Hart’s evidence is that he has known the second respondent for approximately eight years as he assisted him with the breakup of the Killarney Abattoir in around 2012. In October 2016, the second respondent attended the abattoir to assist Mr Hart in the task of cleaning up scrap equipment. He recalls sitting at the back of the abattoir with the second respondent near the workshop when the second respondent received a telephone call. He recalls the second respondent having difficulty hearing the person speaking on the telephone and he put the call onto loud speaker so that he could hear more clearly. The caller was a woman who he later found out was Ms How. He was not “purposefully” listening to the conversation. However, it was clear to him at the time that the conversation between the second respondent and Ms How was about the prospective sale of the Inglewood Abattoir. He recalls that during the conversation Ms How said words to the following effect:

“Keith, I need your assistance in relation to selling the Inglewood Abattoir.”

In the course of the conversation, Mr Hart recalls that he had a brief “aside conversation” with the second respondent to the following effect:

Keith:        “Henry, would you like to buy a second abattoir?”

Mr Hart:    “F… off, one is hard enough”.

Mr Hart recalls that the second respondent responded to Ms How’s request as follows:

“I can get that sorted out for you and I hope that’s all you’ll require of me once I get it sorted out.”

54    Mr Hart does not recall any other specifics of the telephone conversation between the second respondent and Ms How. He does recall that after the telephone conversation had concluded, the second respondent said words to the following effect:

“thank God that’s sorted. It’s been making me very stressed.”

55    With respect to this alleged conversation, Ms How states that she cannot specifically recall the date of any conversations that took place between the second respondent and her in 2016 although, to the best of her knowledge, information and belief, she recalls that the second respondent did ask her to cease taking legal action against him. However, she advised him that she did not have authority from the lenders to give any undertakings or make any representations to that effect. She did not have any conversations with the second respondent to the effect that the lenders, Mr Rowley or herself would not take any further action against him and she never gave any undertakings or made representations to the second respondent to that effect. She states that she spoke with the second respondent on many occasions by telephone about the sale of the Chains or the abattoirs in the period from September 2016 onwards. She notes that in November 2015 and on other occasions, the second respondent had already expressed his interest in arranging and receiving a commission for the sale of the abattoirs and she refers to emails between the second respondent and Mr Rowley dated 3 November 2015 and 5 November 2015 respectively. She had reached a prior understanding with the second respondent that he would assist her to sell the Chains and the abattoirs to minimise as much as possible the money that the lenders were at risk of losing as a result of their dealings with him and the applicant which he would relay to the lenders.

56    Ms How refers to her email to the second respondent dated 26 September 2016 wherein she suggests fraud and suggests to the second respondent that he do everything in his powers to assist the lenders with the sale of the Chains and the security properties. That email is in the following terms:

Keith,

Thanks for the chat on Friday

Here are the problems.

You advised me that Wendy asked you to change the original invoice price ($490,000.00) and provide us with an invoice with an inflated amount.

You in fact changed your invoice to indicate to us that she was paying $76,000.00 for both chains which is some 360K more for the chains than she actually was. The Invoice also indicated that a 90K deposit was paid, which it was not.

You also indicated that once we paid you the $760,00.00 [sic] that you in turn kicked back the over payment to Wendy.

Keith, this presents some serious problems with first one coming to mind, Fraud!

Again I am extremely upset that you chose to lie to me purely because Wendy asked you to do so.

Your actions were a direct result in us advancing funds to associated companies of Wendy’s which will result in the private investors and myself losing considerable amount of money.

I suggest that you now do everything in your power to assist us with the sale of the chains and the security properties.

Again, I cannot express how disappointed I am in you and your firm.

Also on another note I have t [sic] sell these chain [sic], do you have the contact details for David that already made the offer?

57    Ms How states that her relationship with the second respondent in October 2016 is best summarised in her email to the second respondent dated 18 October 2016 which she summarises as conveying to the second respondent that the lenders would consider entering into arrangements with him to avoid the need for litigation, but it was now in his interest to assist the lenders to maximise the value of the assets. Ms How records the fact that in or around July 2017, the second respondent sold the abattoir at Inglewood and received a commission in the order of $5,500 and not the amount of $3,000 as deposed to by the second respondent.

58    With respect to the version of events given by Mr Hart, Ms How states that she does not recall having any conversation to that effect with the second respondent and further, that she was not privy to and cannot comment on the alleged conversations between the second respondent and Mr Hart.

59    The respondents contend that judgment should be given in their favour under r 26.01 of the Rules on the basis that the applicant has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding or the proceeding is an abuse of process of the Court.

60    The relevant principles concerning r 26.01(a) and s 31A(2) have been identified in numerous authorities. It is not necessary to discuss the authorities, other than to say that in the ordinary case, summary judgment will not be entered where the defending party can show that there is a real issue of fact: Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd [2008] FCAFC 60; (2008) 167 FCR 372 at [23] per Finkelstein J; at [74] and [114] per Rares J; at [130] per Gordon J; Kowalski v MMAL Staff Superannuation Fund Pty ltd [2009] FCAFC 117; (2009) 178 FCR 401 at [28]–[31].

61    The difficulty facing the respondents is the ambiguous and general nature of the evidence. It is necessary to identify that at a particular time an agreement was made on terms which are at least reasonably clear. Perhaps recognising that that would be required, counsel for the respondents sought to focus on Mr Rowley’s email dated 20 October 2016 (at [47] above) and in his reply, he added reference to Ms How’s email dated 18 October 2016 (at [51] above).

62    In my opinion, the evidence is not sufficiently clear to enable me to conclude that there is no triable issue of fact in relation to the alleged promise not to sue. The precise chronology is unclear. The precise assistance to be provided by the second respondent is unclear and it appears that he received some remuneration for his efforts. Ms How’s email dated 18 October 2016 suggests that agreement had not been reached at that point and Mr Rowley’s email dated 20 October 2016 refers to remuneration and does not contain an express statement that the respondents would not be sued. This is not an appropriate case for summary judgment. It perhaps goes without saying that the position at trial may be quite different.

63    For the same reasons, this is not a case where there are grounds to enter judgment or dismiss the proceeding on the basis that it is vexatious within r 26.01(b) of the Rules.

64    In the alternative to the above submissions, the respondents submit that the Statement of Claim should be struck out on the ground that it fails to disclose a reasonable cause of action. Rule 16.21(e) of the Rules empowers the Court to strike out all or part of a pleading if it fails to disclose a reasonable cause of action. The respondents relied on a number of matters to support the contention that that power should be exercised in this case.

65    First, the respondents contend that if I do not enter summary judgment in their favour or dismiss the proceeding on the ground that the Statement of Claim does not identify a cause of action that the applicant has, as distinct from a cause of action the Controllers have, then, in the alternative, I should strike out the Statement of Claim relying on the power in r 16.21(e). I reject this contention because, as I have said, I consider that the Statement of Claim does plead reasonable causes of action in the applicant.

66    Secondly, the respondents contend that the applicant’s causes of action are not maintainable in the absence of Mr Sharpe and Ms Sharpe as parties. In developing this submission, the respondents referred to their alleged liability under the Corporations Act. In the case of this cause of action, the respondents point out that their liability is said to arise because they were persons involved in the contraventions within s 79 of the Corporations Act. The contraventions in which they are said to have been involved are contraventions of s 181 and s 182 of the Corporations Act both by Mr Sharpe and Ms Sharpe. The respondents did not cite any authority in support of their contention that Mr Sharpe and Ms Sharpe are necessary parties. They asserted that “without them [i.e., Mr Sharpe and Ms Sharpe] being joined, the primary allegation made against them [i.e., Mr Sharpe and Ms Sharpe] cannot be determined”. It is an essential element in the claim by the applicant against the respondents that the applicant prove a contravention(s) of s 181 or s 182 or both by Mr Sharpe and Ms Sharpe. However, contrary to the submission of the respondents, it is not necessary that the applicant also bring the proceeding against Mr Sharpe and Ms Sharpe. Mr Sharpe and Ms Sharpe are not necessary parties to the applicant’s claim against the respondents (Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427 at [105]–[110], especially at [107], per Gummow ACJ, Hayne, Crennan and Bell JJ). Insofar as the respondents put the same argument in relation to the claim for knowing assistance in the breach of fiduciary duties by Mr Sharpe and Ms Sharpe (paragraphs 15.2 and 20 of the Statement of Claim) and the claim for involvement in the contravention by Mr Sharpe and Ms Sharpe of s 18 of the ACL, the argument is rejected for the same reasons.

67    Thirdly, the respondents contend that there are no particulars of the basis upon which it is alleged in the Statement of Claim that the respondents knew that the Chains Invoice, the Open Letter and the WMM Email provided to Ms Sharpe would be provided by her to potential funders of the Chains and Removal Costs, including PFM (paragraphs 4.1.2, 4.2 and 4.3) and “otherwise who instigated the fraud” alleged in paragraph 12 of the Statement of Claim. The respondents contend that paragraph 12 of the Statement of Claim is a plea of purpose and not of knowledge or of the instigator of the fraud. There is an attempt to plead knowledge in paragraph 20, but the references there “still did not plead the knowledge said to have existed”.

68    Division 16.4 deals with particulars and rr 16.42 and 16.43 are as follows:

16.42 Fraud, misrepresentation etc

A party who pleads fraud, misrepresentation, unconscionable conduct, breach of trust, wilful default or undue influence must state in the pleading particulars of the facts on which the party relies.

16.43 Conditions of mind

(1)    A party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies.

(2)    If a party pleads that another party ought to have known something, the party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge.

 (3)    In this rule:

condition of mind, for a party, means:

(a)    knowledge; and

(b)    any disorder or disability of the party’s mind; and

(c)    any fraudulent intention of the party.

69    In Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537, the Full Court of this Court said the following (at [7]–[10]):

7    A statement of claim must allege a cause of action with sufficient particularity and not simply make allegations in general terms. The adequacy of a statement of claim is to be assessed by reference to whether the cause of action is pleaded at a level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations. A respondent or defendant is entitled to know the factual foundation for the case that is being alleged, so that the respondent or defendant can prepare to meet that case at trial. In order to disclose a reasonable cause of action, a statement of claim must contain an allegation of all of the relevant facts necessary to support any allegation made in it. A pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand.

8    More specifically, r 16.43(1) of the Federal Court Rules 2011 provides that a party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. Under r 16.43(3), condition of mind for a party includes knowledge. In addition, under r 16.43(2), if a party pleads that another party ought to have known something, the first party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. The question of knowledge on the part of the directors is critical to the causes of action sought to be pleaded against them by the appellants.

9    It has long been the case, in various jurisdictions, that particulars are to be provided of facts and circumstances relied upon to support a plea that something ought to have been known (see Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 at 604 and Smith v Littlemore (1996) 15 WAR 289 at 300). Knowledge itself has usually been treated differently. Knowledge of, or recklessness towards falsity, by way of example, may usually be pleaded as the material fact without particularisation (see Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304). Allegations of fraud, or the involvement of persons in statutory breaches sufficiently analogous to allegations of fraud, on the other hand, have required the provision of quite specific particulars.

10    The reason for not being required to particularise knowledge is not fully explained in the cases. It may be assumed that, on the one hand, there is the obvious difficulty of knowing what is inside another’s mind. On the other hand, there may be instances where the evidence to be relied upon to establish knowledge could be identified by particulars. That evidence might be an admission or a communication, written or oral, that could only give rise to the relevant state of mind. In appropriate cases, the provision of particulars has been ordered when sought.

70    In my opinion, the respondents’ contention must be rejected. There may be a case for the provision of particulars, but the matters the respondents identified do not mean that no reasonable cause of action is disclosed in the Statement of Claim. Knowledge has been pleaded and one then goes to the pleading of fraud in paragraph 12. That pleading is adequate. The invoices are, in fact, before the Court.

71    Finally, the respondents contend that the applicant had not particularised its loss in the Statement of Claim. The applicant had instead particularised the lenders’ loss. I reject this submission. As I read the Statement of Claim, the applicant’s loss is its liability to the lenders. Insofar as a complaint is made of a lack of detail as to the items of loss, that complaint can be remedied by the provision of particulars.

The Application for an Order for Security for Costs

72    The Court’s power to make an order for security for costs is contained in s 56 of the Federal Court of Australia Act and s 1335 of the Corporations Act. Rule 19.01 of the Rules is also relevant. Rule 19.01(3) provides for the matters which must be dealt with in the affidavit which accompanies the application for an order for security for costs. In this case, the engagement of the power to make an order is not in dispute. The applicant is clearly impecunious and will not be able to meet an order for costs. A form entitled “End of Administration Return” lodged with ASIC by the receiver and manager of the applicant on 23 July 2020 indicates that the total amount of receipts received during the external administration was $689.98 and the total amount of payments made during the external administration was the same amount. Furthermore, the form also shows that the cash at bank at the end of the period for which the return was made was $0.00.

73    Ms English’s third and fourth affidavits are relevant to the respondents’ application for security for costs. In Ms English’s third affidavit, she annexes correspondence that she sent to the applicant’s solicitors and to the receiver and manager seeking information about the applicant’s financial circumstances in connection with the respondents’ application for security for costs. She gives evidence as to the costs incurred by the respondents to the date of her third affidavit, being costs in the amount of $44,924.98 and the tasks to which those costs relate, and she gives evidence as to the costs she considers the respondents are likely to incur up to and including the conclusion of a three day trial, being an amount of $165,000.

74    In her fourth affidavit, Ms English responds to criticism from the applicant’s solicitors about her earlier estimates in relation to costs. She states that the approach which she took to the itemisation of costs in her third affidavit was a “broad brush” approach and she noted the criticisms made of her approach by the applicant’s solicitors. In response to these criticisms, she prepared and annexed to her fourth affidavit a spreadsheet setting out her estimate of the likely costs to attendance on judgment. The estimate is an estimate of actual costs to be incurred by the respondents, not party and party costs. Ms English refers to her earlier estimate which is nearly $60,000 lower and asks the Court to disregard that estimate.

75    In the course of his submissions, counsel for the respondents said that the amount in Ms English’s fourth affidavit which I should act on is the amount of $254,764.78. Further, that amount was to be discounted to reach a figure appropriate for party and party costs.

76    The applicant relied on the second affidavit of Mr Shueard. Mr Shueard is a solicitor who was admitted in July 2017 and, as I have said, he assists Mr Rowley in the course of his practice. Mr Shueard refers to the third affidavit of Ms English. He also refers to the affidavit of Mr Rowley and the affidavit of Ms How. He says that he has had the benefit of reviewing Mr Rowley’s affidavit and Ms How’s affidavit and that he adopts and refers to the matters set out in those affidavits. He then states that having reviewed those affidavits and conferred with Mr Rowley, he believes that the source of any impecuniosity “as alleged to be suffered by the Applicant is the conduct of the Respondents”. Mr Shueard also points to what he claims are deficiencies in Ms English’s estimate of costs.

77    Mr Shueard states that he is informed by the lenders and verily believes that they are prepared to provide security for costs to the respondents in the form of a joint and several undertaking, signed by the Lenders, “to the amount of $60,000”. On 26 October 2020, Charlton Rowley for the applicant, wrote to Ms English for the respondents stating, among other things:

Our client objects to both the basis and quantum of security for costs. Such as there is any impecuniosity as alleged, the same arises from your clients’ conspiracy to systematically misappropriate the assets of our client. The Respondents cannot therefore look to rely upon their own default and conspiracy to seek security for costs from the defrauded party. We refer you to the usual authorities.

Notwithstanding that, and in the interest of avoiding the costs of your clients’ security for costs application, we are instructed that the Lenders would be willing to offer the Respondents a written joint and several undertaking in the amount of $60,000.00 as security in respect of any adverse costs orders up to the point of any mediation.

78    That offer was rejected by Ms English, both as to the amount offered and the form of security offered. Ms English in her letter dated 27 October 2020 said the following:

Finally, your proposed form of an undertaking is unacceptable. The form of security should be either through the relevant quantum being paid into the Court, into our trust account, or through a bank guarantee. A written undertaking by a group of “Lenders” that you have not identified and who are not parties to these proceedings is worthless in assuring our clients that any adverse costs order will be satisfied.

79    Mr Shueard provides details of some of the assets of three of the lenders: Richard Willson, John Charlton Rowley and MEG Investments Pty Ltd. Mr Shueard states that, subject to an appropriate agreement as to confidentiality, he is informed by the lenders and verily believes that they will be prepared to provide further information about their respective financial positions in order to satisfy any adverse costs orders.

80    The factors which are relevant to the exercise of the discretion to make an order for security for costs are well-known. Justice Edelman, sitting as a judge of this Court, summarised the factors in Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 (Concrete Mining) at [13].

81    The applicant relied on five matters in opposition to an order for security for costs.

82    First, the applicant submits that there is a strong case that the respondents have been involved in fraudulent conduct. That is shown by a comparison of the two invoices which reveal different purchase prices for the Chains and that a deposit was not, in fact, paid. Despite filing two affidavits, the second respondent has not answered this evidence. The strength and bona fides of the applicant’s case is a relevant matter and there is force in the applicant’s submission. However, there are two other matters to be borne in mind. First, as Edelman J pointed out in Concrete Mining (at [13]), “this will invariably only be determined in a provisional manner and in many cases will only be a broad brush impression of little weight”. Secondly, although the conflicting invoices are an important element of the applicant’s case, there are a number of other matters the applicant will need to prove in order to establish its claim.

83    Second, the applicant submits that the fact that its impecuniosity was caused by the respondents’ conduct, which is the subject of the claim, is a relevant factor. There is no clear evidence of the applicant’s financial circumstances from 2015 until recently. Even if it is assumed that the applicant’s impecuniosity was caused, or largely caused, by the respondents’ conduct, that is not a significant factor in this case because there are third parties (i.e., the lenders) who have assets and who stand to benefit if the applicant is successful.

84    Third, the applicant contends that if an order for security for costs is made, the quantum of the security should be calculated only to the point of a mediation. It is a well-established practice that security for costs is ordered to the end of the first day of trial. The Court is at that point in a good position to determine whether further security should be ordered. The practice is not an inflexible one and the Court has a broad discretion in an appropriate case to fix security by reference to some other point in the pre-trial process. However, no order has been made to this point that this proceeding be referred to mediation and, in my opinion, there are no features in this case which warrant a departure from the ordinary practice of ordering security for costs to the end of the first day of trial.

85    Fourth, the applicant contends that the proffered undertaking of the lenders is sufficient security for costs. There are two reasons for rejecting that submission. First, for reasons I will give, the amount of the undertaking is inadequate. Secondly, I do not think a bare undertaking is sufficient. There is some evidence of some of the lenders’ assets, but not enough to constitute a full and complete picture. In any event, if an order for security for costs is justified, as I think it is, I see no reason why the respondents should not have the benefit of security in the usual form of a payment into Court or a trust account or the provision of a bank guarantee.

86    Finally, the applicant contends that there is simply no reliable evidence of the likely quantum of costs. It relied on the fact that Ms English has withdrawn her first estimate which was substantially lower than the estimate now relied upon. In my opinion, the answer to this point is that the estimate now relied upon is sufficiently reliable and cogent to form the basis for an order for security for costs.

87    In my opinion, the appropriate quantum of security is $125,000. My calculations start with a figure of approximately $254,000 as suggested by counsel for the respondents. I have reduced this figure to approximately $200,000 to take account of the fact that quantum is to be determined to the end of the first day of trial and the fact that there may be some duplication in the costs estimate of Ms English as the applicant contends. I have then reduced the figure of approximately $200,000 by 35% to 40% to reach a figure for party and party costs.

The Application to Transfer the Proceeding to the New South Wales District Registry

88    The respondents seek an order transferring the proceeding to the New South Wales District Registry. The Court’s power to transfer the proceeding to a different venue is contained in s 48 of the Federal Court of Australia Act (see also r 2.02 of the Rules).

89    The applicant is a company registered in Queensland and has its registered office and principal place of business in New South Wales.

90    The first respondent is also a company registered in Queensland and has its registered office and principal place of business in New South Wales. The second respondent resides and conducts business in New South Wales.

91    The respondents identify the following key witnesses and the place of residence of each of those witnesses as follows: (1) Ms Sharpe, a previous director of the applicant, who resides in New South Wales; (2) Mr Sharpe, a previous director of the applicant, who resides in New South Wales; (3) the second respondent and the director of the first respondent, resides in New South Wales; and (4) Mr Willson, the current Controller of the applicant, who resides in South Australia.

92    Ms English states that the respondents have identified “numerous further witnesses who all currently reside in New South Wales”, although she does not name those witnesses.

93    In late August 2020, the second respondent went to hospital with heart failure.

94    The second respondent has given evidence of his poor health due to a heart condition. He has produced medical notes and reports. He states that his ability to travel is limited because of his condition and he needs to be close to his individual medical team.

95    The evidence advanced by the applicant in opposition to the application to transfer the proceeding to the New South Wales District Registry may be summarised as follows. First, all of the lenders, or their directors, are located in South Australia or reside in South Australia. Mr Willson and Ms Willson reside in South Australia as does Mr John Charlton Rowley. The principal place of business of Red Dog #1 Pty Ltd (of which Mr Willson is a director) and of RJC Nominees Pty Ltd (of which Mr Willson is company secretary) and of MEG Investments Pty Ltd are in South Australia and the directors of MEG Investments Pty Ltd reside in South Australia. Secondly, the sole director and secretary of PFM, Ms Annette How, resides in Rhye, Victoria, but partly conducts the business of PFM from an office in Adelaide, South Australia. Thirdly, one of the individual lenders and a director of one of the corporate lenders are of an age where the effects of contracting COVID-19 may be more serious. Finally, Ms How has accommodation options in South Australia due to the fact that PFM conducts part of its business in South Australia that she does not have in New South Wales.

96    In their written submissions, the respondents said that they were content for their application for the transfer of the proceeding to be dealt with “pending the resolution of the application for strike out and dismissal”. They said that they made that submission because if they obtain judgment or an order dismissing the proceeding, then it will not be necessary for the application for transfer to be determined. This alternative does not apply because, for reasons I have given, I refuse the application for judgment or an order dismissing the proceeding.

97    In the alternative, the respondents apply for an adjournment of the application for transfer until after they have made an application to have proceedings in the Supreme Court transferred to this Court “to run parallel with these proceedings”. Those proceedings in the Supreme Court were filed on 3 August 2020 and are between the lenders as applicants, Rolton Limited (a New Zealand company) and Roland Smith as respondents. It is alleged in those proceedings that the applicant commissioned the first respondent to provide a valuation of the Chains and that the first respondent provided a valuation on 26 November 2014. The valuation was provided to the lenders who advanced the loan of $1,175,000 to the applicant under the loan agreement. The lenders allege that the first respondent’s valuation was prepared negligently or was misleading or deceptive and they would not otherwise have made the loan. They claim loss and damage of $2,596,978.08. The lenders consent to the transfer of the Supreme Court proceedings to this Court, but do not agree that the hearing and determination of the application for transfer should be delayed until after that is done.

98    In their written submissions, the respondents said that they accept that while COVID-19 protocols are in place and hearings are taking place by audio-visual link, their application to transfer is “doomed to fail”. As I understand it, their approach is that they are content for the proceeding to remain in this Registry if and for so long as they are able to appear by audio-visual link. They submit that the difficulty is, and the need to deal with the application to transfer arises, in the event that face to face hearings resume. In that event, and against that possibility, they pursue their application to transfer. They submit that the balance of convenience is in their favour. The only matters against their application (say the respondents) are that the applicant’s solicitors are in South Australia and that the Controller, Mr Willson, resides in South Australia and they submit that these matters do not outweigh the convenience of the proceeding being transferred to New South Wales. Insofar as the applicant relies on the places of business and places of residence of the lenders or the directors, the respondents do not accept that all of these persons will need to be called as witnesses.

99    The applicant submits that the balance of convenience does not favour the respondents. They submit that, in any event, it is not necessarily decisive. The lenders will need to give evidence as to their reliance on what they say are fraudulent documents. Further, the medical notes and report produced by the second respondent do not support his assertion that he cannot travel or needs to be physically near his medical team.

100    In Custance v SC Admin Pty Ltd [2017] FCA 511, I said (at [3]):

The relevant general principles are well established. In National Mutual Holdings Pty Ltd and Others v The Sentury Corporation and Another (1988) 19 FCR 155, the Full Court of this Court observed that the power conferred on the Court or a judge by s 48 of the Act is in terms wholly unfettered and should be exercised flexibly having regard to the circumstances of the particular case. The power is an aspect of the national character of this Court. The Court observed that the factors a court is entitled to take into account in determining that one city is more appropriate than another for interlocutory hearings or for the trial are numerous and that those factors must be weighed in each case. The Court identified the residence of parties and of witnesses, the expense to parties, the place where the cause of action arose, and the convenience of the Court itself as some of the factors that may be relevant in particular circumstances. The Court said that the balance of convenience would generally be a relevant consideration, but is not necessarily determinative of each case. There is no onus of proof in the strict sense to be discharged by the party applying for an order that the proceeding be transferred. However, the Court must be satisfied after considering all relevant matters that there is sound reason to direct that the proceeding be conducted or continued elsewhere. The Court said (at 162):

Its starting point is that the proceeding has been commenced at a particular place. Why should it be changed? On the one hand, if the party who commenced the proceeding chose that place capriciously the Court would be justified in giving no weight to the choice of place. At the other end of the scale, a proceeding may have continued for some time at the place of commencement with many steps having been taken there, for example, filing of pleadings and affidavits, discovery and inspection. Due weight would be given by the Court to such matters before directing that the proceeding should continue at a different place.

The Court said that ultimately the test involves a determination of where the case can be conducted or continued most suitably bearing in mind the interests of all the parties, the ends of justice in the determination of the issues between them, and the most efficient administration of the Court.

101    As this passage indicates, the balance of convenience is generally a relevant consideration, but is not necessarily determinative of each case.

102    At this point in time, there appears to me to be no reason why the respondents cannot appear at case management and interlocutory hearings by audio-vidual link or, at least, at the majority of them.

103    As far as the trial is concerned, it is difficult to predict the witnesses who will be called and their location. Not only has a Defence not been filed, but more importantly, there is no evidence from the respondents about the inconsistencies in the invoices and their case about that topic. I take into account the second respondent’s medical condition, but in view of what I have just said, the scope and importance of this evidence is unclear. I am not persuaded that there is sound reason to direct that the proceeding be conducted or continued elsewhere.

104    I refuse the application to transfer the proceeding to the New South Wales District Registry.

Conclusions

105    The interlocutory orders sought by the respondents in paragraphs 1–6, inclusive, of their Interlocutory application are refused.

106    Pursuant to s 56 of the Federal Court of Australia Act and s 1335 of the Corporations Act, the applicant must provide security for costs in the amount of $125,000 in relation to this proceeding.

107    The respondents should lodge and serve within 7 days draft minutes of order reflecting the conclusions expressed in these reasons, including terms addressing the nature of the security and the consequences should it not be provided.

108    I will hear the parties as to the costs of the Interlocutory application.

Associate:    

Dated:    12 May 2021