Federal Court of Australia

Sydney Subdivision Pty Ltd (in liq) v Chow [2023] FCA 8

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application dated 7 October 2022 for leave to amend the statement of claim is dismissed.

2.    There be leave to the applicants to make a further application to amend the originating process and statement of claim.

3.    There be liberty to apply for any order as to costs of the interlocutory application.

4.    Within 10 days, any party seeking an order as to costs shall file and serve an outline of submissions of no more than three pages setting out the costs order sought and the basis for the order together with any necessary affidavit confined to matters of fact.

5.    Within 10 days of any party seeking an order as to costs, the opposing party shall file and serve an outline of submissions in reply of no more than three pages.

6.    The question of any order as to costs of the interlocutory application be determined on the papers.

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

REASONS FOR JUDGMENT

COLVIN J:

1    Sydney Subdivision Pty Ltd (in liq) (SSPL) was formerly the trustee of the Benjamin M J Chow Family Trust (Trust). Until July 2015, its directors were Mr Benjamin Chow and Ms Roberta Chow. In its capacity as trustee, SSPL carried on business. Mr Vanda Gould provided accounting, tax, financial and investment advice to SSPL and to each of Mr and Ms Chow.

2    In 2015, the Commissioner of Taxation commenced an audit of the taxation affairs of SSPL. The Commissioner had conducted two earlier audits of its affairs each of which resulted in disallowance of certain deductions. The third audit resulted in adjustments to the income taxation returns of SSPL in each of the financial years 2000 to 2009. Amended assessments and assessments for penalties and interest were issued for each of the financial years 2003 to 2009 (2015 Assessments). The total amount of the 2015 Assessments was $2,602,191.05. In consequence, SSPL was voluntarily wound up on 13 July 2015.

Proceedings against Mr and Ms Chow

3    After an investigation by the liquidator of SSPL which included compulsory examinations and production of documents, proceedings were commenced in this Court by SSPL and the liquidator against Mr and Ms Chow on 11 March 2020. The form of application used to commence the proceedings was an application under the Federal Court (Corporations) Rules 2000 (Cth). It described the claims in the following terms:

On the facts stated in the supporting Statement of Claim, the plaintiff claims:

a.    a declaration that each of Benjamin Chow and Roberta Chow has and have acted in breach of the fiduciary duties which they owed to Sydney Subdivision as directors of Sydney Subdivision;

b.    a declaration that each of Benjamin Chow and Roberta Chow have acted in breach of sections 180,181,182, and 184 of the Corporations Act;

c.    The sum of $2,602,191.05 for unpaid tax, penalties and interest;

d.    The sum of $2,551,330.00 in unpaid director's loans.

e.    Alternatively, damages against each of Benjamin Chow and Roberta Chow.

4    The statement of claim (Claim) filed with the application set out the basis for the claims and concluded with a restatement of the claims to relief in the same terms as the application (together with claims to interest, costs and such other orders as the Court deems fit).

5    In broad terms, the allegations in the Claim were to the following effect:

(1)    At all material times, Mr Gould provided accounting, tax, financial and investment advice to SSPL and Mr and Ms Chow.

(2)    Mr Gould had central management and control of Hua Wang Bank Berhad (HWBB), a company registered in Samoa.

(3)    In 1994, SSPL was approved as an employer member of a superannuation fund (Fund).

(4)    The trustee of the Fund was also a company controlled by Mr Gould.

(5)    In 1994, SSPL transferred an amount of $400,000 styled as superannuation contributions to the Fund and those funds were then transferred to HWBB.

(6)    HWBB entered into a purported loan agreement with SSPL to provide a $1 million loan facility with interest payable on drawdowns by 30 June each year.

(7)    The above arrangements were part of a scheme to allow the Trust to have the benefit in Australia of the superannuation contributions and for SSBL as trustee to claim a tax deduction in Australia for purported interest payments to HWBB, thereby reducing the personal income tax liability of Mr and Ms Chow as the recipients of distributions from the Trust.

(8)    The arrangements were made to conceal the superannuation funds from the Commissioner and to evade, alternatively avoid, income tax liability.

(9)    The scheme was implemented thereby exposing SSBL to a risk of audit and a risk of assessments that disallowed the purported deductions.

(10)    The scheme involved Mr and Ms Chow acting as directors of SSBL to benefit themselves to the detriment of SSPL.

(11)    In or about 2000, there was an audit of the taxation affairs of SSPL which determined that purported interest payments as part of the scheme were not allowable as deductions.

(12)    In the period 2000 to 2006, SSPL continued to claim such purported interest payments as deductions.

(13)    In 2007, there was a second audit which again determined that such purported interest payments were not allowable as deductions.

(14)    After the conclusion of the second audit, a further deduction of $75,216 was claimed for the 2006 tax year on the same basis as the earlier purported interest payments.

(15)    There was a third audit after which the 2015 Assessments were issued.

(16)    Mr and Ms Chow owed common law fiduciary and statutory duties to SSBL as directors.

(17)    Mr and Ms Chow had breached those duties because they had caused SSPL to enter into the scheme and give effect to each of its constituent parts when they knew, amongst other things (a) it was a device to reduce their personal taxable income; (b) the documentation was intended to create a false appearance that there was a genuine commercial loan transaction between HWBB and SSPL; (c) in fact the scheme involved back to back arrangements whereby offshore funds under the control of SSPL were disguised; (d) the scheme was a sham arrangement; and (e) the scheme operated to the personal benefit of Mr and Ms Chow; yet they continued to cause SSPL to file income tax returns claiming purported interest expenses as deductions after the first audit and the second audit.

6    It may be noted that the alleged breach of duty was entering into the scheme concerning the HWBB loan with the knowledge as alleged.

7    The plea as to loss and damage in respect of the alleged breaches of duty was a claim that 'by reason of the audits conducted by the Commissioner and by reason of the Liquidation of [SSPL], [SSPL] has suffered and incurred loss and damages and costs and expenses'. The particulars given listed claims to the total amount of the 2015 Assessments and the costs of winding up.

8    Therefore, it appears that the event alleged to give rise to the loss claimed is the third audit which was said to have commenced in or about 2015 and to have culminated in the issue of the 2015 Assessments between 2 and 4 June 2015.

9    There was a separate claim that an amount of $2,551,330 had been advanced by SSPL to Mr and Ms Chow as unsecured loans and that despite demand the loans had not been repaid to the liquidator of SSPL.

An earlier draft claim included allegations concerning a separate loan scheme

10    Before filing the originating process and the Claim, the solicitors acting for SSPL and the liquidator had considered including a separate claim in relation to a loan provided by Normandy Finance and Investments Limited (Normandy) to SSPL. Normandy was a company incorporated in the United Kingdom. It too was alleged to be controlled by Mr Gould. Information available to the liquidator of SSPL at the time of preparing a draft of the Claim showed that between August 2000 and April 2009, SSPL had claimed interest deductions in respect of a loan from Normandy. Indeed, it appeared that interest deductions had been claimed for the Normandy loan by SSPL for many years before 2000 (as far back as 1996).

11    A copy of the draft Claim was provided to the solicitors acting for Mr and Ms Chow. It included allegations concerning the HWBB loan (of the kind that came to be included in the Claim) as well as a separate claim based upon a scheme concerning the Normandy loan. Relevantly for present purposes, the draft Claim set out a table which identified the interest expenses (and facility fees) that had been claimed by SSPL which were the subject of the claim, being those that related to the period 2000 to 2009. It identified the parts of the 2015 Assessments that related to deductions for the Normandy loan and the parts that related to the HWBB loan. Of the total amount, only $75,216 was shown to be interest relating to the HWBB loan. As has been noted, this amount is separately identified in the Claim as a deduction relating to the HWBB loan.

12    Therefore, it was very clear from the terms of the draft Claim that most of the 2015 Assessments related to deductions that had been claimed for interest expenses (and facility fees) in respect of the Normandy loan. However, there was no evidence available to the liquidator to indicate that in the case of the Normandy loan there was a back to back arrangement of the kind alleged in respect of the dealings involving HWBB. Further, neither the first nor the second audits resulted in the disallowance of the interest deductions that had been claimed by SSPL in respect of the Normandy loan.

13    In those circumstances, a decision was made by those acting for SSPL and the liquidator to remove from the then draft Claim any claim in respect of the Normandy loan dealings. It will be necessary to return to the significance of the decision not to include a claim concerning the Normandy loan in the Claim as filed.

14    As to the reason for the removal of the Normandy loan claim, a partner of the firm of solicitors who has acted for SSPL, has deposed as follows:

On 13 August 2019, a draft statement of claim … was sent to the Respondents' solicitors which contained a claim in relation to the Normandy Loan. I believe that that the draft claim in relation to the Normandy Loan was included on the basis that the solicitors at the time believed that it was part of a back-to-back loan arrangement, whereby the funds originated from the Respondents or related entities, were transferred to Normandy Finance and then loaned back to Sydney Subdivision.

Based on a discussion that I recently had with Ms Pavey, I believe that a decision was made to remove aspects of the Draft SOC in relation to the Normandy Loan shortly before commencing the proceedings as Ms Pavey did not have documents to establish the source of the funds for the Normandy Loan.

The [Claim] was filed … setting out the liability to the ATO … which did not differentiate between the aspects of the [liability] that related to the Normandy Loan and those aspects that related to the purported loan from Hua Wang Bank Berhard.

15    Ms Pavey is a solicitor who was involved at the time that the draft Claim was sent to the solicitors for Mr and Ms Chow.

The way the Claim as filed dealt with the Normandy loan

16    As has been noted, the draft Claim included a table which identified the extent to which the interest deductions the subject of the Claim related to the Normandy loan. However, the Claim as filed did not include the table. Instead, it included the following (paras 41-43):

In or about 2015, the Commissioner … commenced an audit of the financial and taxation position of Sydney Subdivision (third audit).

To the knowledge of each of Sydney Subdivision and each of Benjamin Chow and Roberta Chow, the third audit conducted by the Commissioner placed Sydney Subdivision to the risk of exposure to the true purpose and effect of the HWBB Loan Scheme.

To the knowledge of each of Sydney Subdivision and each of Benjamin Chow and Roberta Chow, the third audit conducted by the Commissioner placed Sydney Subdivision to the risk of additional taxation, penalties and interest for unpaid tax.

17    The Claim as filed then identified the 2015 Assessments (para 44) and produced a table setting out the assessments and penalties for each of the years 2003 to 2009 (para 45). The table was in similar terms to that which had been in the draft Claim save that it did not separately identify amounts that related to claimed interest deductions for the Normandy loan.

18    It can be seen that the nature of the claim made was that (a) the HWBB scheme exposed SSPL to the risk of the third audit; and (b) the third audit also exposed SSPL to the risk of additional taxation, penalties and interest for unpaid tax of a kind that was unconfined. So, unlike the draft Claim, the whole of the 2015 Assessments (not just the HWBB loan interest deductions) were attributed as consequences of the HWBB scheme having exposed SSPL to the risk of the third audit. The claim was framed in this way even though the first and second audits had not disallowed deductions arising from the Normandy loan.

19    Plainly, this was not a matter of oversight or error. Having regard to the evidence, it was the result of a conscious and informed decision by those then acting for SSPL and the liquidator.

The conduct of the proceedings

20    After the originating process and the Claim were filed, the proceedings progressed. A defence was filed in November 2020. It included the following plea as to the claim in para 44 that the Commissioner had issued the 2015 Assessments:

As to paragraph 44 of the Statement of Claim the Respondents admit that the ATO reassessed the taxation obligations of the Trust. The Respondents deny that all of those amounts related to deductions claimed regarding HWBB.

The deductions related to HWBB for each financial year were:

(a)    2003: $32,560

(b)    2004: $59,000

(c)    2005: No claim for interest related to HWBB

(d)    2006: $75,216

(e)    2007: No claim for interest related to HWBB

(f)    2009: No claim for interest related to HWBB

Total: $166,776.

21    Therefore, it was clear from the defence that one matter that Mr and Ms Chow relied upon in answer to the Claim was an allegation that most of the 2015 Assessments related to the disallowance of deductions for the Normandy loan. Given the way in which the draft Claim had been prepared, the decision that was made to remove any reliance upon the Normandy loan and the terms of paras 43 and 44 of the Claim as filed, it would have been obvious to any competent solicitor with the conduct of the proceedings for SSPL and the liquidator that the defence was attributing significance to the fact that most of the 2015 Assessments did not relate to the HWBB loan.

22    Discovery was then sought and obtained (noting that it took some time to resolve issues about the extent of discovery to be provided by Mr and Ms Chow and to secure provision of discovery by them). Affidavits were then filed in support of the Claim. Mr and Ms Chow were ordered to file their affidavits in response. They failed to comply with the order. Instead, they filed an interlocutory application seeking summary judgment or to strike out parts of the Claim. One of the matters relied upon to support the summary judgment application was the fact that the majority of the liability for the 2015 Assessments related to the Normandy loan.

23    Those acting for Mr and Ms Chow may be criticised for their delay in seeking to bring an application for summary judgment. Indeed, the delay may have been a reason why the application may not have been entertained. However, instead of objecting and pressing for Mr and Ms Chow to file their statements, the applicants prepared amendments to the Claim and sought leave to amend. Amongst other things, the proposed amendments sought to introduce a claim based upon an alleged scheme in relation to the Normandy loan of the same kind that had been in the draft Claim (but deliberately not included in the Claim). The amendment application was opposed by Mr and Ms Chow but only to the extent that the proposed amendments sought to introduce reliance upon an alleged scheme in respect of the Normandy loan (Normandy Claim).

The contentions of the parties on the application to amend the Claim

24    In support of the application to introduce amendments to advance the Normandy Claim, it is contended that:

(1)    The Court has a broad discretion to grant leave to amend the Claim which is to be exercised in accordance with the overarching purpose stated in s 37M of the Federal Court of Australia Act 1976 (Cth).

(2)    The amendment would allow for the real issues in dispute to be determined completely and finally.

(3)    The proceedings are not well advanced as Mr and Ms Chow have not served their evidence and no date has been set for a hearing.

(4)    The omission of a claim based upon an alleged separate scheme concerning the Normandy loan arises from the application of fresh legal minds to the issues in the proceedings.

(5)    The blame for the failure to include a claim based on the Normandy loan does not lie at the feet of SSPL or the liquidator.

(6)    There is no costs prejudice to Mr and Ms Chow because they could not be said to have wasted significant costs if the amendment is allowed.

(7)    The question whether there is a limitation point should be determined at trial especially where there are issues as to whether it will apply by analogy to the claim for breach of director's fiduciary duties because circumstances such as fraudulent concealment would make it unconscionable to do so.

(8)    If the amendment is not allowed then SSPL and the liquidator will have to commence separate proceedings concerning the Normandy loan in circumstances where the statutory limitation under s 1317K of the Corporations Act 2001 (Cth) may have expired.

(9)    There would be no forensic prejudice to Mr and Ms Chow if the amendments were granted because it should be inferred that prior to the commencement of the proceedings they took steps to collate all the information available to them concerning the Normandy loan in order to respond to inquiries from the Commissioner in the course of the third audit and to answer notices to produce as part of public examinations conducted by the liquidator.

(10)    Mr and Ms Chow sat on their hands and delayed making an application for summary dismissal or somehow were responsible for not exposing in a clear way the deficiency with the way the Claim was pleaded when it came to the parts of the 2015 Assessments that related to the Normandy loan.

25    It can be seen from these contentions that the amendment application was brought on the basis that the amendments should be allowed to relate back to the date of the commencement of the originating process. In the alternative, it was proposed that the amendments should be allowed with the question as to when they may take effect to be deferred until the final hearing. The latter course would have the consequence that Mr and Ms Chow would have to face all of the forensic burden of dealing with the Normandy claim as any adjudication as to whether the claim was out of time would only be forthcoming after a full trial.

26    The respondents advance contentions to the following effect as reasons why leave should not be given to introduce the Normandy Claim:

(1)    After a number of years in which matters were investigated and the basis for the Claim was evaluated, a conscious and informed forensic decision was made not to include the Normandy Claim.

(2)    The Normandy Claim was not included in the Claim because of an assessment that it lacked merit and it has not been explained why it is now thought that the claim has merit.

(3)    More than seven years have passed since SSPL went into liquidation and legal costs have been incurred and stress suffered by Mr and Ms Chow in dealing with the investigation and allegations that have resulted in the proceedings. They are an elderly couple in their seventies. Also, the proposed Normandy Claim makes serious allegations as to their personal probity. These are considerations that are said to weigh against the grant of leave at this stage to expand the scope of the proceedings.

(4)    Since the bringing of the Claim important evidence has ceased to be available to Mr and Ms Chow.

(5)    The proposed amendments to introduce the Normandy Claim contain no material facts to support the claim that the Normandy loan was a sham.

(6)    The Normandy Claim is now out of time and it is not a claim that arises out of the same facts or substantially the same facts as the Claim. As these matters are clear, this is not a case in which leave should be granted on terms that would defer the determination of the date from which the amendments might be allowed and whether the claim is barred by limitation periods until the final hearing.

Outcome

27    For the following reasons, the application for leave to amend should be refused because it seeks leave to add the Normandy Claim. It would be open to SSPL and the liquidator to bring a further application to amend. Insofar as it may concern the Normandy Claim, the success of any such application will depend whether SSPL and the liquidator can demonstrate that there is a properly pleaded arguable claim that is not plainly out of time. In order for that to be so, it must be established that there is a basis upon which the amendment can relate back to the commencement of the proceedings even though it raises a new claim that goes beyond the existing facts; or that there is some arguable basis as to why the limitation period of six years does not apply the merits of which should be adjudicated at the final hearing. If those matters are established then there will remain an issue as to whether the application should be refused by reason of the time that has passed since the proceedings were commenced and any prejudice to Mr and Ms Chow.

The basis for the application for leave to amend

The relevant rules

28    The proceedings in the present case were commenced using the form of originating process in the Corporations Rules. The form commences by stating: 'On the facts stated in the supporting affidavit(s), the plaintiff claims …'. It may be observed that, in the present case, the form was modified to refer to the facts stated in the Claim. It appears that the originating process and the Claim were filed together.

29    There is no provision in the Corporations Rules about pleadings and their amendment. However, they do state that the 'other rules of the Court apply, to the extent that they are relevant and not inconsistent with these Rules … to a proceeding in the Court under the Corporations Act': r 1.3.

30    The Federal Court Rules 2001 (Cth) provide that a person who wants to start a proceeding in the Court's original jurisdiction must file an originating application: r 8.01(1). It requires the use of form 15 (not used in the present case). The originating application must state 'the relief claimed' and, in a case where relief is claimed under a statutory provision, must state that provision: r 8.03. If the application claims damages, it must be accompanied by a statement of claim or an alternative accompanying document required by any practice note issued by the Chief Justice: r 8.05(1). This appears to have been the course followed by SSPL and the liquidator in the present case. It appears to be the proper course having regard to the interaction between the Corporations Rules and the Federal Court Rules. That is to say, where a claim for damages is commenced by an originating process under the Corporations Rules then it should be commenced with a statement of claim (or an alternative accompanying document required by a practice note - such as a concise statement).

31    There is no provision in the Corporations Rules about amending an originating process. As to amendment of an originating application brought under the Federal Court Rules, r 8.21 provides:

(1)    An applicant may apply to the Court for leave to amend an originating application for any reason, including:

(a)    to correct a defect or error that would otherwise prevent the Court from determining the real questions raised by the proceeding; or

(b)    to avoid the multiplicity of proceedings; or

(c)    to correct a mistake in the name of a party to the proceeding; or

(d)    to correct the identity of a party to the proceeding; or

(e)    to change the capacity in which the party is suing in the proceeding, if the changed capacity is one that the party had when the proceeding started, or has acquired since that time; or

(f)    to substitute a person for a party to the proceeding; or

(g)    to add or substitute a new claim for relief, or a new foundation in law for a claim for relief, that arises:

(i)    out of the same facts or substantially the same facts as those already pleaded to support an existing claim for relief by the applicant; or

(ii)    in whole or in part, out of facts or matters that have occurred or arisen since the start of the proceeding.

(2)    An applicant may apply to the Court for leave to amend an originating application in accordance with paragraph (1)(c), (d), (e) or subparagraph (g)(i) even if the application is made after the end of any relevant period of limitation applying at the date the proceeding was started.

(3)    However, an applicant must not apply to amend an originating application in accordance with subparagraph (1)(g)(ii) after the time within which any statute that limits the time within which a proceeding may be started has expired.

32    The Federal Court Rules also specify the date from which an amendment to add a party is to take effect (r 8.22) and the way in which an amendment to an originating application is to be recorded (r 8.23). There is separate provision in the Federal Court Rules concerning pleadings and their amendment. Again, having regard to r 1.3 of the Corporations Rules, it appears that the provisions in the Federal Court Rules concerning amendment should be applied in the present case.

33    SSPL and the liquidator bring the application for leave to amend under r 16.53 of the Federal Court Rules which states:

Unless rule 16.51 applies, a party must apply for the leave of the Court to amend a pleading.

34    Rule 16.51 (which allows for one amendment without leave before the close of pleadings) does not apply in the present case because a defence was filed a considerable time ago.

Principles concerning the doctrine of relation back

35    Ordinarily, 'an amendment, duly made, takes effect, not from the date the amendment is made, but from the date of the original document which it amends': Baldry v Jackson [1976] 2 NSWLR 415 at 419 (Samuels JA). However, an amendment to introduce a claim that may be barred by the period of limitation at the time the amendment is made is not an ordinary amendment. If it were to be allowed to relate back then it would prejudice the opposing party's ability to raise a limitation point even though the claim was out of time. Such amendments are only treated as taking effect from the date of the original document where the amendment introduces a claim that 'arises out of the same or substantially the same facts' as the claims that have been brought within time: Ethicon Sàrl v Gill [2018] FCAFC 137; (2018) 264 FCR 394 at [47] (Allsop CJ, Murphy and Lee JJ). There is some uncertainty as to the current source of the authority for this limited 'relation back' practice because it was previously to be found in an express rule concerning amendments to 'any document in the proceeding' but is now only to be found in the provision in the Federal Court Rules that is concerned with amendment of the originating application: Voxson Pty Ltd v Telstra Corporation Limited (No 7) [2017] FCA 267 at [16]-[20] (Perram J), noting the limited respect in which those views were found not to be correct in McGraw-Hill Financial, Inc v Clurname Pty Ltd [2017] FCAFC 211 at [23] (Allsop CJ, Jagot and Yates JJ). See also the analysis of the 'relation back doctrine' by Brereton J in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 230 at [45]-[52].

36    All of which leaves open the possibility that Weldon v Neal (1887) 19 QBD 394 applies in the case of an application to amend a statement of claim. The 'rule' established by that case is usually understood to be to the effect that a claimant cannot amend proceedings to set up a fresh claim in respect of causes of action that have become statute barred by the time of the application to amend (even though they would have been brought within time had they been included when the proceedings were commenced). To do so would be to unjustly prejudice the opposite party who would otherwise be able to set up a limitation defence to the claim: Rodgers v Commissioner of Taxation (1998) 88 FCR 61 at 64 (Wilcox, Tamberlin and Emmett JJ).

37    Further, the rule of practice described in Weldon v Neal must now be applied in the context of the express legislative provision concerning such amendments to be found in the Federal Court Act. As to the relation back of amendments, s 52(2B) provides:

The Rules of Court may make provision for:

(a)    the amendment of a document in a proceeding; or

(b)    leave to amend a document in a proceeding;

even if the effect of the amendment would be to allow a person to seek a remedy in respect of a legal or equitable claim that would have been barred because of the expiry of a period of limitation if the remedy had originally been sought at the time of the amendment.

38    The terms of s 52(2B) appear to contemplate the making of an express rule conferring a power of the kind described in the statutory provision. They seem to reflect a view that the Court could not, at a time when a remedy was barred by expiry of a limitation period, allow an amendment to introduce a new claim as the basis for seeking the remedy unless the amendment was permitted by a provision in the Rules that was expressly authorised by statute. In short, the terms in which s 52(2B) are expressed seem to assume that the Court has no power beyond that conferred expressly by a rule made under the authority conferred by s 52(2B) by which to allow an amendment that will relate back to the date of commencement of proceedings (that is, to take effect as if included in the proceedings at the time that the proceedings were commenced).

39    There is an alternate possibility. It is to the effect that in determining when an action has been commenced for the purposes of a limitation period, the Court treats proceedings that have been commenced as including any cause of action that arises out of the same or substantially the same facts as formed the basis for the proceedings when commenced. It does so as a matter of general law principle (unless modified by statute). Therefore, a later application to make an amendment to advance such a claim can be allowed on the basis that it has been commenced in time. In effect, it was always part of the controversy the subject of the proceedings and therefore could not be said to be out of time if sought to be added to the express claims to be adjudicated. Of course, any such amendment must meet other principles designed to ensure fairness in the conduct of the procedure when it comes to amendment. However, provided the expansion of the case to include a new claim or cause of action does not go beyond the controversy encompassed by the same or substantially the same facts as were the subject of the proceedings when commenced then it is within time. A principle of that kind may well depend upon the terms in which the particular limitation period is expressed. However, it provides an explanation for a source of authority for allowing an amendment to add a new claim that will relate back to the date of commencement if encompassed by the same or substantially the same facts that does not depend upon express legislative authority. As to these matters, see the reasoning of Wigney J in Gloucester Shire Council v Fitch Ratings, Inc (No 2) [2017] FCA 248 at [235] and the summary of the approach at general law in Belgravia Nominees Pty Ltd v Lowe Pty Ltd [2017] WASCA 127; (2017) 51 WAR 341 at [46] (Martin CJ, Murphy and Mitchell JJA); and Agtrack (NT) Pty Ltd t/as Spring Air v Hatfield [2003] VSCA 6; (2003) 7 VR 63 at [40]-[44], [81]-[82] (Ormiston J, Chernov and O'Bryan JJ agreeing), outcome reversed on appeal on different grounds Agtrack (NT) Ptd Ltd t/as Spring Air v Hatfield [2005] HCA 38; (2005) 223 CLR 251.

40    However, in McGraw-Hill Financial, Inc v Clurname Pty Ltd, the Full Court appeared to go even further when it was said that the existence of r 8.21(1)(g) and (2) 'does not mean that the Court's power to permit an amendment [to an originating application] asserted to involve a statute-barred claim is confined to the circumstances in r 8.21(1)(g)(i)'. This appears to be a reference to the Court's power to permit an amendment on the basis that it will relate back to the date the proceedings were commenced even where the amendment goes beyond the same or substantially the same facts as those already the subject of the controversy being adjudicated and without an express rule justifying such a course on the basis of the power conferred by s 52(2B) of the Federal Court Act.

41    However, in Morgan v Banning (1999) 20 WAR 474 at 483 Wheeler J (Ipp and Owen JJ agreeing) articulated two propositions concerning the doctrine of relation back which appear to be inconsistent with the expansive view expressed in McGraw-Hill Financial, Inc v Clurname Pty Ltd, namely:

First, if the writ when issued, although defective, is not a nullity, and its terms are wide enough to encompass the amendments sought to be made to clarify or particularise or 'cure' it, then it seems that no question of limitation arises. Such an action is within time and subsequent steps (even those directed to defects in the original indorsement) are merely steps taken in a validly instituted action with respect to which it is not necessary to consider limitation questions. However, if it is so irregular that, subsequent to the expiry of the limitation period, the defendant is successful in having it wholly set aside, it will then be too late for the plaintiff to bring a further action.

The second proposition which seems to me to follow is that if the defective indorsement appearing on the writ when issued, is not of a type which is capable of encompassing amendments sought to be made after the expiry of the limitation period, so that the amendments truly 'add' an additional and time barred cause of action (rather than particularising, clarifying, or expanding one already instituted) then, whether leave to amend is granted or not, the new action remains time barred. Whatever the rules of court may provide, an action which is in fact instituted out of time is able to be defeated by reliance upon the Limitation Act, which the court has no power to override, whether by a procedural rule of 'relation back' or otherwise.

(emphasis added)

42    In his Honour's concurring judgment, Owen J emphasised that the rules and practices of the court relating to limitation matters must be seen within the statutory context and that there is no inherent jurisdiction or rule of the court that can circumvent statute or the operation of limitation provisions: at 476.

43    The above approach has subsequently been confirmed by the Court of Appeal in Western Australia: see the review of the authorities in Belgravia Nominees Pty Ltd v Lowe Pty Ltd at [29]-[47].

44    Importantly, s 52(2B) was introduced following obiter observations by Toohey J in Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514. The significance of those observations was explained by Cowdroy J in McGrath v HNSW Pty Ltd [2014] FCA 165; (2014) 219 FCR 489 at [35]-[36]:

The decision of Wardley … concerned an application to amend a statement of claim to include a cause of action barred by virtue of s 82(2) of the TPA. The Full Court of the Federal Court had found that the relevant cause of action was not barred by s 82(2). On appeal to the High Court, such finding was upheld per curiam. Toohey J (although not required to do so) also considered the power of the Federal Court to grant leave to amend a statement of claim to introduce a time barred cause of action. The extant rule governing the amendment of documents in the Federal Court was O 13 r 2(1) of the Federal Court Rules 1979 (Cth) ('the 1979 Rules'). Such rule provided:

The Court may, at any stage of any proceeding, on application by any party or of its own motion, order that any document in the proceeding be amended, or that any party have leave to amend any document in the proceeding, in either case in such manner as the Court thinks fit.

Having considered the scope of the jurisdiction exercised by the Federal Court (see 559-561), Toohey J found that O 13 r 2(1) was not sufficiently broad to permit amendments to statements of claim that would add a new and otherwise time barred cause of action. His Honour noted that any incidental or necessary powers invested in the Federal Court by virtue of its jurisdiction could not overcome a clear statutory prohibition such as that contained in s 82(2) of the TPA. His Honour stated at 561-562:

When the Federal Court is faced with an application to amend a statement of claim by introducing allegations that, though they may relate to a time after the relevant limitation period has expired, do no more than expand a cause of action already pleaded, there is no difficulty in treating O.13 r.2 as wide enough to permit such an amendment. But when, as here, the proposed amendment introduces an admittedly new cause of action, the position is quite different. Section 82(2) presents a statutory barrier to any new cause of action; to this barrier, reference to express, implied or incidental powers provides no answer.

45    After Wardley, the Federal Court Act was amended to insert s 59(2B): s 44 of the Law and Justice Legislation Amendment Act 1994 (Cth). The Explanatory Memorandum in respect of the amendment stated (at paras 113-115):

New subsection 59(2B) will enable the Rules of Court to make provision for -

•    the amendment of a document in a proceeding; or

•    leave to amend a document in a proceeding,

even if the effect of the amendment would be to allow a person to seek a remedy in respect of a claim that is out of time at the time of the amendment.

The proposed amendment is necessary to overcome the operation of the rule in Weldon v Neal (1887) 19 QBD 394. That case held that leave to amend will not be granted to enable a plaintiff to raise a new cause of action if that cause would, if proceedings in relation to it were then started for the first time, be barred by the expiry of a period of limitation. The amendment would not enable Rules to be made to allow a person to amend a claim so as to seek relief which was not available at the time the action was commenced because the action was commenced out of time.

Comments made by the Hon. Justice Toohey of the High Court in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 have raised some doubts whether the Federal Court currently has the power to make such rules. This amendment will overcome that doubt.

46    Therefore, the precise circumstances in which the Court may allow an amendment to a pleading on the basis that it will relate back to the date of commencement of the proceedings is somewhat uncertain. What is clear is that amendments that seek to introduce a new cause of action at a time that is beyond the expiry of the limitation period must be justified by reference to some source of authority that allows the amendment to relate back to the date of commencement of the proceedings otherwise it will be out of time.

47    Finally, in those cases where r 8.21(1)(g) is relied upon as the basis for an amendment, it has been observed that 'the Court should not be too pedantic in considering the nature of the facts added to the existing pleading' as the question whether 'the added facts are substantially the same as the facts already pleaded will be a question of degree, and will depend on the nature and extent of the existing pleaded case, the facts sought to be added in and the relief already sought': Camilleri v The Trust Company (Nominees) Limited [2015] FCA 1138 at [11] (Middleton J). As to instances where reliance was placed upon r 8.21(1)(g) see Captiv8 Pty Limited (in liq) v Bodger [2018] FCA 1801 at [54] (Gleeson J); Bryant (Liquidator) v L.V. Dohnt & Co Pty Ltd, in the Matter of Gunns Limited (In Liq) (Receivers and Managers Appointed) [2018] FCA 238 at [67]-[71] (Davies J); and Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) [2020] FCA 1824 at [27] (Middleton J).

Possible deferment of question as to when amendment takes effect

48    Where the determination of the time when a cause of action accrues or some other relevant event occurs for the purposes of a limitation period requires adjudication of aspects of the claim, the Court may make procedural orders which defer the determination of the limitation point until the final hearing. Usually such orders will take the form of deferring the adjudication of both the question whether to allow the amendment on a relation back basis and whether, in any event, the claim the subject of the amendment is statute barred.

General principles as to amendments

49    Limitation points aside, the manner in which the Court's power to grant leave to amend a statement of claim ought be exercised was described by Gilmour and Foster JJ in Caason Investments Pty Ltd v Cao [2015] FCAFC 94; (2015) 236 FCR 322 at [19]-[21] in terms which gave significance to each of the following aspects:

(1)    The power of the Court to grant or refuse leave must be exercised in the way that best promotes the Court's overarching purpose to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible.

(2)    The power is broad and has the remedial objective of ensuring that any defect in the pleadings is cured and that the real questions in the controversy are properly agitated and to avoid a multiplicity of proceedings.

(3)    The object of the Court is not to punish parties for mistakes made in the conduct of their case, but to correct errors with the result that a decision can be made on the real matters in controversy.

(4)    Leave to amend should be granted unless the proposed amendment is futile, such that the issue sought to be added is unlikely to succeed, the amendment is likely to be struck out or would cause substantial prejudice or injustice to the opposing party in a way that cannot be compensated by costs.

50    In Australian Competition and Consumer Commission v Productivity Partners Pty Ltd (trading as Captain Cook College) (No 2) [2020] FCA 863 at [6], Stewart J summarised the factors to be considered on an application for leave to amend pleadings as including the following:

(1)    prejudice to another party that cannot be adequately compensated by an award of costs, which would include the inevitable prejudice of unnecessary delay where that exists;

(2)    inefficiencies in the use of the court as a publicly funded resource arising from the vacation or adjournment of trials;

(3)    the need to maintain public confidence in the judicial system, which has a potential to be lost where a court is seen to accede to applications made without adequate explanation or justification;

(4)    the objective of doing justice between the parties;

(5)    the objective that the pleadings identify the 'real' issues between the parties;

(6)    the overriding purpose of the civil practice and procedure provisions in s 37M of the Federal Court of Australia Act 1976 (Cth), namely to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible; and

(7)    the nature and the importance of the amendment to the party that is seeking it.

The significance of the way the application to amend was characterised by SSPL and the liquidator

51    As has been noted, SSPL and the liquidator cast their application as one seeking to amend the Claim. They disavowed any need to amend the originating process. They maintained that the amendments sought, including the amendments to rely upon the Normandy loan, still sought the same amounts and claimed damages of the same kind as were stated in the originating process. Therefore, so they contended, no issue arose as to whether the present application might be justified on the basis of r 8.21 (or some other source of relation back authority).

52    However, a pleading may not be amended in a manner that goes beyond the scope of the originating process. A pleading which goes beyond the originating process is liable to be struck out. If a further claim is to be added then leave must be sought to amend the application. As to these matters, see ABB Service Pty Ltd (formerly known as ABB Engineering Construction Pty Ltd) v Hetherington [2001] WASCA 235 at [8] (McLure J, Wheeler J agreeing), noting that their Honours were there dealing with proceeding commenced by an indorsed writ.

53    As has been explained, in the present case, the originating process and the Claim together comprised the documents by which the proceedings were initiated. The fact that the Normandy Claim was proposed to be added as another basis upon which SSPL and the liquidator sought the relief that was already described in the originating process did not mean that the proposed amendment did not seek to add a cause of action that went beyond the originating process. The proposed addition of the Normandy Claim, if allowed, would add a new cause of action. It would expand the proceedings beyond their scope when initiated.

54    It is of no assistance to SSPL and the liquidator for the purposes of issues of limitation to seek to cast the application in the limited terms advanced. The amendment to add the Normandy Claim must be justified, if at all, on the basis that it proposes the addition of a new cause of action. For that reason alone the application must fail. It proposed an amendment to the scope of the originating process but sought to justify it on the basis that it was a mere pleading amendment that might be permitted on that basis. It claimed that any limitation point was either answered on the basis that the amendment did not expand the scope of the application or that it was a question that could be deferred until final hearing. I am not persuaded that the application can be allowed on the basis that it is simply an amendment to a pleading.

55    However, in all the circumstances, I would allow SSPL and the liquidator an opportunity to bring a further application and seek to justify it on the basis that it seeks to amend the originating process. Allowing for that possibility, I will deal with certain other issues to the extent that they were fully argued and may have relevance if SSPL and the liquidator seek to press their application to add the Normandy Claim.

Is the Normandy Claim a new claim?

56    Having regard to the terms of the Claim, the claim to the sum of $2,602,191.05 and the alternative claim to damages are based upon facts and circumstances that are confined to the HWBB loan (which is described as part of the HWBB scheme). What is now sought to be introduced is an allegation about a separate scheme in relation to the Normandy loan. For reasons that have been given it is a new claim. Any amendment to introduce the claim must be justified on that basis.

Does the Normandy Claim arise out of the same facts and circumstances as the existing claim?

57    The factual circumstances giving rise to the Normandy Claim are distinct from those that concern the HWBB loan. Both the existing claim and the Normandy Claim are said to involve Mr Gould, but there is no alleged overlap in the events that comprised the HWBB scheme and the events that are now sought to be pleaded that comprise the Normandy scheme. As has been noted, the schemes are not alleged to have the same form because there is no back to back aspect that is said to form part of the Normandy scheme.

58    The existing claim relies upon the two earlier audits and the consequent disallowance of deductions relating to the HWBB loan as part of the material facts that were said to give rise to the breach of duty because it exposed SSPL to a risk of audit. There is no reliance upon any aspect of the Normandy scheme as giving rise to that risk.

59    The proposed amendments to introduce the Normandy Claim do not arise out of the same facts and circumstances as the existing claim.

60    Therefore, this is not a case where r 8.21(1)(g)(i) provides a basis for relation back.

Is the Normandy Claim clearly out of time?

61    On the case as advanced for SSPL and the liquidator, the latest that any cause of action accrued was when loss was alleged to have been suffered by reason of the issuing of the 2015 Assessments in June 2015.

62    Two matters were advanced as to why the proposed amendments should not be disallowed on the basis that they were out of time. Firstly, it was said that the amendments should be allowed on the basis that they would relate back to the date of commencement of the proceedings. For reasons that have been given, the basis upon which the amendment application was brought does not provide a proper basis for such an approach. Whether there is some other basis for the amendments to be allowed on the basis that they relate back will be a matter to be considered if and when there is an amended application brought on the basis that it proposes an amendment to the scope of the originating process.

63    Secondly, although there was a limitation period of six years for the statutory claims by reason of s 1317K of the Corporations Act and it was accepted that the limitation period for the general law claims should be determined by analogy, the Court would not do so in the present case. It appears that the reason why that was said to be so was a claim that Mr and Ms Chow had been responsible for fraudulent concealment and applying the statutory time limit by analogy would be unconscionable. Reliance was placed upon the reasoning of Gleeson J in BCI Finances Pty Limited (in liq) v Binetter (No 4) [2016] FCA 1351 at [334]-[335] where her Honour said:

Equity applies the Corporations Act limitation periods by analogy unless it would be unconscionable to permit the respondents to rely upon the statute: cf. Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181; (2014) 87 NSWLR 435.

I accept the liquidators' submission that it would be unconscionable to permit the respondents to rely upon the s 1317K in this case, not least of which because the liquidators were only appointed to the companies in 2014 and 2015. Before the liquidators were appointed, the applicants were under the management of various of the respondents and therefore unable to prosecute the relevant claims. The fact that the respondent directors did not conceal any breach of fiduciary duty from the applicant companies does not assist the respondents.

64    It can be seen that her Honour's reasoning was based upon the fact that those against whom the claims were brought had been in control of the company for a considerable period after the conduct relied upon to support the claim. It was not until the liquidators were appointed that the claims could have been pursued. The appointment had occurred relatively recently.

65    Like the present case, BCI Finances Pty Limited (in liq) v Binetter (No 4) was concerned with alleged breaches of director's duties that resulted in the issue of taxation assessments. The assessments had issued in 2009 and 2010 but the liquidators were not appointed until 2014 and 2015. In the present case, the assessments were issued in 2015 and almost immediately SSPL was placed in liquidation. It was not explained by SSPL or the liquidator why the reasoning of Gleeson J might be applied to the delay between 2015 and the time of the application to amend to add the Normandy Claim. Nor was there any explanation as to the nature of the alleged concealment beyond general assertion. It may be noted that the assessments disallowed the deductions relating to the Normandy loan and the facts relied upon to support the amendment appear to have been known since 2015. It is not enough to waive the notion of unconscionability as if it were a magic wand. In the present case it was accepted that the limitation in the statute would apply by analogy but for unconscionability. In order for there to be an arguable case that there was no limitation point (assuming no relation back), SSPL and the liquidator needed to articulate some basis upon which unconscionability may mean that there should not be an analogous application of the statutory limitation. Only if that was done would it be appropriate for the Court to defer a determination of that question until after pleadings and in all likelihood until the final hearing: as to which, see the analysis by Buss JA, Steytler P and Pullin JA agreeing in Hewitt v Henderson [2006] WASCA 233 at [29]-[30].

66    In those circumstances, it will be necessary for SSPL and the liquidator to demonstrate on any further application to amend that there is some arguable basis upon which the six year limitation period will not apply (assuming there is to be no relation back).

Does the proposed Normandy Claim have merit?

67    SSPL and the liquidator failed to demonstrate that the proposed Normandy Claim has arguable merit. I accept the submission that the proposed claim lacks any pleaded material facts to support the claim that the Normandy loan was a sham. On any amended application it will be necessary to demonstrate arguable merit and to plead the material facts relied upon.

Has the delay in seeking the amendment been explained?

68    As to the terms of the defence, the partner with the conduct of these proceedings (who took over conduct of the proceedings in around April 2000 - a month after they were commenced) has deposed that she 'did not understand the way in which paragraph 44 [of the defence] was pleaded to mean that the majority of the of the ATO liability related to the Normandy Loan, not the HWBB Loan'. The affidavit from the partner goes on to say:

The first time that I am aware of that the Respondents' solicitors [directly] raised any issue of deficiency of the SOC in relation to the Normandy Loan was on 28 July 2022 when they served the Respondent's interlocutory application for summary judgment and the affidavit of Benjamin Sewell, affirmed 22 July 2022.

It was only after receipt of that application and review of the two judgments I refer to at paragraph 26 of My First Affidavit that consideration was given to pleading a breach of director's duties claim in relation to the Normandy Loan irrespective of the source of the funds on the basis that following the first two ATO audits, continuing to claim deductions for similar offshore loans would expose the company to risk of further audit, penalties and interest.

69    The reference to 'My First Affidavit' is to an affidavit in which the following statements were made (paras 24-28):

It is not entirely clear to me why the Statement of Claim did not include further particulars of the purported loan agreement with Normandy (the Normandy Loan).

However, upon review of the relevant ATO audits, it is likely to have been due to the Respondents' failure to maintain proper books and records of Sydney Subdivision and their failure to provide complete records to the ATO and the liquidator in relation to the Normandy Loan, if in fact any such records ever existed.

Recently, the following judgments were handed down by the Federal Court concerning sham loan arrangements involving the same accountant, Vanda Gould: Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971 and Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972.

In light of the matters raised by the Respondents and the issues addressed in those judgments, the Applicants have set out further particulars of the claim involving the Normandy Loan.

Given that this matter is not yet listed for hearing, and that the respondents have failed to file and serve their evidence as ordered by the Court, there should be no prejudice to the Respondents, other than the potential for limited costs thrown away to plead to the paragraphs that have been added to the Proposed ASOC in relation to the Normandy Loan.

70    I do not accept that the above matters provide an explanation for the delay in seeking to add the Normandy Claim. As I have explained, there was a conscious decision not to include the Normandy Claim. The allegation made in the Claim was that all of the disallowed deductions after the third audit were a consequence of exposing SSPL to the risk of audit through participating in the HWBB scheme. In short, even though most of the disallowed deductions did not relate to the HWBB loan nevertheless they were alleged to be a consequence of being exposed to the risk of audit. Framing the Claim in that way was a considered course.

71    The defence pleaded the issue concerning the extent to which the disallowed deductions related to the Normandy loan. It exposed the answer to the Claim that is now sought to be relied upon by SSPL and the liquidator to justify an amendment.

72    There was no attempt to explain how recent decisions might be the basis for the amendment now sought.

73    SSPL and the liquidator now seek to pursue a form of claim that they abandoned as not being supportable. They do so in response to an application for summary judgment. Implicitly, they acknowledge that there may be force in the summary judgment claim insofar as it concerns the claim to disallowed deductions concerning the Normandy loan. They do not explain why the proposed Normandy Claim has merit.

74    The amendment to add the Normandy Claim represents a change to a considered position. It is not explained by the way in which the proceedings unfolded or the conduct of the defence by Mr and Ms Chow.

75    Therefore, the only explanation for the fact that the amendment is now sought is that advanced orally, namely that the lawyers who now have conduct of the Claim take a different view to those who were involved in framing the Claim at the time the proceedings were commenced. Any further application to amend should be considered on that basis.

Will there will be prejudice to Mr and Ms Chow?

76    The question of any prejudice is best adjudged in the context of any further application to amend and introduce the Normandy Claim.

Conclusion and costs

77    As has been indicated and for the reasons that have been given, the application to amend should be refused. As Mr and Ms Chow have been successful, I would be inclined to order SSPL and the liquidator to pay the costs the application. However, I will afford an opportunity to the parties to make short written submissions as to costs. The question of any order as to costs of and incidental to the application to amend should be determined on the papers.

Associate:

Dated:    13 January 2023