ACN 060477830 in Liq Formerly T/A David Koo & Assoc P/L v K Koo - [2008] SADC 170

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Application)
ACN 060477830 IN LIQ FORMERLY T/A DAVID KOO & ASSOC P/L v K KOO & ORS
[2008] SADC 170
Judgment of Her Honour Judge Shaw
17 December 2008
PROCEDURE
At close of evidence, plaintiff applied for leave to amend its Statement of Claim – proposed amendments reliant upon first defendant’s evidence - defendants opposed late amendment and argued that their case would have been conducted differently. Held: defendants would be incurably prejudiced if proposed amendments allowed – in exercise of discretion, leave to amend refused.
Corporations Act 2001; District Court Rule 53.01, referred to.
Duke Group (in liq) v Arthur Young (Reg) & Peat Marwick Hungerfords (Third Party) & Ors (1991) 4 ACSR 355; Mehta v Commonweatlh Bank of Australia (1990) ATPR 41-026; Patrick v Capital Finance Pty Ltd [2003] FCA 206, considered.

ACN 060477830 IN LIQ FORMERLY T/A DAVID KOO & ASSOC P/L v K KOO & ORS
[2008] SADC 170

This is an application by the plaintiff for leave to amend its Statement of Claim. The terms of the proposed amendments are set out in a “Second Further Particularised Statement of Claim Reduced/Orders Sought” (“the Proposed Reduced Claim”).
The plaintiff (“DKA”) is an incorporated company, which was placed into voluntary administration on 28 April 2004. From 29 June 1993 to 15 July 2002, DKA was named David Koo and Associates Pty Ltd.
The first defendant, David Koo was a director of DKA from 29 June 1993 to 8 April 2002.The second defendant, Nermalla Koo was a director of DKA from 29 June 1993 to 3 December 2001. The third, fourth and fifth corporate defendants are associated companies of the first and second defendants (“the associated companies”).
The plaintiff contends that the proposed amendments to the Statement of Claim amount to no more than a better particularisation of an alternative basis upon which the plaintiff alleges that the first and second defendants are liable for a breach of their directors’ duties. The defendants oppose the application. The defendants say that the Proposed Reduced Claim amounts to a substantial amendment of the Statement of Claim. It is contended that the application to amend is made too late and that it is made only because the plaintiff’s case as pleaded, is doomed to failure. It is submitted that in any event, if the amendments are allowed, the defendants will suffer incurable prejudice.
The Original Statement of Claim
In its original Statement of Claim, DKA alleged that the first and second defendants as directors of DKA, owed fiduciary duties to DKA inter alia, to act honestly and to make decisions which were in the best interests of DKA.
DKA also alleged that pursuant to sections 180(1), 181(1), 182(1) and 183(1) of the Corporations Act 2001 (“the Act”), the first and second defendants as directors of DKA, owed duties to DKA, inter alia, to discharge their duties with reasonable care and to not improperly use their position.
DKA alleged that each of the first two defendants “caused DKA to make payments” to the associated companies. DKA particularised each of the payments and the manner in which the payments were treated in the accounts of DKA.
I refer to the introduction in the following paragraphs of the Statement of Claim:
9.In the period from 1 July 1995 to 21 February 2002 David Koo and Nermalla Koo caused DKA to make payments to or on behalf of Solidstate from time to time (the “Solidstate Payments”)....
10.In the year ended 30 Jun 2000, David Koo and Nermalla Koo caused DKA to make payments to or on behalf of Fresh Cut from time to time (the “Fresh Cut Payments”)....
11.In the period from 7 April 2000 to 14 November 2001, David Koo and Nermalla Koo caused DKA to make payments to or on behalf of DTEX from time to time (the DTEX Payments”)....
....
DKA alleged that each of the first defendants breached their duties as directors by giving instructions for the making of payments to associated companies in circumstances where they knew that such payments were contrary to the interests of DKA. I refer for example, to the following paragraphs of the Statement of Claim.
13.The Solidstate Payments were made on the instructions of David Koo and Nermalla Koo in circumstances where David Koo and Nermalla Koo:
13.1   intended that Solidstate would have the benefit of such payments;
13.2   did not intended that the Solidstate payments would be repaid;
13.3   knew that the Solidstate Payments were not for the benefit of DKA;
13.4   knew that Solidstate had not and would not provide services or goods to DKA equal in value to the amounts of the Solidstate payments;
13.5instructed DKS’s internal and external accountants to record the Solidstate payments in the manner set out in paragraph 9 above to disguise their true nature;
13.6did not intend that DKA should seek repayment from Solidstate; and
13.7did not on DKA’s behalf seek the repayment of the Solidstate Payments.
14.The Fresh Cut Payments were made on the instructions of David Koo and Nermalla Koo in circumstances where David Koo and Nermalla Koo;
....
14.5   Instructed DKA’s internal and external accountants to record the Fresh Cut Payments in the manner set out in paragraph 10 above to disguise their true nature;
....
15.The DTEX Payments were made on the instructions of David Koo and Nermalla Koo in circumstances where David Koo and Nermalla Koo;
....
15.5   Instructed DKA’s internal and external accountants to record the DTEX Payments in the manner set out in paragraph 11 above to disguise their true nature;
In paragraph 16, DKA particularised the circumstances in which the giving of the alleged instructions amounted to a breach of the first and second defendant’s duties as directors of DKA. DKA claimed that the total of the payments made was $662,481.10[1].
[1] Paragraph 18 of the original Statement of Claim.
DKA alleged that in any event, the first and second defendants caused DKA to claim tax deductions which were not properly claimable, because they gave instructions to DKA’s accountant in relation to the manner in which he was to record the payments in the accounts of DKA. I refer to paragraph 18.
18.Further, to the matters pleaded in paragraphs 1 to 17 herein, and in any event, DKA repeats the matters pleaded in sub-paragraphs 13.5, 14.5 and 15.5 above and says that:
18.1David Koo and Nermalla Koo caused DKA to claim tax deductions for the DKA Payments in circumstances where the DKA Payments were not made for the purpose of generating assessable income.
....
DKA claimed that as a result of the improperly claimed deductions, DKA had suffered loss and damage in the amount of $62,405.79[2].
[2] ibid at paragraph 20
Plaintiff’s Opening
During his opening, counsel for DKA explained that DKA contended that the first and second defendants were directly responsible for giving instructions to Mr Gordon, the internal accountant of DKA as to the allocation of payments to DKA’s associated companies and the method of recording those payments in the books of DKA. For example, the plaintiff’s counsel said:
And every time, no exception [Roger Gordon] asked David Koo how to characterise those payments.[3]
[3] T41.37
It was alleged that Mr Koo instructed Mr Gordon to record the payments and expenses in such a way so as to disguise the true nature of the payments to the associated companies. It was alleged that the conduct of Mr Koo was dishonest.
Further, it was alleged that as a result of the first and second defendants having acted in the manner alleged, they had direct knowledge that the claimed tax deductions in the returns were incorrect at the time that they were lodged.
Circumstances of Application to Amend
DKA called Mr Gordon who gave evidence that he recorded the payments to the associated companies and the expenses of DKA in accordance with the instructions of Mr Koo. Mr Gordon’s credibility was challenged in cross-examination.
At the conclusion of Mr Gordon’s cross-examination, counsel for DKA informed the court that DKA’s case as pleaded, did not depend upon Mr Gordon’s evidence.[4] There was no application to amend the Statement of Claim at that time.
[4] T384.12; 390.9
The first defendant, Mr Koo gave evidence disputing Mr Gordon’s evidence. He explained that Mr Gordon was responsible for the prime entries in the accounts, for preparing draft accounts and for preparing taxation returns. He said that he did not check the accuracy of the final accounts. Mr Koo said he relied entirely on Mr Gordon to record accurately the financial dealings of DKA and that he did not check the detail in the tax returns.
At the close of the defendants’ case, DKA’s counsel informed the court that insofar as DKA’s case depended upon the credibility of Mr Gordon, it had taken the view that it was unlikely to succeed. He informed the court that DKA proposed to discontinue its case against the third, fourth and fifth corporate defendants. Counsel for DKA informed the court that it intended to rely upon Mr Koo’s evidence given in the defendant’s case to support a “reduced basis” for its claim against the first and second defendants. Subsequently, DKA filed a Proposed Reduced Claim detailing the proposed changes to the Statement of Claim.
The Proposed Reduced Claim
In the Proposed Reduced Claim, DKA proposes to proceed against the first and second defendants only. Further, the proposed amendments include the deletion and alteration of paragraphs of the Statement of Claim in order to remove the allegation that the first and second defendants had any part to play in the making or recording of the relevant payments to associated companies.
For example, paragraph 9 of the Statement of Claim is amended so that it is not alleged that the first and second defendants “caused DKA to make payments”. In the Proposed Reduced Claim, the plaintiff alleges only that “DKA made payments” to the associated companies of the first and second defendants.
The proposed amendments limit the duty said to be owed to DKA by the first and second defendants, to a duty to exercise their powers and discharge their duties as directors “with the degree of care and diligence that a reasonable person would exercise” if that person was in the position of the directors[5].
[5] Para 4 of the Proposed Reduced Claim.
The plaintiff proposes to particularise the duty owed so that it is directed to the omissions or failures of the first and second defendants as directors in relation to claiming properly allowable taxation deductions in the taxation returns filed on behalf of DKA.
The Proposed Reduced Claim alleges only a breach of director’s duties in the nature of inter alia, a failure to check the entries in the taxation returns before they were lodged and a failure to ensure that the deductions were properly claimable.
I refer to the following paragraphs of the Proposed Reduced Claim:-
4.By reason of their positions as directors of DKA, David Koo and Nermalla Koo owed duties to DKA pursuant to section 180(1) of the Act as follows:
Degree of care and diligence
To exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if he or she
4.1 was a director of DKA in DKA’s circumstances; and
4.2occupied the office held by, and had the same responsibilities within DKA, as David Koo and Nermalla Koo;
and in particular to:
4.3ensure that DKA only claimed tax deductions which were allowable pursuant to relevant taxation legislation;
4.4check that the DKA Payments in DKA’s end of year financial statements and income tax returns were deductible expenses pursuant to relevant taxation legislation;
4.5ensure that DKA avoided improperly claiming tax deductions in a manner which could expose DKA to penalties levied by the ATO.
5.In the period from 1 July 1995 to 21 February 2002 DKA made payments to or on behalf of Solidstate from time to time (the “Solidstate Payments”) ....
6.In the year ended 30 Jun 2000, DKA made payments to or on behalf of Fresh Cut from time to time (the “Fresh Cut Payments”) ....
7.In the period from 7 April 2000 to 14 November 2001, DKA made payment to or on behalf of DTEX from time to time (the “DTEX Payments”) ....
In the Proposed Reduced Claim, paragraphs 13 to 17 of the original Statement of Claim are deleted.
Of particular significance is the deletion of paragraphs 13.5, 14.5 and 15.5 of the Statement of Claim. Paragraph 18 of the original Statement of Claim referred back to and relied upon paragraphs 13.5 , 14.5 and 15.5, of the original Statement of Claim. In the Proposed Reduced Claim, paragraph 18 of the original Statement of Claim is recast as paragraph 9 and any allegation that the first and second defendants gave instructions to the accountant in relation to the recording of payments to associated companies is removed. It is alleged in paragraph 9 of the Proposed Reduced Claim inter alia, that the first and second defendants were responsible for improper tax claims because they lodged or acquiesced in the lodgement of the relevant tax returns.
In the Proposed Reduced Claim, paragraph 9 provides:
9.In any event, DKA says that:
9.1 David Koo and Nermalla Koo caused DKA to claim tax deductions for the DKA Payments for the tax year of those payments in circumstances where the DKA Payments were not made for the purpose of generating assessable income of DKA in that year and were not deductions properly claimable by DKA in the Income Tax Returns of DKA but rather were in each instance a loan from DKA. As loans the DKA payments are not a deductible expense of DKA;
....
In the Proposed Reduced Claim, particulars are provided of deductions claimed in the tax returns from the years 1996 to 2002 by reference to the exhibits tendered during the trial.
The proposed recast paragraph 9 also provides[6]:
[6] Paragraph 9.1(2) of the Proposed Reduced Claim
Particulars of Causing
(1) The tax returns were completed by Mr Roger Gordon.
(2)The tax returns were lodged with the ATO either by Mr Roger Gordon or by somebody else not known to the Plaintiff.
(3)Each of the tax returns was lodged with the ATO at either the request or direction of the first and second defendants (“the directors”) or at least with their knowledge, permission or acquiescence and the plaintiff’s claim is not dependent on whether it is one or the other.
9.2 by taking the steps referred to in sub-paragraph 9.1 herein DKA paid less income tax than it would have been required to pay had the nature of the DKA Payments been recorded accurately in DKA’s end of year financial statements and income tax returns for the relevant period;
....
In the Proposed Reduced Claim, paragraph 19 of the original Statement of Claim is recast as paragraph 10.
The proposed paragraph 10 includes the following:
Breach of Directors’ Duties
10.In the premises of the matters pleaded in paragraph 9 of this pleading, David Koo and Nermalla Koo have breached their duties owed to DKA in that they have not exercised their powers with a reasonable degree of care and diligence to ensure that DKA:
10.1only claimed tax deductions which were allowable deductions pursuant to relevant taxation legislation;
10.2accurately recorded the nature of the DKA Payments in DKA’s end of year financial statement and income tax returns to exclude any deductions for the DKA payments being loans;
10.3avoided improperly claiming tax deductions in a manner which could expose DKA to penalties levied by the ATO namely maintaining in the tax returns the claim for the DKA payments as deductible expenses when those payments were loans and not properly claimable as deductions.
The Proposed Reduced Claim also provides “Further Particulars of the Directors’ Breach of Duty of Care”[7].
[7] Paragraph 10 of the Proposed Reduced Claim.
Paragraph 19 of the original Statement of Claim referred back to paragraph 18, which had included the reference to paragraphs 13.5, 14.5 and 15.5 of the statement of claim. The effect of the recast paragraph 10 is to delete the allegation of improper acts or unlawful instructions by the first and second defendants to the accountant.
DKA’s Submissions
Counsel on behalf of DKA submitted that the Proposed Reduced Claim was not an amendment of the pleadings. Rather, it amounted to no more than the provision of further particulars. It was submitted that DKA had always pleaded a breach of director’s duties and that the further particulars merely provide a better particularisation of the alternative basis upon which DKA sought to establish its case as pleaded in the original Statement of Claim. It was submitted that the need to amend arose only after Mr Koo’s evidence where he put forward a defence to DKA’s claim about which DKA did not have prior notice.
Defendant’s Submissions
The defendants strenuously oppose the proposed amendments. It is submitted that DKA was given clear notice of the defendant’s answer to Mr Gordon’s allegations during Mr Gordon’s cross-examination. Further, DKA’s decision to abandon a case which relied upon the evidence of Mr Gordon did not depend upon the evidence of Mr Koo but rather upon the demonstrable falsity of Mr Gordon’s evidence which was exposed during his cross-examination.
The defendants submitted that they would suffer irremediable prejudice if the proposed amendments were allowed after the close of evidence. The defendants argued that the proposed amendments would result in a markedly different case to that which was the subject of the original Statement of Claim and the evidence adduced during the hearing.
The defendants prepared its case, cross-examined Mr Gordon and called evidence from Mr Koo to meet DKA’s original claim that the defendants unlawfully instructed the internal accountant, Mr Gordon to falsify DKA’s financial records and tax returns in order to defraud the Australian Taxation Office. The answer by the defence to this claim was that Mr Gordon was not a credible witness when he alleged that he allocated payments to the associated companies and recorded them in accordance with the instructions from Mr Koo.
It was submitted that if the Proposed Reduced Claim had been the subject of the trial from the outset, the defendant’s cross-examination of Mr Gordon would have been approached completely differently. The defendants did not, for example, explore during the cross-examination of Mr Gordon or in Mr Koo’s evidence, any other dealings that the first and second defendants may have had with Mr Gordon or with other DKA staff which might have been relevant to the Proposed Reduced Claim. It was not realistic at this late stage, for Mr Gordon to be recalled in order to put the defendants’ case in response to the Proposed Reduced Claim which, in certain respects, was inconsistent with the original Statement of Claim.
Legal Principles
Pursuant to DCR 53.01, pleadings are able to be amended at any time up to the time of judgment by leave of the court, if the interests of justice so allow.
I refer to the statements of principle by Olsson J in Duke Group (in liq) v Arthur Young (Reg) & Peat Marwick Hungerfords (Third Party) & Ors[8]. Olsson J stated[9].
1.An amendment should be allowed at any stage of proceedings to enable the real matters in controversy between the parties to be addressed, provided that the amendment can be effected without injustice to the other parties.
2.An amendment ought to be permitted if it could have been pleaded when the defence was first filed, provided that its allowance, at the stage when application is made for leave to amend, does not give rise to prejudice to the plaintiff which cannot be redressed by an order for costs or for an adjournment.
3.An amendment to pleading sought not to be permitted in circumstances where, if pleaded initially, it could have been struck out as a plea which is patently bad in law or on some other ground.
4.As to any plea wanting in particularity, before trial the usual (although not invariable) order is to allow defects to be cured by directing appropriate particulars to be given. On the other hand, in the case of such a plea sought to be made by way of amendment after the commencement of a trial, there is a discretion to refuse the amendment if, to allow it, would inevitably give rise to an application for better particulars with the resultant disruption of the orderly progress of the hearing. (It should be recorded that the validity of this last mentioned approach was questioned on the hearing before the Full Court but, in my opinion, the formulation of it is patently beyond reproach.)
[8] (1991) 4 ACSR 355 at page 382-3
[9] ibid at [43]

Olsson J also referred to the underlying principle as explained by Rogers DJ in Mehta v Commonwealth Bank of Australia[10]:
The lodestar which guides the court is whether an amendment is necessary for the purpose of determining the real question in controversy between the parties. As soon as it appears that the way in which a party has framed its case will not lead to a decision of the real matter in controversy, it is a matter of right to have the pleading corrected. The fact that the application is late in the proceedings is relevant only on the question whether the prejudice occasioned by it is curable. The exercise of the power is conditioned by one overriding qualification. The other party must be placed in as good a position as it would have been had the mistake of judgment not been made. If the prejudice cannot be cured the amendment must be refused. It is not a relevant type of prejudice that allowance of the amendment will, or may, deprive the other party of a success which it would achieve were the amendment refused.
[10] (1990) ATPR 41-026
In relation to the importance of avoiding prejudice to the defendants, I also refer to the remarks of Tamberlin J in Patrick v Capital FinancePty Ltd[11] where His Honour stated[12]:
5.The purpose of pleading is to clearly define the issues and inform the parties in advance of the case which they have to meet so as to enable them to take the necessary steps to deal with the allegations. ....
6.It is not the function of pleadings to allow an amendment which will enable a case to be made out at the conclusion of all the evidence, particularly in multi-party litigation, so as to adjust the claims to accord with what a party has been able to make out in cross-examination, in circumstances where such an amendment would raise fresh issues and would prejudice the respondents in such a way as to render the prejudice irremediable.
[11] [2003] FCA 206
[12] ibid at [5]-[6]
Findings
In the original Statement of Claim, DKA alleged an affirmative and specific breach of duty by the first and second defendants, namely the giving of dishonest instructions to DKA’s accountant. There was no plea of an omission.
It is plain that the plaintiff must have concluded that Mr Gordon was discredited during his cross-examination and that its case, insofar as it depended upon Mr Gordon’s evidence, was doomed to failure. However, it was not until after the evidence of Mr Koo that the plaintiff sought to formulate a case which did not depend upon an acceptance of Mr Gordon’s evidence.
I accept the defendants’ submission that the defendants’ case was conducted within the framework of alleged dishonest conduct. I accept the defendants’ submission that the cross-examination of Mr Gordon and the evidence led from Mr Koo were directed towards meeting DKA’s case as pleaded and opened upon, namely, that the first and second defendants breached section 180 of the Act by giving repeated unlawful instructions to Mr Gordon to falsify DKA’s financial records and tax returns in order to make improper tax claims.
In the Proposed Reduced Claim, DKA alleges breaches of directors’ duties pursuant to section 180 of the Act that focus upon the duty to ensure the accuracy of taxation returns. DKA alleges that the first and second defendants failed to take the required care to check the taxation returns before lodgement. DKA alleges that a proper checking would have revealed DKA’s incorrect accounts and improperly claimed deductions.
If the proposed amendments are allowed, the first and second defendants will be called upon to answer a case which alleges that although the recording of payments by DKA to associated companies may have been made without the knowledge of the first and second defendants, they should have conducted better checks of the accounts or the taxation returns before signing them or before the returns were lodged.
I accept the submission of the defendants that there are potential defences open to the first and second defendants in response to the Proposed Reduced Claim, which have not been pleaded nor explored in evidence. Counsel for the defendants referred to potential causation issues, “novus actus interveniens”, and potential defences such as the “business judgment” rule or the “deemed reasonable reliance” rule.[13]
[13] s 180(2) of the Act; s 189 of the Act
Conclusions
In my view, if the proposed amendments were allowed at this stage of the trial, it would result in incurable prejudice to the first and second defendants.
I consider that DKA was given clear notice of the defendants’ case during the cross-examination of Mr Gordon.
Even though the original Statement of Claim alleged a breach of director’s duties pursuant to sections 180(1), 181(1), 182(1) and 183(1) of the Act, there is a marked difference between the issues which were the focus of the original Statement of Claim and those in the Proposed Reduced Claim. The Proposed Reduced Claim is not merely a ‘reduced’ claim nor merely a better particularisation of a claim already clearly identified. In my view, the central issues in the Proposed Reduced Claim were not clearly identified and particularised in the original Statement of Claim, nor even during the plaintiff’s opening.
If they had been, the defendants’ counsel may have been able to cross-examine Mr Gordon, having regard to this alternative or ‘reduced’ basis for DKA’s claim against the first and second defendants, and adduce further evidence.
In my view, the failure to clearly identify and adequately particularise that alternative or ‘reduced’ basis for the alleged liability of the first and second defendants prior to the close of evidence, has resulted in prejudice to the first and second defendants.
In my view, the proposed recasting of DKA’s case at this late stage of the trial, will cause prejudice to the first and second defendants in the proper presentation of their case that is not now capable of being effectively remedied either by an order for costs, or by an adjournment, or by the recalling of Mr Gordon and/or of the first defendant.
Accordingly, in the exercise of my discretion, I refuse DKA’s application for leave to amend its Statement of Claim in accordance with the Proposed Reduced Claim.