Andalee Pty Ltd v Delfield Investments Pty Ltd - [2009] WASC 55

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: ANDALEE PTY LTD -v- DELFIELD INVESTMENTS PTY LTD [2009] WASC 55

CORAM: MASTER SANDERSON

HEARD: 11 DECEMBER 2008

DELIVERED : 17 MARCH 2009

FILE NO/S: CIV 2081 of 2006

BETWEEN: ANDALEE PTY LTD (ACN 078 481 320) as trustee for the King Family Trustee Number 2 and the Hart Family Trust Number 2
Plaintiff
AND
DELFIELD INVESTMENTS PTY LTD (ACN 078 515 376) as trustee for the Parker Discretionary Trust
First Defendant
BARRY PARKER
Second Defendant
TINA PARKER
Third Defendant

Catchwords:

Practice and procedure - Application to restrain defendants' solicitors from continuing to act for defendants - Turns on own facts

Legislation:

Nil

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr M N Solomon
First Defendant              :     No appearance
Second Defendant         :     Mr G M Rutherford
Third Defendant            :     Mr G M Rutherford

Solicitors:

Plaintiff:     Tang Legal
First Defendant              :     No appearance
Second Defendant         :     Cornerstone Legal
Third Defendant            :     Cornerstone Legal

Case(s) referred to in judgment(s):

Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2005] WASC 189
Frankland River Olive Company Ltd v Charters Securities Pty Ltd (Receiver and Manager Appointed) [2004] WASC 88
Newman v Phillips Fox (a firm) (1999) 21 WAR 309

MASTER SANDERSON: By amended application filed 19 September 2008, the plaintiff sought an order that Cornerstone Legal, the present solicitors for the second and third defendants, cease acting for the second and third defendants in these proceedings.
In determining this application, it is necessary to briefly state the facts and the law relating to such applications. In fact, there was no dispute between the parties as to the facts and both agreed as to the applicable legal principles. On these two issues, what follows is largely taken from the plaintiff's submissions filed in support of the application.
The plaintiff and the first defendant entered into a partnership in May 1997 and traded under the business name 'Re‑sale Machinery and Consulting Services'.
The plaintiff was associated with the interests of one Wallace Frederick King (Wally King) and his family and Nicholas Hart and his family. Wally King and Nicholas Hart were directors of the plaintiff.
The first defendant was associated with the interests of the second and third defendants. The second and third defendants are husband and wife. At all times the second defendant was the sole director of the first defendant. The second and third defendants each held one of the two issued shares in the first defendant.
As the plaintiff's solicitors put it, there were two 'camps'. On the one hand, there was the plaintiff and Wally King and Nicholas Hart; on the other hand, there were the defendants. The partnership (that is, the plaintiff and the first defendant jointly) employed the second and third defendants. The second and third defendants managed and conducted the day to day affairs of the partnership business.
In September 1999, the third defendant registered the name 'RSM Crane Sales & Hire'. There is a dispute on the pleadings about when the third defendant began conducting business under that name. However, the third defendant concedes that she did so from early 2001 (see par 29 of the substituted defence). In these proceedings, the plaintiff complains that the third defendant, in breach of her duties as an employee of the partnership, conducted a competing business. The plaintiff further complains that both the first and second defendants were knowingly concerned with the third defendant's breach of duty.
By the end of 2000 or early 2001, the relationship between the two camps had broken down. Various arrangements were entered into in respect of the termination or dissolution of the partnership. These arrangements are the subject of the dispute. The plaintiff alleges that certain agreements were reached in relation to the dissolution of the partnership whereby the three defendants would assume both the business and the liabilities of the partnership. The plaintiff would effectively exit the business handing over to the other camp all the assets and liabilities. The arrangements were complex, but on the plaintiff's case, that is the effect of the alleged arrangement.
The plaintiff alleges that the defendants took possession of the partnership business, but did not otherwise honour the agreement. The plaintiff alleges it has incurred loss because it was left to discharge a number of debts of the partnership that under the agreement were to be assumed by the defendants. In addition, the plaintiff complains that the defendants assumed control of the partnership business, but had failed to account for partnership assets. The plaintiff seeks an account.
The plaintiff issued proceedings on 6 October 2006. It filed a statement of claim on 23 October 2006. An amended statement of claim was filed on 3 January 2008. Answers to a request for further and better particulars of the statement of claim was filed on 26 February 2008.
Cornerstone Legal entered an appearance for each of the defendants on 18 October 2006. The law firm thereafter handled the court proceedings and corresponded on behalf of all three defendants. This correspondence is set out in the affidavit of Wally King sworn 1 October 2008 (see pars 10 ‑ 11). On 15 March 2007, the second defendant filed a defence in which he denied any breach of fiduciary duty by reason of his being knowingly concerned with the third defendant's allegedly competing business. He also denied any agreement in relation to the winding up or dissolution of the partnership. The second defendant pleaded that the plaintiff abandoned the partnership during late 2000 or 2001. He pleads that as sole director of the first defendant he proceeded to sell the assets of the partnership and apply the remaining moneys to the debts of the partnership. The second defendant denied that the plaintiff was entitled to any relief.
Also on 15 March 2007, the third defendant filed a defence and counterclaim. The third defendant also denied the allegations and said that she did not derive any 'taxable income' from her other business 'during the material time'. She pleaded that she only commenced trading in that business after the plaintiff abandoned the partnership. The third defendant also denied any agreement in relation to the dissolution or termination of the partnership. She too asserted that the plaintiff abandoned the partnership in late 2000 or 2001.
In her counterclaim of 15 March 2007, the third defendant alleged:
(a)that she agreed with the plaintiff and the first defendant to lend moneys to the partnership from time to time and that, in breach of the agreement in respect of these loans, the partnership had failed to repay her;
(b)that she acted as guarantor for the partnership and, pursuant to that guarantee, was required to pay $194,439.86 to the National Australia Bank and that the plaintiff has failed to repay that to her 'in breach of its liability to indemnify' her; and
(c)that after the plaintiff abandoned the partnership she incurred expenses in winding up the affairs of the partnership and in discharging debts of the partnership in respect of which the plaintiff is liable to indemnify her in the sum of $155,928.96.
There followed a pleading dispute focused on the plaintiff's complaint that the third defendant's counterclaim was unacceptably vague. A substituted counterclaim was filed on 24 September 2007. Still the plaintiff was not satisfied. The plaintiff's further complaints were detailed in a letter of 17 October 2007. On 10 June 2008, the second and third defendants filed a substituted defence. It contained a counterclaim. This was something new for the second defendant and a substitution for the third defendant.
In their substituted defences, the second and third defendants maintain the partnership was dissolved by the plaintiff by notice in November 2000, effective 14 February 2001. This is substantially the position asserted by the plaintiff. In the alternative, the defences plead subsequent dates for dissolution. The substituted defences maintain the denial of the alleged arrangements in relation to termination or dissolution.
The counterclaims by the second and third defendant set out in the pleading can be summarised as follows:
(a)It is alleged that in or about March 2002, the second defendant, as an officer of the first defendant and thus on behalf of the partnership, agreed with the second and third defendants that the partnership would remunerate them for the numerous hours they spent transporting, storing and selling partnership assets. It is alleged that the partnership has failed to remunerate each of the second and third defendants and thus the plaintiff and the first defendant are 'jointly indebted' to each of the second and third defendants for remuneration or compensation.
(b)The guarantee provided by the third defendant was called upon by the National Australia Bank and thus each of the plaintiff and the first defendant, as partners in the partnership, are liable to indemnify the third defendant for the amount of $194,439.86.
(c)It is alleged that the plaintiff and the first defendant, as partners, resolved to authorise the second defendant to enter into loan agreements on behalf of the partnership, whereby the partnership would borrow funds 'from time to time' from the third defendant. Pursuant to that alleged authorisation, the second defendant, on behalf of both the plaintiff and the first defendant, entered into loan agreements whereby each of the plaintiff and first defendant borrowed $201,998.14 from the third defendant over a period of time from May 2001 ‑ October 2002. It is alleged that these loans have not been repaid and are thus owed by the partnership to the third defendant.
It is the plaintiff's case that the history of the first defendant's deregistrations and reinstatements by the Australian Securities and Investment Commission (ASIC) is relevant to this application. I should therefore detail what has occurred. This history is taken from the supplementary affidavit of Nicholas Daniel sworn 14 November 2008 and from the plaintiff's submissions (pars 25 ‑ 32).
On 15 November 2003, the first defendant applied for voluntary deregistration. In support of the application for voluntary deregistration, the second defendant signed a form sent to ASIC certifying as true and correct that:
(a)the first defendant's assets were worth less than $1,000;
(b)the first defendant had no outstanding liabilities; and
(c)the first defendant was not a party to any legal proceedings.
The plaintiff alleges that this declaration was false. It says that, at the time the declaration was made, the first defendant was a party to legal proceedings. Further, it is said that assuming the second defendant had an honest belief in the matters pleaded in his counterclaim, the second defendant, as the sole director of the first defendant, must have believed that the first defendant owed money to both him and the third defendant at the time they certified the form.
After ASIC reinstated the first defendant, it was deregistered twice more. It was subsequently reinstated by order of this court, and then reinstated again by ASIC. The plaintiff makes the point that the effect of the first defendant's deregistration was to leave the plaintiff as the only entity with a liability for the second and third defendant's alleged claims.
In October 2006, Cornerstone Legal entered an appearance for each of the three defendants. They are still the solicitors for the second and third defendants. They were removed as solicitors on the record for the first defendant in August 2008. The plaintiff regards it as a matter of some significance that Cornerstone Legal remained as the first defendant's solicitors for just under two years. They point to a letter dated 9 January 2007 in which Cornerstone Legal advised that, in light of the first defendant's deregistration, 'it intended to apply to the court for orders that Cornerstone Legal cease to act'. No application to that effect was made. By letter dated 13 March 2008, Cornerstone Legal expressly contemplated the possibility that they would be actively acting for the first defendant in these proceedings if it was reinstated. However, they subsequently had a change of heart. By letter dated 7 May 2008, Cornerstone Legal advised that it 'will not act for Delfield'. It was not until some three months later that the application to be removed from the record was made.
It is the representation of the first defendant by Cornerstone Legal at the time when the second and third defendants made their counterclaims that is at the heart of the plaintiff's complaint. I cannot sum up the plaintiff's position better than to quote pars 40 ‑ 45 of counsel's submissions:
40.Cornerstone Legal thus actively represented Delfield in circumstances where Delfield was being sued in relation to the dispute arising from the circumstances of, and the arrangements for, termination and dissolution of the partnership (and related issues with respect to accounting for assets of the partnership by Andalee and Mr and Mrs Parker).
41.In their counter‑claims, Mr and Mrs Parker in effect allege liabilities on the part of Delfield arising from circumstances of, and arrangements for, the termination and dissolution of the partnership. In large measure, they allege that these liabilities arose from the conduct of Mr Parker acting as an officer (sole director) of Delfield.
42.Mr and Mrs Parker's counter‑claims conveniently seek relief only against Andalee. However, it is important to understand that in substance the liability is asserted against Delfield no less than against Andalee. Indeed, the counter‑claims speak of Andalee and Delfield being 'jointly indebted'.
43.Put simply, at the heart of these proceedings lies a dispute concerning obligations and liabilities arising from the termination and dissolution of the partnership. Cornerstone acted for Delfield as well as Mr and Mrs Parker in relation to that dispute, actively so for some months and at least on the record until August 2008.
44.In so acting for Delfield, Cornerstone owed Delfield duties of fidelity, loyalty and confidentiality in relation to those matters.
45.Cornerstone now asserts that it can continue to act for Mr and Mrs Parker to advance causes of action effectively against Delfield in relation to matters concerning obligations and liabilities arising from the termination and dissolution of the partnership in order to attack Andalee.
In Newman v Phillips Fox (a firm) (1999) 21 WAR 309, Steytler J said:
The justification for intervention by the court in applications of this kind has traditionally been founded upon one or more of three bases. These are the protection of confidential information, restraint from a breach of fiduciary duties in the context of a conflict of interest and the court's control over the conduct of solicitors as its officers (314).
His Honour went on to say that in that case, the third of these bases was sufficient standing by itself for the court to intervene.
Steytler J also reviewed the authorities that justify intervention by reference to the notion of 'loyalty' and the maintenance of public confidence in the administration of justice which is a consequence of loyalty which a legal practitioner shows to his client such that 'conduct which has a tendency to jeopardise the perception of faithful commitment to the interests of the client should be prevented' (319). His Honour went on to say that 'the notion that a lawyer can readily change sides (undermines) the appearance that justice is being done'.
His Honour's decision has been consistently followed: see, for example, Frankland River Olive Company Ltd v Charters Securities Pty Ltd (Receiver and Manager Appointed) [2004] WASC 88; and Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd [2005] WASC 189.
The plaintiff's position is that in acting for the first defendant, Cornerstone Legal may have come into some confidential information which may benefit their present clients - the second and third defendants. What that confidential information might be, and how that information would stand separate and apart from the second and third defendants, is not clear. As I pointed out at the beginning of these reasons, at all material times the second defendant was the sole director of the first defendant. The second and third defendants each held one of the two issued shares in the first defendant. Of course, the first defendant is a corporation and has a separate legal existence from the second and third defendants. But in reality, it is the alter ego of these two individuals. It has no independent mind directing its interests. As a matter of practice, I cannot see how any information could have passed into the hands of Cornerstone Legal from the first defendant that could not have been obtained from the second or third defendants.
As the decisions to which I have made reference make plain, what is important in this area is the perception of unfairness. If a firm of solicitors are acting for three individuals, and one of those individuals turns against the other two, it is clearly inappropriate for the firm to continue to act for any one of the three. That is obvious. But that is not this case. In my view, an independent observer would see it as perfectly appropriate that the same solicitors should act for parties in the position of the three defendants in this case. It may well be that, in strict legal theory, the first defendant has claims against the second and third defendants. But in reality, that is of no consequence. The three defendants are like the Blessed Trinity, three separate parts of one indivisible whole.
As if all that is not enough, the first defendant is now in liquidation. An application to liquidate the first defendant was heard immediately after this application. It was brought by the plaintiff. The winding up order was not opposed. The consequence of that order is that a liquidator can now represent the interests of the first defendant, if the first defendant is to take any part in these proceedings. In my view, that removes any risk of misuse of confidential information.
Finally, there is the position of the second and third defendants. They wish to retain the services of Cornerstone Legal. Doubtless they have spent a good deal of money and they now have solicitors who are fully conversant with their case. To force them to change solicitors at this stage of the proceedings would be extremely harsh. It would also serve no purpose.
For these reasons I would dismiss the plaintiff's application. I will hear the parties as to the precise form of orders and as to costs.