Ashrafinia v Ashrafinia
[2012] NSWSC 500
•15 May 2012
Supreme Court
New South Wales
Medium Neutral Citation: Amir Ashrafinia v Mohammad Reza Ashrafinia; Parvaneh Karami Fakhrabadi v Mohammad Reza Ashrafinia [2012] NSWSC 500 Hearing dates: 28 February 2012 Decision date: 15 May 2012 Jurisdiction: Equity Division Before: Slattery J Decision: No order for costs made against the solicitor for the corporate plaintiff - each party to bear his own costs of this application.
Catchwords: PRACTICE AND PROCEDURE - costs - indemnity costs or ordinary costs - challenge to retainer of solicitor for corporate plaintiff, being one of two plaintiffs - solicitor acting for a period of two months - onus of proof on party impugning retainer - exercise of Court's discretion where proceedings would have continued in the name of the non-corporate co-plaintiff in any event - HELD: corporate plaintiff's solicitor not ordered to pay the defendant's costs. Legislation Cited: Corporations Act 2001 (Cth)
Civil Procedure Act 2005 (NSW)
Uniform Civil Procedure Rules 2005 (NSW)Cases Cited: A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450
Cohen v The State of Victoria [2011] VSC 229
Dhami v Martin [2010] NSWSC 770
Hawksford v Hawksford (2005) 191 FLR 173
Hillig v Darkinjung Pty Ltd & Ors (No 2) [2008] NSWCA 147
McMaster v Eznut Pty Ltd [2006] WASC 109
Mitropoulos v Greek Orthodox Church and Community of Marrickville & District Ltd (1993) 10 ACSR 134
Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
Toole v Flexihire Pty Ltd (1991) 6 ACSR 455
Wilson v Manna Hill Mining Co Pty Ltd [2004] FCA 912
Wood v Inglis [2008] NSWSC 1147
Zimmerman Holdings v Wales [2002] NSWSC 447Category: Separate question Parties: First Plaintiff:- Amir Hossain Ashrafinia
First Plaintiff:- Parvaneh Karami Fakhrabadi First Defendant:- Mohammad Reza Ashrafinia
First Defendant:- Mohammad Reza Ashrafinia;
Second Defendant:- Ashrafi Persian Trading Company Pty Limited
Second Defendant:- Amir Hossain Ashrafinia
Third Defendant:- Abbas Ashrafinia
Fourth Defendant:- Ashrafi Persian Trading Company Pty LimitedRepresentation: Mr D. Jenkins (for Mohammad Reza Ashrafinia)
Mr J. Johnson (for Amir Hossain Ashrafinia)
Mr G. McGrath SC (for Parvaneh Karami Fakhrabadi)
Mr J. Sleight (for Mr G. Doyle)
Mr D. Currie (for Azadeh Ashrainia)
Mr G. Doyle (appears for himself)
File Number(s): (2008/281524); (2011/166674) Publication restriction: No
Judgment
The Court is determining a number of disputes within the Ashrafinia family. The points at issue in this judgment are: (1) whether a corporate plaintiff validly retained a solicitor, to act for it as one of two co-plaintiffs in one of two sets of proceedings being heard together; and if so, (2) whether that solicitor should pay the defendant's costs of the proceedings for the period of time that he was purporting to act on behalf of the corporate plaintiff. To understand the questions before the Court it is necessary to outline the background of the family relationships and the proceedings in which these applications are embedded.
The Ashrafinia Family and their Proceedings
Abbas Ashrafinia ("Abbas") and Parvaneh Karami Fakrabadi ("Karami") were married for many years and have three children: Mohammad Reza Ashrafinia ("Mohammad"), Amir Hossain Ashrafinia ("Amir") and Azadeh Ashrafinia ("Azadeh"). For convenience, and I hope with no disrespect to any of the parties, I will refer to them all by their first names in this judgment.
The Ashrafinia family operated a motel business from a site in Roslyn Gardens, Elizabeth Bay, from at least the 1980's, and into the 1990's. The family motel business was operated through two companies: initially through a company called Ashrafi Motels Pty Limited ("Motels") controlled by Abbas and Karami. Then by a March 1995 transaction, which is not in contest in these proceedings, the motel business appears to have been transferred to a company called Ashrafi Persian Trading Company Pty Limited ("Trading"). Trading appears to be controlled at least by Mohammad and Amir, however the ultimate control of Trading is one of the issues in the overall litigation. Trading is also the trustee of a family investment trust ("the trust").
There are two sets of proceedings before the Court. One commenced in 2008 ("the 2008 proceedings"), and the other commenced in 2011 ("the 2011 proceedings"). In these proceedings, Mr McGrath SC appears for Karami, Mr Jenkins of counsel appears for Mohammad, Mr Johnson of counsel appears for Amir and Mr Sleight of counsel appears for Mr Doyle.
The 2008 Proceedings
In the 2008 proceedings, the plaintiff Amir sues his brother Mohammad and Trading as trustee of the trust. The allegations in the 2008 proceedings are: that a joint venture agreement was made between Amir and Mohammad in about 2001, such that the motel business would continue to be carried on under the management of Amir and Mohammad; that the motel business would be acquired for their equal benefit and would be redeveloped by them or a company they owned; and, that they would also acquire other properties together for the purposes of improvement and sale to generate further joint venture funds, which would be invested in the development of the motel site; that Mohammad breached his fiduciary duty by misapplying joint venture funds; and, that to the extent that Mohammad holds interests in a number of properties, he holds those interests on trust for Amir or holds them charged with an obligation to refund the joint venture funds which are said to have been misapplied.
The 2008 proceedings allege that a number of properties were bought and sold in transactions, the basic outline of which is not much in dispute. But two of those properties are central to the disputes within the 2008 proceedings. One is in Victoria Street, Darlinghurst ("the Oporto property"). The other is a residential property in Brunton Place, Marsfield ("the Marsfield property").
The 2011 Proceedings
The matter has become complicated by the commencement of the 2011 proceedings in May 2011. Karami brought the 2011 proceedings, initially as the sole plaintiff. The defendants to the 2011 proceedings are Mohammad as first defendant, Amir as second defendant, Abbas as third defendant and Trading as fourth defendant. As originally conceived, the 2011 proceedings raised allegations of breach of trust and allegations potentially founding various forms of equitable relief based upon the events over a long period of about 20 years. Little needs to be said about these wider allegations other than in general profile. All but one of these allegations and claims to relief has now been abandoned.
The original form of the 2011 proceedings sought to unwind some of the arrangements made within Abbas and Karami's operation of Motels. In essence, it alleged that unbeknown to Karami, the other family members Abbas, Amir and Mohammad, had appropriated the business of Motels either themselves, or through Trading, and misapplied, to their own benefit, the revenue generated by Motels. That was undoubtedly would have been a complicated case, depending upon extensive evidence that would have taken some time to conduct.
Mr McGrath SC, who has only appeared in the 2011 proceedings for Karami since 17 February 2012, sought by motion to amend the pleadings to advance a "slimmed down" case, which relied upon only one claim for relief. His amended pleading assumes that the motel business is an asset of the trust, a discretionary trust. His pleading alleges that the trust is constituted with a written trust deed and that Karami and Azadeh are its beneficiaries. Karami seeks that Trading account for its conduct of the trust and for Trading's directors, Amir and Mohammad, to account for their conduct of its affairs relevant to the trust. As Mr McGrath SC outlined in the amended pleading, the reason for that this account is claimed is that Trading, Mohammad and Amir, are all alleged to have used the cash flows generated by the motel business between March 1996 and February 2009 for their own purposes and intermingled those funds with their own funds, to pay for a variety of living expenses for themselves, for Karami, and to purchase properties.
It is further contended in the proposed form of the 2011 proceedings that the acquisition of properties, including the Oporto property, the Marsfield property and a number of other investment properties in Elizabeth Bay, could not have occurred but for the cash flows the motel business generated, which Karami says belong to Trading and to the trust. Karami also says that these cash flows have been diverted to Amir and Mohammad's personal use in breach of trust.
The present judgment is only one of the many procedural disputes within the Ashrafinia family in relation to the 2008 and the 2011 proceedings. The proceedings were originally listed together for hearing two weeks commencing 5 March 2012. This hearing date was vacated after a contest about the amendment of the pleadings in the 2011 proceedings and after the dismissal of a motion to strike out those proceedings. The present issues were argued at the same time as these other matters.
The 2011 Proceedings: The Challenge to Retainer
Mohammad, and only Mohammad, not his co-defendant Amir, now claims that the 2011 proceedings were amended and conducted by Motels as second plaintiff, without Motels giving proper authority to Mr Gerard Doyle of Doyle Edwards Anderson Lawyers Pty Ltd ("DEA Lawyers") to act for it in the 2011 proceedings. Mr Doyle was the solicitor who purported to act, through his firm DEA Lawyers, for Karami, from the commencement of the 2011 proceedings until 25 October 2011. He purported to act for Motels, from approximately 22 August 2011 to 25 October 2011. DEA Lawyers is a corporate entity of which Mr Doyle is a director and an employee. Although DEA Lawyers we the firm retained by Motels, Mohammad sought to bring the challenge to retainer personally against Mr Doyle, who was the solicitor on record on behalf of the second plaintiff in the 2011 proceedings.
By motion Mohammad seeks findings against Mr Doyle: that there was no valid retainer between Mr Doyle and Motels; that all claims brought by Motels be struck out; and, an indemnity costs order against Mr Doyle. Mohammad says that, to the extent that Mr Doyle purported to bring the 2011 proceedings on behalf of Motels he did so without authority. Mohammad makes two principal contentions against Mr Doyle in support of the claim that Mr Doyle brought the 2011 proceedings without authority. The first contention is, that the notice period of the directors' meeting of Motels, which purported to authorise Mr Doyle to initiate that part of the 2011 proceedings, was not reasonable. Mohammad's second contention is, that a quorum was not present at the directors' meeting of Motels, which purported to authorise Mr Doyle to initiate the 2011 proceedings for Motels.
The 2011 Proceedings - some Procedural History
In order to understand these grounds of challenge to Mr Doyle's retainer for Motels, it is necessary to set out the broader procedural history of the 2011 proceedings.
Amir initiated the 2008 proceedings by Summons in November 2008. Pleadings closed by the end of 2009. Evidence was completed in anticipation of the trial in mid 2011.
But the orderly sequence of the 2008 proceedings was interrupted in May 2011 by a procedural shot across the bows by Karami, who indicated as early as November 2010 that she might make a claim of the kind described in the original form of the 2011 proceedings. But it took her some time to launch those proceedings. On 20 May 2011, Karami filed a Summons in her own name. But it was not served for about another 3 weeks on Mohammad. Perhaps the claim was not fully thought through; perhaps there are other explanations. I do not have to determine what the reasons for the delay were. It seemed to have been appreciated shortly before a trial before Sackar J in June 2011 that Karami's allegations in the 2011 proceedings were not just allegations made in her own interests but allegations more appropriately put on behalf of Motels.
There was now a degree of urgency in the commencement of the 2011 proceedings, apparently because it was realised that it was desirable for the 2011 proceedings to be determined at the same time as the 2008 proceedings. Thus, on 14 June 2011, shortly before the intended commencement of the hearing of the 2008 proceedings before Sackar J, Karami served a draft Statement of Claim on behalf of herself and Motels. Then, on 17 June 2011, before Mr Doyle became the solicitor on the record for Motels, Sackar J ordered the vacation of the dates of 27, 28, 29 and 30 June 2011 and 1 and 4 July 2011. The vacation of these June 2011 hearing dates seems to have been occasioned by the need to hear the 2008 and 2011 proceedings together and the then anticipated difficulty of hearing both proceedings during the 2011 hearing dates, because of the late commencement of the 2011 proceedings.
The then involvement of DEA Lawyers and Mr Doyle in the 2011 proceedings is only a part of the history of the 2011 proceedings. Other relevant parts of that history are as follows. The original Summons filed on 20 May 2011 on behalf of Karami by DEA Lawyers named Motels as the fifth defendant. Then, a draft Statement of Claim was circulated on 14 June 2011, prior to the hearing before Sackar J (Exhibit A, 56). But, it was not until 22 August 2011 when DEA Lawyers filed an amended Statement of Claim on behalf of both Karami and Motels (now named as the second plaintiff) that Mr Doyle became the solicitor on the record for Motels.
The representation of Motels on the Court record by Mr Doyle in the 2011 proceedings continued for approximately two months ending on 25 October 2011 when Mr Doyle filed a Notice of Ceasing to Act for Motels. A Notice of Intention to file and serve the Notice of Ceasing to Act was filed half way through this period, on 19 September, 2011. In summary, DEA Lawyers and Mr Doyle purported to act for Motels in the 2011 proceedings from as early as 14 June 2011, but as solicitors on the record from 22 August 2011, until 25 October 2011. The 2011 proceedings are still on foot.
Onus of Proof in relation to the Challenge to Retainer
Mohammad challenges Mr Doyle's retainer with Motels. The first question is, which party - the party claiming the retainer or the party challenging the retainer - carries the onus of proof in relation to the existence of the retainer.
In the course of careful oral submissions the parties dealt with this issue. The law may be concisely stated. The party impugning a legal practitioner's authority bears the onus of proof: Hawksford v Hawksford (2005) 191 FLR 173 at [33]-[55] per Campbell J. However, depending on the quality of the moving party's evidence, an evidential onus may move to the legal practionner in relation to particular factual findings: Hawksford v Hawksford (2005) 191 FLR 173 at [55] per Campbell J; Wood v Inglis [2008] NSWSC 1147 at [20] per Barrett J.
Mohammad carries the onus of proof of any want of authority in Mr Doyle to act for Motels. However, if Mohammad satisfies that evidential burden, the onus may shift to Mr Doyle in relation to particular issues.
Grounds of Challenge to the retainer between DEA Lawyers and Motels
The challenge to Mr Doyle's retainer depends in part upon whether the replaceable rules of Corporations Act 2001 (Cth)) apply to Motels. This therefore became a threshold question for short consideration.
Section 135 - "the Replaceable Rules" - of the Corporations Act
Motels was incorporated on 4 May 1987. On 27 January 1999 Motels filed an Application for Voluntary Deregistration. However, the registration of Motels was reinstated on 4 April 2007, before the commencement of the 2011 proceedings.
Section 601AH of the Corporation Act deals with the legal effect of reinstatement of the registration of companies.
"601AH Reinstatement
Reinstatement by ASIC
(1)ASIC may reinstate the registration of a company if ASIC is satisfied that the company should not have been deregistered.
Reinstatement by Court
(2)The Court may make an order that ASIC reinstate the registration of a company if:
(a)an application for reinstatement is made to the Court by:
(i)a person aggrieved by the deregistration; or
(ii)a former liquidator of the company; and
(b)the Court is satisfied that it is just that the company's registration be reinstated.
(3)If the Court makes an order under subsection (2), it may:
(a)validate anything done between the deregistration of the company and its reinstatement; and
(b)make any other order it considers appropriate.
Note: For example, the Court may direct ASIC to transfer to another person property vested in ASIC under subsection 601AD(2).
ASIC to give notice of reinstatement
(4)ASIC must give notice of a reinstatement in the Gazette. If ASIC exercises its power under subsection (1) in response to an application by a person, ASIC must also give notice of the reinstatement to the applicant.
Effect of reinstatement
(5)If a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered. A person who was a director of the company immediately before deregistration becomes a director again as from the time when ASIC or the Court reinstates the company. Any property of the company that is still vested in the Commonwealth or ASIC revests in the company. If the company held particular property subject to a security or other interest or claim, the company takes the property subject to that interest or claim."
Section 601AH(5) provides that the effect of reinstatement of the registration of a company is that the company is taken to have continued in existence as if it had not been deregistered. Therefore, because Motels was incorporated on 4 May 1987, despite its deregistration, by Corporations Act, s 601AH(5), Motels is still taken to be registered on 4 May 1987.
In addition Corporations Act, s 135 sets out the companies to which the replaceable rules contained in the Corporations Act, s141 apply.
"135 Replaceable rules
Companies to which replaceable rules apply
(1)A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words:
(a)replaceable rule-applies as a replaceable rule to:
(i)each company that is or was registered after 1 July 1998; and
(ii)any company registered before 1 July 1998 that repeals or repealed its constitution after that day; and
(b)replaceable rule for proprietary companies and mandatory rule for public companies-applies:
(i)as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and
(ii)as a replaceable rule to any company that is or as registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and
(iii)as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and
(iv)as an ordinary provision of this Act to any public company whenever registered.
The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder.
Note 1: See sections 198E, 201F and 202C for the special provisions that apply to a proprietary company while the same person is both its sole director and sole shareholder.
Note 2: A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it.
Company's constitution can displace or modify replaceable rules
(2)A provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company's constitution.
Failure to comply with replaceable rules
(3)A failure to comply with the replaceable rules as they apply to a company is not of itself a contravention of this Act (so the provisions about criminal liability, civil liability and injunctions do not apply).
Note: Replaceable rules that apply to a company have effect as a contract (see section 140)."
Because Motels is taken to be registered on 4 May 1987 (Corporations Act, s 601AH(5)), the replaceable rules contained in the Corporations Act do not apply to it. Motels was registered before 1 July 1998 (Corporations Act, ss 135(1)(a)(i) and 135(1)(b)(ii)) and has not repealed its constitution after 1 July 1998 (Corporations Act, ss 135(1)(a)(ii) and 135(1)(b)(iii)). Therefore, the replaceable rules are not applied to Motels in these reasons.
The First Ground: Lack of Notice
The first ground of challenge to the retainer that Mohammad raises is that reasonable notice was not given of the directors' meeting of Motels, which purported to resolve to instruct DEA Lawyers to act on behalf of Motels in the 2011 proceedings.
Notice of a directors' meeting to be held at 1pm on 17 June 2011 at Unit 5, 500 Princes Highway, St Peters was given by way of Notice of Directors' Meeting on 16 June 2011 ("the Notice"), Exhibit A, 73. Moreover, there is no clear evidence whether the Notice was sent by mail or email. The state of the evidence is at least consistent with it being sent by email. The Notice included a statement of the proposed consideration of a resolution that DEA Lawyers be instructed to Act for Motels amongst the foreshadowed business at the meeting.
Article 114 of the Articles of Association of Motels ("the Articles") provides that a director may at any time summon a directors' meeting. The Articles do not specify a particular notice period preceding a directors' meeting. Neither is there a general law requirement of a particular notice period, which must precede a directors' meeting.
However, there is a general law requirement that reasonable notice of a directors meeting must be given to all directors: Toole v Flexihire Pty Ltd (1991) 6 ACSR 455, 461 per Demack J; Wilson v Manna Hill Mining Co Pty Ltd [2004] FCA 912 at [25] per Lander J; Dhami v Martin [2010] NSWSC 770 at [47] per Barrett J; McMaster v Eznut Pty Ltd [2006] WASC 109 at [161] - [169] per Simmonds J.
Similarly, although not applying as a replaceable rule to Motels, Corporations Act, s 248C provides that a director calling a directors meeting must give reasonable notice to every other director. In deciding what is fair and reasonable the nature of the company, the practice of the directors of the particular company and the nature of the business to be transacted at the meeting are important factors: Toole v Flexihire Pty Ltd (1991) 6 ACSR 455 at 461 per Demack J. Relevantly, notice will not be reasonable if it does not allow the directors sufficient time to attend the meeting: Toole v Flexihire Pty Ltd (1991) 6 CSR 455 at 461 per Demack J. Notice must be given even if the director is outside the jurisdiction: Mitropoulos v Greek Orthodox Church and Community of Marrickville & District Ltd (1993) 10 ACSR 134.
Mr Jenkins argued for Mohammad that because the notice of the directors' meeting was not reasonable, the resolution purporting to instruct DEA Lawyers to act for Motels in the 2011 proceedings is not valid. Mr Jenkins says that the one day's notice given was not reasonable, because Abbas was overseas, in Iran, and that was insufficient time for Mohammad to attend the meeting. As the party impugning Mr Doyle's authority to act, Mohammad carries the onus of proof of establishing material which would show that the notice of the directors' meeting was not reasonable.
Mohammad has not discharged that onus. Mohammad submits that as Abbas was in Iran at the time when the notice was served, reasonable notice of the directors' meeting was not given. But, Mohammad has not adduced admissible evidence that Abbas was in fact in Iran at the time when notice was served. Abbas sought to rely upon an email from Abbas dated 16 June 2011 to the Associate to Sackar J when the matter was listed before his Honour, which email asserted that he was in Iran at the relevant time. But during argument I reserved my decision on whether that email could be used as evidence of the facts asserted within it. I now rule that it cannot be so used. There was no obvious impediment at the time of hearing for Mohammad to obtain evidence of Abbas' whereabouts at the relevant time by more conventional means. Indeed Abbas was within the jurisdiction at the time of hearing the present motion.
But for the following reasons, even if Abbas was overseas, in Iran, at the time Notice was given, I would not find that the Notice was unreasonable.
First, Motels is a proprietary company limited by shares with only 2 (or, on one view - see below, at most 3) directors, such that a short time period for notice was reasonable. Secondly, as the party with the onus, Mohammad raises no evidence of the practice of the board of directors in relation to the giving of notice for directors' meeting from which comparisons relating to the Notice can be made. Thirdly, the nature of the business to be transacted at the meeting - being the commencement of the 2011 proceedings and the giving of instructions to DEA Lawyers to act for Motels in the 2011 proceedings - was reasonably urgent given the imminence of the hearing before Sackar J, therefore justifying a short period of notice. For example, in McMaster v Eznut [2006] WASC 109 at [169] and [178] Simmonds J recognised that the urgency of appointing an administrator was grounds for a short period of notice being, in that case, notice at or just before the directors meeting. Fourthly, technology might have facilitated Abbas' attendance at the directors' meeting: Corporations Act, s 248D. Mohammad adduces no evidence as to why technology could not have facilitated Abbas' attendance at the directors' meeting or whether or not all the directors of Motels had consented to the use of technology such that technology could have facilitated Abbas' attendance at the directors' meeting. In short, there may be many reasons why a meeting notice period of one day was justifiable.
Mohammad has not adduced evidence sufficient to show that these reasons do not apply. So there is no basis to impugn Mr Doyle's authority to act on the grounds that there was a lack of notice of the 17 June 2011 directors' meeting. Thus, on this first ground the evidential onus does not shift to Mr Doyle.
The Second Ground: Lack of Quorum
The second ground of challenge to the retainer Mohammad raises is that there was no quorum at the 17 June 2011 directors' meeting that purported to resolve to instruct Mr Doyle to act on behalf of Motels in the 2011 proceedings. Article 112 of Motel's Articles provides until otherwise determined by the directors, that two directors shall form a quorum at directors' meetings. The parties accepted that Article 112 regulated the number of directors that constituted a quorum at Motel's directors' meetings.
In order to understand Mohammad's challenge to the retainer on the ground of lack of quorum at the 17 June 2011 directors' meeting, it is necessary to understand something of the conduct of that meeting. The Minutes of the Meeting of Directors ("Minutes") record it was attended by Karami and Leila Ashrafinia ("Leila"). The Minutes indicate that Leila was appointed "for the purposes of s201H of the Corporations Act 2001". The Minutes note that a quorum was present, resolve to commence the 2011 proceedings and resolve to instruct DEA Lawyers to act on behalf of Motels in the 2011 proceedings.
But, as noted above, the replaceable rules under Corporations Act, s 135 do not apply to Motels. Instead, article 90 of the Articles provides, albeit similarly to s 201H:
"Directors may fill casual vacancies and appoint additional Directors
The Directors shall have power at any time and from time to time to appoint any other person as a Director either to fill a casual vacancy or as an addition to the Board but so that the total number of Directors shall not at any time exceed the maximum number fixed. But any Director so appointed shall hold office only until the next annual general meeting of the Company when he shall retire but shall be eligibel (sic) for re-election at such meeting. But an auditor or a partner or employee of an auditor of the Company shall not be capable of being appointed a Director of the company."
The validity of Leila's appointment as director of Motels is relevant. If Leila was not validly appointed, a quorum was not present at the 17 June 2011 directors' meeting. Mr Jenkins submitted that there was no record of any s 201H appointment of Leila as a director of Motels; nor did the ASIC register record any appointment of Leila as a director by the two other directors. Nor was there anything in the Minutes recording that the directors of Motels (Abbas and Karami) had resolved to appoint Leila as a director. This suggests that Leila had not been validly appointed as a director. Neither Mr Doyle nor Karami, produced any evidence displacing the inference arising from this material, that Leila had not been validly appointed as a director of Motels.
I infer therefore that Leila was not validly appointed as a director of Motels. Therefore a quorum was not present at the 17 June 2011 directors' meeting. The purported resolution at that meeting to instruct Mr Doyle of DEA Lawyers to act on behalf of Motels in the 2011 proceedings is therefore invalid.
However, the question arises whether the purported resolution to instruct DEA Lawyers to act on behalf of Motels in the 2011 proceedings may nonetheless be validated. For the following reasons it cannot be validated.
Section 201M of the Corporations Act provides:-
"201M Effectiveness of acts by directors
(1)An act done by a director is effective even if their appointment, or the continuance of their appointment, is invalid because the company or director did not comply with the company's constitution (if any) or any provision of this Act.
(2)Subsection (1) does not deal with the question whether an effective act by a director:
(a)binds the company in its dealings with other people; or
(b)makes the company liable to another person.
Note: The kinds of acts that this section validates are those that are only legally effective if the person doing them is a director (for example, calling a meeting of the company's members or signing a document to be lodged with ASIC or minutes of a meeting). Sections 128130 contain rules about the assumptions people are entitled to make when dealing with a company and its officers."
Corporations Act, s 201M makes effective acts by directors, if their appointment is invalid. Section 201M is only available where the invalidity of the directors' act is caused by the invalidity of his or her appointment. In Wood v Inglis (2008) 68 ACSR 420 at 433-434 Barrett J emphasised that s 201M only applies where there is a defective appointment. But here there is no evidence Leila was appointed. The situation in Wood v Inglis is similar: there s 201M was found not to operate, where the general meeting had the power to appoint directors but no directors' meeting was held. Neither Mr Doyle nor Karami can point to any directors' meeting appointing Leila as a director such as to attract the operation of s 201M. In Morris v Kanssen [1946] AC 459 at 472, Lord Simons noted that s 226(1), the predecessor to s 201M, "cannot be utilised for the purpose of ignoring or overriding the substantive provision relating to such appointment". Thus Corporations Act, s 201M does not save the 17 June 2011 meeting from invalidity for want of a quorum.
Indoor Management Rule?
Although the Court has concluded the 17 June 2011 resolution is invalid for want of a quorum the parties debated whether Mr Doyle may nevertheless rely on the resolution by invoking the Indoor Management Rule, or under Corporations Act, ss 128 and 129. Mr Doyle claimed that he could. But Mohammad disputes this.
The Indoor Management Rule allows a third party dealing with Motels to assume that all necessary steps internal to the company have been taken: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 154-155 per Mason CJ, 171 per Brennan J and 207 per Toohey J. Sections 128 and 129, provide:-
"128 Entitlement to make assumptions
(1)A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
(2)A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
(3)The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.
(4)A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.
129 Assumptions that can be made under section 128
Constitution and replaceable rules complied with
(1)A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.
Director or company secretary
(2)A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:
(a)has been duly appointed; and
(b)has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
Officer or agent
(3)A person may assume that anyone who is held out by the company to be an officer or agent of the company:
(a)has been duly appointed; and
(b)has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
Proper performance of duties
(4)A person may assume that the officers and agents of the company properly perform their duties to the company.
Document duly executed without seal
(5)A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.
Document duly executed with seal
(6)A person may assume that a document has been duly executed by the company if:
(a)the company's common seal appears to have been fixed to the document in accordance with subsection 127(2); and
(b)the fixing of the common seal appears to have been witnessed in accordance with that subsection.
For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.
Officer or agent with authority to warrant that document is genuine or true copy
(7)A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy.
(8)Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section."
Mr Doyle fails in his submission that he can rely on the Indoor Management Rule to overcome the quorum defect in the 17 June 2011 meeting. Corporations Act, s 129(2) requires that a person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director of the company (a) has been duly appointed and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director. But in this case, the ASIC register did not record any appointment of Leila as a director of Motels. No information available to the public from ASIC indicated that Leila was appointed as a director of Motels. Consequently, the Indoor Management Rule does not permit Mr Doyle to assume that Leila was duly appointed.
Costs incurred from Mr Doyle acting for Motels?
Mr Doyle has not adduced evidence to displace the inferences: (1) that the 17 June 2011 directors meeting lacked a quorum; and (2) that therefore the 17 June 2011 resolution was invalid.
Mohammad seeks an order for indemnity costs against Mr Doyle, for his conduct of the proceedings without proper authority. But the first question is what costs have been incurred as a result of Mr Doyle acting for Motels. Some initial perspective on the relative size of these costs is needed. The 2011 Proceedings have been largely conducted without Motels as the second plaintiff. Mr Doyle only became the solicitor on the record for Motels on 22 August 2011. By 22 August 2011, the hearing dates of 27, 28, 29, 30 June 2011 and 1 and 4 July 2011 before Sackar J had been vacated.
This issue was the subject of further submissions from the parties. At the conclusion oral argument on the challenge to retainer, I granted leave to the parties to put on a supplementary note on whether the costs of the hearing dates vacated should be part of the order, and the question of whether costs should only be ordered against Mr Doyle if a costs order against Karami is not satisfied. These supplementary submissions revealed starkly differing contentions.
Mohammad submits that the Court should order Mr Doyle to pay Mohammad's costs of the 2011 proceedings thrown away by reason of his unauthorised commencement of the proceedings on behalf of Motels. Specifically, Mohammad submits all of Mohammad's costs, the costs incurred both before and after Mr Doyle filed a Notice of Appearance should be the subject of an indemnity costs order. In particular, Mohammad submits that the late stage Mr Doyle commencing the proceedings on behalf of Motels was the cause for the vacation of the hearing dates before Sackar J.
In reply, Karami noted that there was not sufficient evidence enabling the Court to make findings as to why Sackar J vacated the hearing dates or to make costs orders encompassing the costs thrown away by the vacation of the hearing dates before Sackar J. Similarly, Mr Doyle submitted that there is no evidence that the vacation of the hearing dates before Sackar J was caused by the involvement of Motels or Mr Doyle in the proceedings. Karami submits that it follows that if an order for costs thrown away by Motels in the 2011 proceedings is made, that order should expressly exclude any provision for costs of the vacated hearing dates before Sackar J of the 2008 proceedings.
In my view, it is not clear that Mr Doyle's intervention in the 2011 proceedings purportedly on behalf of Motels caused vacation of hearing dates in June and July 2011. So no costs order made against Mr Doyle should include the costs thrown away by the vacation of the hearing before Sackar J in June 2011.
Discretion in regard to the award of costs
If the Court makes any finding that Mr Doyle acted for Motels without authority then Mohammad's motion seeks costs against Mr Doyle. But, even if Mr Doyle acted for Motels without authority, the award of costs against him remains in the discretion of the Court: Hillig v Darkinjung Pty Ltd & Ors (No 2) [2008] NSWCA 147 and Civil Procedure Act 2005 (NSW), s98.
The applicable principles may be concisely stated. The common order or ordinary rule when a solicitor has taken unauthorised steps in litigation, is to require the solicitor to personally pay the costs they have caused the parties to incur up until the order is made: Hawksford v Hawksford [2005] NSWSC 463 at [111] per Campbell J; Hillig v Darkinjung Pty Ltd & Ors (No 2) [2008] NSWCA 147 at [47]-[52] per McColl JA (Beazley and Giles JJA agreeing); A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 458 per Young J. However, on sufficient grounds being shown the Court may depart from the ordinary rule: A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 458 per Young J; Hillig v Darkinjung Pty Ltd & Ors (No 2) [2008] NSWCA 147 at [51]-[52] per McColl JA, Beazley and Giles JJA agreeing. Any costs the subject of a cost order may be on an indemnity basis or on the ordinary basis: A W & L M Forrest Pty Ltd v Beamish (1998) 146 FLR 450 at 460 per Young J.
Mr Doyle has without actual authority purported to initiate legal proceedings on behalf of Motels. The question now is whether Mr Doyle should be ordered to pay indemnity costs, or costs on the ordinary basis, or whether some other order should be made. In exercising the discretion whether to require a legal practitioner to personally pay the costs they have caused the parties to incur, because they acted without authority, Courts commonly take into account a number of factors, some of which are relevant in this case.
The Court of Appeal in Hillig v Darkinjung Pty Ltd & Ors (No 2) [2008] NSWCA 147 did not make a costs order against a solicitor purporting to act without authority. The Court was influenced to reach that result by a number of factors that are also present in this case. There the solicitor in question was unable to determine by reference to objective facts whether or not the resolutions, that the directors who appointed the solicitor relied upon as the basis of their power to instruct the solicitors, were effective: at [53]. McColl J especially noted that where the party represented by the solicitor whose authority is challenged is a defendant, and the question whether the defendant can retain a solicitor lies at the heart of the proceedings, a court would not readily order the solicitor to pay the costs of the proceeding: at [55]. McColl J also noted that where a solicitor is placed on notice of a challenge to authority to act, the solicitor should attempt to determine whether the client's authority to retain the solicitor can be objectively determined: at [56]. Where the client's authority to retain the solicitor can be objectively determined, the court must be anxious to ensure that an order that the solicitor bear the costs is appropriate in the circumstances; in the consideration of which the public interest that citizens have legal representation for the purposes of the conduct of litigation is relevant: at [56]. The Court did not make an order for costs against the solicitor in Hillig.
Bryson J ordered costs against the solicitor: in Zimmerman Holdings v Wales [2002] NSWSC 447 at [11]. In so ordering costs, his Honour emphasised that: the authority of the directors purporting to instruct the solicitor was under challenge before the execution of the purported retainer (at [11]-[12]); that the directors purported to directly retain the solicitor (at [17]), and that the loss suffered was considerable, particularly because the litigation was pending for months prior to the hearing: at [17]. Although Bryson J ordered costs against the solicitor, the urgency of the proceeding was a factor against the making of an order for costs; but because of the interval between the commencement of proceedings and the second joinder of additional parties, there was ample time for the solicitor to review and consider the retainer: at [11]. Furthermore, Bryson J noted that the fact that the solicitor received a warranty of authority from the directors of the client company, to the effect that the directors had authority to commence proceedings, was a factor against the exercise of the discretion to order costs against the solicitor: at [17]. Ultimately, however, Bryson J exercised the discretion to make a costs order mainly against the solicitor, because the information in relation to whether authority existed was in the hands of the solicitors and was not available to the defendants: at [17].
In Cohen v The State of Victoria [2011] VSC 229 J Forrest J ordered costs against the solicitor who commenced proceedings for a plaintiff without authority. J Forrest J highlighted that: but for the solicitor, the proceedings would not have commenced (at [15]); the solicitor did not attempt to enter into a cost agreement or retainer with the purported client and in fact kept the purported client in the dark about the client's role as the representative party (at [16]); and that the solicitor's conduct amount to a breach of ethical obligations (at [18]) in making the cost order against the solicitor.
Discretion in Regard to Mr Doyle
The following factors guide the exercise of the discretion here; and from these the Court concludes that Mr Doyle should not pay the first defendant's, Mohammad's, costs of defending the claim that Motels brought against him.
First, the resolutions contained in the Minutes were presented to Mr Doyle as proof of the fact that DEA Lawyers were authorised to act for Motels in the 2011 proceedings. He did not act recklessly. He took the trouble to ensure that he had what he thought were appropriate resolutions.
Secondly, although it was open to Mr Doyle to go behind the resolutions to consider their validity; and although his involvement in the overall proceedings made him aware of the disharmony between the directors of Motels; but nevertheless the arguments that have succeeded on invalidity did not immediately appear on the face of the Minutes Mr Doyle was given.
Thirdly, there was apparent urgency in obtaining instructions for and executing the amendment of the Statement of Claim in anticipation of having the amended 2011 proceedings heard in June 2011 with the 2008 proceedings. Thus Mr Doyle is not to be judged by a standard that might apply to a more extended decision-making process.
Fourthly, Mr Doyle did not press on to act for Motels without authority. Lawyers for Mohammad, Brown Wright Stein, raised the query about his retainer by letter on 23 September 2011. Mr Doyle filed a Notice of Ceasing to Act on 24 October 2011 and communicated that to Brown Wright Stein by letter on 25 October 2011. Although there was no evidence as to the events following the query as to retainer, it is to be inferred that Mr Doyle was concerned that he not act for Motels without authority.
Fifthly, Mr Doyle's involvement purportedly on behalf of Motels did not of itself occasion Mohammad to incur a substantially increased and separable burden of costs that would not have otherwise been incurred by Mohammad dealing with the existing statement of claim in the 2011 proceedings. This is not one of those cases where the whole existence of proceedings and the complete cost burden incurred by a defendant can be explained by the solicitor acting without proper authority. He only acted in that capacity for two months. I am not satisfied on the evidence that Motels involvement in the 2011 proceedings occasioned much additional burden to Mohammad.
Sixthly, Mr Doyle's involvement in the 2011 proceedings was not a significant cause of the vacation of the hearing dates before Sackar J in June 2011. Those dates were essentially vacated because Karami had commenced the 2011 proceedings late and the new proceedings needed to be heard at the same time as the 2008 proceedings. They were eventually listed before me for that purpose.
Conclusions and Orders
I conclude that Mr Doyle should not pay the first defendant's costs of defending the claim that Motels brought against the first defendant. I therefore dismiss this aspect of the first defendant's motion.
Costs would normally follow the event unless "it appears to the court that some other order should be made as to the whole or any part of the costs": UCPR r 42.1. But in this case, although Mr Doyle has been successful in the exercise of the court's costs discretion, I do not think that Mohammad should pay Mr Doyle's costs of this motion. This is because Mr Doyle has only been successful upon the exercise of a costs discretion and in the exercise of that discretion it is not appropriate for Mohammad to bear the costs of questioning what was established to be a defect in Mr Doyle's instructions. It was in my view a defect worthy of investigation and one which was in no way the fault of Mohammad.
I will therefore note that there will be no order as to costs to the intent that the first defendant, Mohammad and Mr Doyle will each bear their own costs of this motion.
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Decision last updated: 15 May 2012
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