Brookfield v McPherson's Limited

[2003] FCA 1237

FEDERAL COURT OF AUSTRALIA

Brookfield v McPherson’s Limited [2003] FCA 1237

PRACTICE AND PROCEDURE – standing – applicant assignee of cause of action in principal proceeding – principal proceeding unsuccessful – applicant seeking to set aside adverse judgment in principal proceeding as that respondent allegedly procured result through deliberate failure to give proper discovery – respondent (parent company) to present proceeding alleged to be parent company and to be complicit in its failure to give discovery – whether applicant has standing to bring proceeding against parent company for loss suffered in principal proceeding by wrongful conduct of respondent when assignment of cause of action did not relate to the present claim.

Corporations Act s 588FB(1)
Corporations Law ss 588FB, 588FC, 588FE

Dey v Victorian Railways Commissioners (1949) 78 CLR 62 referred to
General Steel Industries Incv Commissioner for Railways (NSW) (1964) 112 CLR 125 referred to
Commonwealth Bank of Australia v Quake (1991) 178 CLR 134 referred to
Lonrho Ltd v Shell Petroleum Co Ltd (No.2) [1982] AC 173 cited
Lonrho Plc v Fayed [1992] 1 AC 448 cited
Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VF 637 cited
Little v Law Institute of Victoria (No.3) [1990] VR 257 cited
Canada Cement La Farge Ltd v British Columbia Lightweight Aggregate Ltd (1983) 145 DLR (3d) 385 cited
Creasy v Breachwood Motors Ltd (1992) 10 ACLC 3,052 referred to
In re Darby; Ex parte Brougham [1911] 1 KB 95 referred to

IAN WALTER BROOKFIELD (ABN 1247621465) & SEPTIC PRODUCTS AUSTRALIA PTY LTD (IN LIQ) v McPHERSON’S LIMITED (ACN 004068419)

S 505 of 2003

MANSFIELD J
4 NOVEMBER 2003
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 505 OF 2003

BETWEEN:	IAN WALTER BROOKFIELD (ABN 1247621465) & SEPTIC PRODUCTS AUSTRALIA PTY LTD (IN LIQ) APPLICANTS
AND:	McPHERSON'S LIMITED (ACN 004068419) RESPONDENT
JUDGE:	MANSFIELD J
DATE OF ORDER:	4 NOVEMBER 2004
WHERE MADE:	ADELAIDE

THE COURT ORDERS THAT:

1.        The motion to summarily dismiss the application be refused. 

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 505 OF 2003

BETWEEN:	IAN WALTER BROOKFIELD (ABN 1247621465) & SEPTIC PRODUCTS AUSTRALIA PTY LTD (IN LIQ) APPLICANTS
AND:	McPHERSON'S LIMITED (ACN 004068419) RESPONDENT

JUDGE:	MANSFIELD J
DATE:	4 NOVEMBER 2003
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1. This is a motion to dismiss the application.  It is on the basis that the applicants do not have the standing to have instituted and to maintain the application against the respondent.

2. To understand how that issue arises, it is necessary to refer briefly to the background to the action.  In Federal Court of Australia action SG 112 of 1993 (the principal action), the applicants claimed damages against Davey Products Pty Ltd (now called Yevad Products Pty Ltd) (in this judgment called Yevad) for the supply of allegedly defective submersible pumps.  The supply of those pumps was to Septic Products Australia Pty Ltd (In Liq) (Septic), but by the time of the proceeding, it had gone into liquidation.  The liquidator of Septic assigned to Mr Brookfield by deed dated 28 October 1993 such rights as Septic had against Yevad in respect of Yevad’s supply of submersible pumps to Septic.  Septic was a party joined in the proceedings to satisfy the procedural requirement as to joinder of an assignor of a chose in action.  Mr Brookfield did not directly suffer any loss of which he complained in the proceeding.

3. The principal action was unsuccessful.  It was dismissed with costs against Mr Brookfield.  Judgment was entered on 8 February 1996.

4. During the pre-trial procedures in the principal action, on 3 March 1995, McPherson’s Limited (McPherson’s), the parent company of Yevad, sold all the assets of Yevad including its business to a company called Domali Pty Ltd (which then changed its name to Davey Products Pty Ltd) (Domali).  At the time of the sale, Yevad changed its name to its current name and it ceased to trade.  Yevad’s business records were transferred to Domali as part of the sale transaction, including such records as it had relating to the failures of submersible pumps which it had sold or supplied over preceding years.

5. To that time, instructions with respect to the principal action were given to Yevad’s solicitors by Mr Robert Morrow, now deceased, an employee of Yevad who upon the transfer of the business transferred his employment to Domali.  Instructions were also given at a higher level by Mr Alan Edward Fahy, a director of McPherson’s on behalf of Yevad, and also a director of Yevad.  By arrangement with Domali, Mr Morrow continued to be available to Yevad and its solicitors to give instructions with respect to the action on Yevad’s behalf, including with respect to issues relating to discovery.  The present applicants also allege that McPherson’s, from 3 March 1995, funded the ongoing conduct of the principal action on behalf of its subsidiary Yevad.

6. Hence, the applicants allege that McPherson’s at all times has been aware of and involved in the defence of the principal action by Yevad, and subsequently in its conduct in resisting the applicants’ claim to set aside the judgment in the principal action.

7. Following the judgment in the principal action, an appeal was instituted unsuccessfully to the Full Court of the Federal Court, and special leave to appeal to the High Court was refused.  Thereafter the applicants driven by Mr Brookfield, have maintained the assertion that the judgment dismissing their claim against Yevad in the principal action was procured by the deliberate failure of Yevad to give proper discovery in the principal action.  This includes assertions relating to the numbers of submersible pumps sold by Yevad in the period of time relevant to the principal action and about the numbers of such pumps which were returned with complaints of defective performance.  They have maintained those allegations by a series of proceedings, to date unsuccessfully.  There is now being heard by another judge what may be understood to be the final application by the applicants to have the judgment in the principal action set aside.  In that application it is alleged that the judgment in the principal action was procured by the deliberate failure of Yevad to give proper discovery in the principal action, and that proper discovery would very probably have led to a different outcome in that action.  It is not necessary to refer in detail to those allegations at the present time.

8. The present application reflects the perception of Mr Brookfield that, if the application to set aside the judgment in the principal action were successful, whilst Yevad would no longer have a costs order in its favour which it might execute against Mr Brookfield, the action of the applicants against Yevad in the principal action, if it then proceeds, will be against a company with no real assets.  In addition, any costs ordered in Mr Brookfield’s favour in the application to set aside the judgment in the principal action against Yevad may not be recoverable against Yevad.  Consequently, Mr Brookfield has explained, he has instituted the present application against McPherson’s.  He accepts the proposition which he must make out which he expresses in the following terms:

   ‘If a non-party to proceedings (whether or not the non-party is related to a party in the proceedings) procures a party in proceedings to breach its duty to give proper discovery in those proceedings to the detriment of the opposing party to those proceedings, the opposing party may recover from the non-party the loss suffered as a result.’

9. That is the purpose of the present application.

10. McPherson’s has applied to have the action against it dismissed.  It contends that neither of the applicants has the standing to institute the present claim, even if the propositions underlying its maintenance be correct.  The propositions made by Mr Brookfield include that McPherson’s procured the disposal of assets of Yevad, including its business records, so that Yevad was prevented from complying with its obligations to give proper discovery in the principal action, and placed Yevad in a position where it would be unable to meet any judgment which the applicants obtain against it.  It is therefore claimed that McPherson’s is liable for whatever the applicants may recover in the application to set aside the judgment in the principal action, and in the principal action, against Yevad.

11. The evidence indicates that:

    1.Mr Brookfield has never had a personal cause of action in the principal action against Yevad; he simply claims as the assignee of Septic’s rights against Yevad;

    2.Septic has been deregistered as from 11 September 1998 and so has not instituted and cannot institute this application.

12. McPherson’s contends that Mr Brookfield’s causes of action in the principal action against Yevad were confined to those causes of action validly assigned by Septic by its liquidator, and do not extend to any action against McPherson’s.  Consequently, he has no cause of action against McPherson’s in his own right, nor by assignment, and therefore (it is argued) he has no standing to bring the present application.  If the allegations of Mr Brookfield are correct, it would be an unattractive proposition to accede to.

13. The particular deed of assignment is recorded in the judgment of the judge at first instance in the principal action.  It records:

    ‘RECITALS

    A.The Assignor is the Appointed Liquidator of Septic Products Australia Pty Ltd (ACN 050 294 972) (In Liquidation).

    B.The Assignee is the applicant in certain legal proceedings to be instituted in the Federal Court of Australia for damages against DAVEY PRODUCTS PTY LTD (ACN 004 813 192), I.T.T. FLYGT LIMITED and WHITE INTERNATIONAL PTY LTD (ACN 000 119 380).

    C.The Assignor has agreed to assign to the Assignee absolutely all of the Assignor’s right, title and interest as applicant to the aforementioned proceeding.

    NOW THIS DEED WITNESSES:

    1.Assignment

    In consideration of the payment of ONE DOLLAR ($1.00) paid by the Assignee to the Assignor and in consideration of the Assignee accepting this assignment the Assignor assigns all of the Assignor’s right, title and interest as applicant in certain Federal Court proceedings to the Assignee.’

14. The assignment to Mr Brookfield is limited to Septic’s rights in the principal action.  The assignment did not include any rights which Septic might have had against McPherson’s, either in respect of the supply of pumps to Septic or by reason of McPherson’s alleged involvement in the conduct of the principal action.

15. I accept that the assignment does not provide Mr Brookfield directly with the entitlement to maintain the current application against McPherson’s.  It is also clear that Septic itself is not in a position to do so.  However, by reason of the assignment of Septic’s rights against Yevad, Mr Brookfield was entitled to maintain the principal action.  There is no argument presented on the present motion that he does not therefore have the standing to maintain the separate application to have the judgment in the principal action set aside on the grounds referred to.  If it is set aside, he will (at least arguably) be entitled to the costs of the separate application against Yevad.  The costs order against him in the principal action may be set aside.  He might then proceed with the re-hearing or further hearing of the principal action, and again arguably succeed in recovering an award of damages against Yevad.

16. McPherson’s on the present application does not claim to have been unaware of the basis upon which Mr Brookfield was an applicant in the principal action.  The allegation that it had financed and was involved in the conduct in the defence of the principal action has not been controverted by any evidence.  For present purposes, I assume that there is an arguable case that it was complicit in the alleged failure of Yevad to give proper discovery during the course of the conduct of the principal action, that it was aware that the discovery was inadequate, and that proper discovery was likely to have produced a different outcome in the principal action.  Those are matters which are presently being determined in the separate application to set aside the judgment in the principal action.  None of those things may be made out.  There may be degrees of involvement of McPherson’s less than I have assumed in relation to Yevad’s conduct of the principal action, or none at all.  They are not matters to be determined on the present motion.

17. I am mindful that an order which summarily prevents a party from pursuing a claim in the normal way should only be made in a very clear case:  Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc. v Commissioner for Railways (NSW) (1964) 112 CLR 125.

18. Once Mr Brookfield’s case is assumed to be as alleged in the statement of claim, I do not think the fact that his action against Yevad in the principal action was as an assignee of Septic, and that the assignment did not include any rights Septic may have had against McPherson’s, leads to the view that Mr Brookfield necessarily has no standing to bring the present application.  As I understand his claim, there are two types of loss which he seeks to recover.  The first is the loss which he allegedly suffered by McPherson’s alleged complicity in Yevad’s conduct of the principal action, namely the costs of and related to having to set aside the principal judgment.  I consider in that regard that it is arguable that Mr Brookfield now has a claim against McPherson’s in his own right.  Those costs might also include the costs incurred in resisting attempts to enforce the costs order made against him in the principal action. 

19. The High Court in Commonwealth Bank of Australia v Quade (1991) 178 CLR 134 at 142 – 143 explained the basis upon which the Court could set aside a judgment where the unavailability of evidence at the trial resulted from a significant failure by the successful party to give proper discovery. The Court has inherent power to set aside a judgment in such circumstances in the interests of justice. I think it is a small step to make directly accountable for the consequential costs a third party which has knowingly procured, or been complicit in, the misconduct of the successful party. The conduct of the third party in that circumstance might be seen as it being party to an unlawful conspiracy to inflict financial harm upon another entity in the conduct of the proceedings. Cp Lonrho Ltd v Shell Petroleum Co Ltd (No 2) [1982] AC 173; Lonrho Plc v Fayed [1992] 1 AC 448; Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VR 637. On an application such as the present, the difference between the views of the House of Lords (to date followed in Australia): Little v Law Institute of Victoria (No 3) [1990] VR 257, and of the Supreme Court in CanadaCement LaFarge Ltd v British Colombia Lightweight Aggregate Ltd (1983) 145 DLR (3d) 385; as to the precise elements of such a cause of action do not need to be explored.

20. The second type of loss which Mr Brookfield claims is the amount to which Mr Brookfield claims to be entitled in the principal action against Yevad, and which he claims he should now recover from McPherson’s because it has denuded Yevad of its capacity to meet that liability.  In my view the position presently is not clear that Mr Brookfield has any real prospect of succeeding in that claim against McPherson’s. 

21. I assume, as is alleged, that Yevad would be unable to meet any judgment. Generally speaking the parent company would be liable to the person who recovers a judgment against the subsidiary where the subsidiary is under external administration and only if the transaction whereby, in effect, it became possessed of Yevad’s assets is uncommercial: s 588FB(1) of the Corporations Act, or its predecessor under the Corporations Law: ss 588FB, 588FC and 588FE. The allegation is made that McPherson’s sold the business of Yevad for the purpose of dividing it of assets, so it could not meet any judgment against it. It was not a share transfer. In the first instance the business of Yevad should have been converted into the asset represented by the sale price. That would remain an asset of Yevad. How, if at all, McPherson’s came to receive the asset representing the proceeds of sale of Yevad’s business is not alleged. It may be that the proper course is for Mr Brookfield (assuming all other things in his favour) to secure a monetary judgment against Yevad, and if it is unable to meet the judgment then for a liquidator to investigate and, if appropriate, to pursue assets of Yevad to the extent that they have not been maintained or exchanged for value or dissipated through (for example) other normal trading. See e.g. Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052; In re Darby;  Ex parte Brougham [1911] 1 KB 95. The point is that the present pleading leaves much in the realm of speculation. However, the present application does not dissect the statement of claim and seek to have particular parts of it struck out as disclosing no cause of action. It does not assert that only particular aspects of the nature of Mr Brookfield’s claim should be dismissed on a summary basis as they are untenable in law. It attacks generally his standing to have brought the present application at all. For the reasons I have given, in my judgment at least in respect of his claim for the loss allegedly suffered by him directly as a result of McPherson’s alleged complicity in Yevad’s conduct of the principal action in the circumstances as they exist or have been alleged, Mr Brookfield has an arguable claim to standing to maintain the action against McPherson’s.

22. I accordingly decline to make the orders sought on the present notice of motion.  I will not formally dismiss the motion, as it may be that McPherson’s will seek at a later point in the proceedings to attack the statement of claim or parts of the statement of claim on other grounds.  I will therefore simply adjourn the notice of motion to a date to be fixed.  I suspect that the parties, in the light of these reasons, will simply await the outcome of Mr Brookfield’s application to set aside the principal judgment.  Depending on the outcome of that application, it may be determined that there is no point in the current proceedings being maintained.

I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield .

Associate:

Dated:            3 November 2003

Counsel for the Applicant:	The applicant appeared in person
Counsel for the Respondent:	Mr W J N Wells QC
Solicitor for the Respondent:	Thomson Playford
Date of Hearing:	4, 8 August 2003
Date of Judgment:	4 November 2003