Francis (Trustee) v Oculus Accounting Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Francis (Trustee) v Oculus Accounting Pty Ltd [2021] FCA 448

File number: QUD 11 of 2020
Judgment of: DERRINGTON J
Date of judgment: 30 April 2021
Catchwords: PRACTICE AND PROCEDURE – application by director for leave to appear for company in proceedings – insufficient evidence of financial ability of company and those who stand behind it to fund the litigation – no evidence of director’s authority to make application on behalf of the company – director’s lack of ability to conduct complex litigation – application dismissed
Legislation: Federal Court Rules 2011 (Cth), rr 1.34, 4.01
Cases cited:

AA Shi Pty Ltd v Avbar Pty Ltd (No 4) [2010] FCA 878

ACCC v Dataline.net.au Pty Ltd [2004] FCA 1361

Act General Cleaning Co Pty Ltd v Con Naoum [1996] FCA 1560

Basetec Services Pty Ltd v CPB Contractors Pty Ltd (formerly Leighton Contractors Pty Ltd) [2017] FCA 510

Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (1986) 8 NSWLR 104

Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2002] FCA 1002

Damjanovic v Maley (2002) 55 NSWLR 149

Deputy Commissioner of Taxation v Compumark Pty Ltd [2012] FCA 583

Enviro Pak Pty Ltd v New Horticulture Pty Ltd [2013] FCA 306

Flightdeck Geelong Pty Ltd v All Options Pty Ltd [2020] FCAFC 138

Hubbard Association of Scientologists International v Anderson [1972] VR 340

Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68

Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 12) [2012] FCA 289

Re G J Mannix Ltd [1984] 1 NZLR 309

Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241

Worldwide Enterprises Pty Ltd v Silberman [2009] VSC 165
Division: General Division
Registry: Queensland
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Number of paragraphs: 64
Date of hearing: 9 April 2021
Counsel for the Applicants: Mr D Turnbull
Solicitor for the Applicants: Bounty Law
Counsel for the First Respondent: Mr D de Closey (seeking permission to appear for the First Respondent)

ORDERS

QUD 11 of 2020
BETWEEN:

GARRY CHARLES FRANCIS AND JODI LEE FRANCIS BOTH IN THEIR OWN RIGHT, AND/OR ACTING AS TRUSTEES OF THE FRANCIS FAMILY TRUST, AND ALSO ACTING AS REPRESENTATIVES OF THE GROUP MEMBERS

Applicants
AND:

OCULUS ACCOUNTING PTY LTD ACN 097 021 031

First Respondent

DUAL AUSTRALIA PTY LTD ACN 107 553 257

Second Respondent

MIRAMAR UNDERWRITING AGENCY PTY LTD ACN 111 534 797

Third Respondent

ORDER MADE BY:

DERRINGTON J

DATE OF ORDER:

30 APRIL 2021

THE COURT ORDERS THAT:

1.The first respondent’s application for an interlocutory order for a dispensation pursuant to r 1.34 of the Federal Court Rules2011 (Cth) in respect of r 4.01(2) be dismissed.

2.The first respondent pay the applicants’ costs of and incidental to the application.

3.The matter be listed for a further case management hearing at 9:30 am on 12 May 2021.

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

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Details
Case
[2021] FCA 448
Decision Date

CaseChat Overview and Summary

In the Federal Court of Australia, the case of Francis (Trustee) v Oculus Accounting Pty Ltd involved an application by the director of Oculus Accounting Pty Ltd, Mr de Closey, for leave to appear for the company in ongoing litigation. The applicants, who had invested in Guvera Limited, alleged that Oculus breached various duties and obligations in the course of advising them regarding their investment in Guvera, which subsequently went into external administration. The application for leave was brought under the requirement in r 4.01 of the Federal Court Rules 2011 (Cth) that the parties to the proceedings must be represented by legal practitioners.

The primary legal issue before the court was whether the application should be granted, considering Oculus's financial inability to fund the litigation and the director's authority to represent the company. The court found that there were significant deficiencies in Mr de Closey's evidence, particularly in establishing his authority to bring the application and represent Oculus. Additionally, the court determined that Oculus had not demonstrated a sufficient reason for the grant of the dispensation sought, as it had not satisfied the Court that it and the persons standing behind it lacked the ability to fund the litigation. The court also considered that Mr de Closey was not a suitable person to represent Oculus if it remained unrepresented.

The court dismissed the application for leave, highlighting that the financial evidence provided by Oculus was inadequate to support the claim of impecuniosity and that Mr de Closey's lack of authority to represent the company was a substantial deficiency. The court further noted that Oculus had not demonstrated a compelling reason for granting the dispensation, as the financial position of the company and its directors did not convincingly show an inability to fund the litigation. Consequently, the court ruled that the application should be dismissed, and the first respondent was ordered to pay the applicants' costs of and incidental to the application. The matter was subsequently listed for a further case management hearing.

Orders

Orders of the court

1. The first respondent’s application for an interlocutory order for a dispensation pursuant to r 1.34 of the Federal Court Rules 2011 (Cth) in respect of r 4.01(2) be dismissed.

2. The first respondent pay the applicants’ costs of and incidental to the application.

3. The matter be listed for a further case management hearing at 9:30 am on 12 May 2021.

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

Background

Background to the litigation

For the reasons set out below, the application should be dismissed.BACKGROUNDThe proceedings The general circumstances in which these proceedings have arisen can be briefly stated. At the relevant times, Oculus conducted a business providing accounting and taxation advisory services. Whilst Oculus denies an allegation that part of its business was the provision of investment or financial advice, the claim against it by the applicants is based upon their allegation that it did so in relation to the making of investments in a particular company. In broad terms, the applicants allege that:(a)Oculus was engaged to procure investors to subscribe for shares in the company, Guvera Limited (Guvera), a so-called “start-up” company then engaged in the business of providing internet music streaming;(b)in or about February 2014, Oculus or its agents advised the first named applicants in relation to their subscription for 40,000 shares in Guvera for the amount of $100,000;(c)an application to list Guvera on the Australian Securities Exchange was rejected and the company was subsequently placed into external administration in May 2017;(d)in the course of advising the first named applicants in relation to their investment in Guvera, Oculus breached various duties owed to the applicants, including duties of care and fiduciary duties, and also breached obligations arising under Schedule 2 of the Competition and Consumer Act 2020 (Cth); and(e)as a consequence, the applicants suffered loss or damage, which is recoverable from Oculus, as their Guvera shares are now worthless and unsaleable. While significant aspects of those allegations are denied by Oculus in its defence, that summary briefly encapsulates the case, as it is presently pleaded, that Oculus will have to meet at trial. The action is a representative proceeding, pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth), on behalf of the applicants and other persons with the same, similar or related claims against Oculus (Group Members). The precise number of Group Members is unknown, but orders were made earlier this year for the service of “opt out” notices on approximately 107 persons or entities. The applicants quantify their loss as being the amount of $100,000 (the amount paid for the Guvera shares). It is reasonable to assume that the total claims against Oculus by Group Members may be many times that amount. Pleadings have now closed and the parties have undertaken discovery. The next steps in the proceeding are likely to include the service of opt out notices (as earlier orders to do so were vacated) and the preparation of lay and expert evidence.The present application The need for the present application arose when Oculus’ now former solicitors filed a Form 6 on 22 February 2021, advising that Oculus had terminated their retainer and had not appointed a new lawyer to represent it in these proceedings. The Court subsequently learned of Mr de Closey’s intention to represent Oculus in the proceeding. He was informed that, in order to do so, he would need to obtain a dispensation in respect of the requirement in r 4.01, and to that end would have to bring a formal application and put on evidence in support of it.

Evidence

Evidence Before The Court

The application was ultimately heard on 9 April 2021. The applicants maintained their opposition to application at the hearing, relying on their earlier filed written submissions.Mr de Closey’s evidenceOculus Mr de Closey deposed that Oculus is an accounting firm located in Tweed Heads in New South Wales. It employs 12 staff members, comprising two full-time and 10 part-time staff. Mr de Closey and Ms Jennifer Dallinger are the only two directors of Oculus, and have been since November 2001. They are also the company’s only two shareholders, each holding 300,000 fully paid, ordinary shares in the company. In his earlier affidavit, Mr de Closey deposed that the proceeding had taken a “severe financial toll” on Oculus in terms of the legal fees incurred to date and had distracted from the servicing of its clients and the running of its business. He deposed that the financial resources of Oculus and of its directors had become so depleted that it could no longer afford legal representation, and that the directors were in ongoing discussions with an insolvency firm in relation to their options. He further deposed that there was a “very real prospect” that the directors would “resolve to place [Oculus] into liquidation in the near future”. Those matters were unsupported by any detail in Mr de Closey’s initial affidavit or by any documentary evidence exhibited to that affidavit. There were several unaudited financial statements for Oculus annexed to Mr de Closey’s second affidavit. These record that in the current financial year to date (2020/21) and the previous two financial years (2018/19 and 2019/20), Oculus has made trading losses of $69,923, $129,704 and $73,705 respectively. Notably, those losses take into account the amounts of $117,000 and $54,000 that were received by Oculus in the current and immediately previous financial years as part of the recently ended “Job Keeper” financial assistance scheme. The financial statements also record that, in the current and immediately previous financial years, Oculus incurred legal fees in the amount of $143,915 and $104,663 respectively. In cross-examination, Mr de Closey referred to a total amount of $300,000, but the financial statements suggest that this is rounds up from the actual figure. He attributed those legal fees wholly to the costs of this proceeding. It can accepted, absent contrary evidence, that the amount of $248,578 has been incurred in legal fees. It is to be observed that that is an extraordinary figure considering the complexity of the proceedings and the stage to which it has advanced. Mr de Closey deposes that Oculus has “little cash available to further fund legal counsel”, referring to a $100,000 overdraft facility it has with the National Australia Bank of which $33,778 has apparently been drawn as at 31 March 2021. A balance sheet dated 31 March 2021 records that Oculus has current assets comprising amounts owed by trade debtors totalling $88,578 and that it has no cash at hand.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Furthermore, it is clear that establishing the impecuniosity of the company alone is insufficient: Termi-Mesh at [13]. It is necessary to also consider the financial capacity of those standing behind the company to fund its representation in the litigation. It is unlikely to be in the interests of justice to grant the indulgence sought where those who stand to benefit from it being granted can, themselves, afford to fund the company’s representation in the litigation: Termi-Mesh at [14].CONSIDERATION From the outset, it should be noted that there were significant deficiencies in Mr de Closey’s material in support of the application. In particular, there was no evidence of his authority to bring the application or to represent Oculus in the proceeding, despite the absence of such evidence having been raised with Mr de Closey at the hearing. That issue alone is a sufficient basis for dismissing the application. However, it also fails on its merits. Here, there are two key considerations: firstly, whether Oculus and the persons standing behind it lack the ability to fund legal representation; and secondly, whether Mr de Closey is a suitable person to represent Oculus if it is not legally represented. Mr de Closey’s initial evidence was to the effect that Oculus would imminently be put into liquidation, or that it would be were it to be required to incur further legal fees in respect of this proceeding. Even if it is accepted as a sufficient reason, the evidence does not satisfy the Court that this is the case. Mr de Closey’s later evidence was more equivocal as to whether he thought liquidators would be appointed in the near future, even if it were required to incur further legal fees. It is also significant that the directors have had no further discussions with insolvency practitioners since 9 March 2021. Furthermore, while it may be accepted that no further amounts would be received as part of the JobKeeper scheme, Mr de Closey also acknowledged that the second half of the financial year is generally more “financial” for accounting firms. As Mr Turnbull submitted, Oculus is evidently not failing to the extent that the directors are taking any less money out of the business: they have directly or indirectly received significant amounts in the form of salaries, superannuation, loan repayments, and distributions to their family trusts (although there has been a slight increase in the indebtedness of Oculus). There is a limit to the extent to which this can be held against them – they are of course entitled to compensation for services rendered to the company. However, when asking for an indulgence from the Court on the basis that their company has limited funds, it is somewhat inconsistent for the directors to continue to draw significant amounts of money out of the company. Mr de Closey submitted that Oculus continuing to trade did not evidence its ability to fund the legal fees in relation to this proceeding. This misunderstands Oculus’ position in respect of this application: it bears the onus of establishing that there is a sufficient reason why it is in the interests of justice that it be granted the dispensation sought (in this case, because the company and the persons standing behind it lack the ability to fund the litigation, and the circumstances otherwise support the grant of the dispensation). This it has failed to do. It did not satisfy the Court that the persons standing behind it, being Mr de Closey and Ms Dallinger, lacked the financial capacity to fund the litigation. It may be accepted that Mr de Closey at least has no assets from which he could fund the litigation. However, the consideration has a broader ambit. It is relevant in this case to consider whether, if Mr de Closey wished to fund the litigation, he could do so by accessing funds from his wife. The evidence to the contrary was unsatisfactory.