Idoport Pty Ltd v National Australia Bank Ltd
[2004] NSWSC 695
•13 August 2004
CITATION: Idoport Pty Limited and Anor v National Australia Bank Limited & Ors, National Australia Bank Limited v OAMPS Limited and Ors [2004] NSWSC 695 HEARING DATE(S): 2/08/04, 3/08/04, 4/08/04 JUDGMENT DATE:
13 August 2004JURISDICTION:
Equity Division
Commercial ListJUDGMENT OF: Einstein J DECISION: Orders for equitable discovery to be made as sought except qua identification of assets of Efficiency Investment B.V. CATCHWORDS: Practice and procedure - Abuse of process - Discovery - Principles generally - Limits and extent of jurisdiction to order discovery - Equitable discovery in aid of prospective third party costs applications - Supreme Court Rule Part 52A rule 4 (5) (d) - Whether funding as a commercial venture for reward by third parties of litigation who cloak their identity in order to avoid assuming liability for adverse costs orders is capable of amounting to an abuse of process of the court - Whether depending upon particular circumstances the degree of a funder's active participation, involvement or control of litigation is capable of amounting to an abuse of process of the court - Consideration of whether parties who use the courts process and funders who stand behind them should be at risk in relation to costs if the proceedings be successful - Companies - Piercing the corporate veil - Costs of proceedings - Applications for gross sum costs orders LEGISLATION CITED: Equity Act 1901 (NSW)
Legal Profession Act
Maintenance, Champerty and Barratry Abolition Act 1993 (NSW)
Supreme Court Act 1970 (NSW)
UK Supreme Court Act 1981
United States Federal Rules of Civil Procedure, introduced in 1938CASES CITED: A v C [1981] 2 WLR 629
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Walton v Gardiner (1993) 177 CLR 378
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Wik Peoples v State of Queensland (1996) 187 CLR 1
Williams v Spautz (1992) 174 CLR 509PARTIES :
Idoport Pty Limited ACN 075 318 106 (Plaintiff 50113/98)
National Australia Bank Limited ACN 004 044 937 (First Defendant 50113/98, Plaintiff 2571/04))
National Markets Group Limited ACN 071 105 149 (Second Defendant 50113/98)
National Australia Financial Management Limited (ACN 000 176 116)
(Third Defendant 50113/98)
Australian Market Automated Quotation (Ausmaq) System Limited
(ACN 062 527 575) (Fourth Defendant 50113/98)
Glenn L L Barnes (Fifth Defendant 50113/98)
Francis J Cicutto (Sixth Defendant 50113/98)
David M Krasnostein (Seventh Defendant 50113/98)
Kevin F Courtney (Eighth Defendant 50113/98)
Russell A McKimm (Ninth Defendant 50113/98)
Oamps Limited ACN 006 743 719 (First Defendant 2571/04)
Australian International Insurance Limited ACN 006 544 690
(Second Defendant 2571/04)
Robert Porter (Third Defendant 2571/04)FILE NUMBER(S): SC 50113/98; 2571/04 COUNSEL: Mr N Hutley SC, Mr A Paterson (Plaintiff 50113/98)
Mr J Gleeson SC, Dr A Bell (Defendants 50113/98, Plaintiff 2571/04)
Mr DP Robinson SC, Ms A Seward (First and Second Defendant 2571/04)SOLICITORS: Withnell Hetherington (Plaintiff 50113/98)
Freehills (Defendants 50113/98, Plaintiff 2571/04)
Norton Gledhill (First and Second Defendant 2571/04)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST
Einstein J
13 August 2004
50113/98 Idoport Pty Limited & Anor v National Australia Bank Limited & Ors
2571/04 National Australia Bank Limited v OAMPS & Ors
JUDGMENT
The background to the applications presently before the court
The Commercial List Proceedings
1 On 24 September 1998, Idoport Pty Limited (“Idoport”) and Market Holdings Pty Limited (“Market Holdings”) commenced Proceedings No. 50113 of 1998 in the Commercial List against National Australia Bank Limited [“the National” or NAB”], National Markets Group Limited (“NMG”), National Australia Financial Management Limited, Australian Automated Quotation (AUSMAQ) System Pty Limited (“AUSMAQ System”), Mr Glenn Barnes, Mr Francis Cicutto, Mr David Krasnostein, Mr Kevin Courtney and Mr Russell McKimm.
2 On 1 March 1999, Idoport and Market Holdings commenced proceedings No. 50026 of 1999 in the Commercial List against Mr Donald Argus.
3 Interlocutory proceedings seeking the appointment of a receiver/manager and injunctive relief were heard and determined in mid 1999: [1999] NSWSC 828.
4 On 15 February 2000, National and NMG commenced the first cross-claim in Proceedings No. 50113 of 1998 against Idoport, Market Holdings, Negubo Pty Ltd [“Negubo”], Investors Buying Service (IBS) Pty Limited and Mr John Maconochie [the “Maconochie Parties”].
5 On 3 July 2000, the Maconochie Parties commenced the second cross-claim in Proceedings No. 50113 of 1998 against National, NMG, Mr Richard McKinnon and Mr Simon Moore.
6 The final hearing of the Commercial List Proceedings (which were ordered to be heard and determined together) commenced on 24 July 2000 before me.
7 In late August and early September 2001, the Court heard argument in relation to the defendants’ application for security for costs in the Commercial List Proceedings.
8 On 13 September 2001, the Court’s reasons were given ordering that Idoport provide security for certain of the defendants’ costs of the Commercial List Proceedings (see [2001] NSWSC 744). Formal orders were made on 24 September 2004.
9 On 17 October 2001, on the application of Market Holdings in the Commercial List Proceedings, the Court ordered that the proceedings be dismissed so far as they concerned any cause of action or the whole or any part of any claim for relief made in the proceedings by Market Holdings (see [2001] NSWSC 914).
10 On 1 December 2001, the Commercial List Proceedings were stayed as a result of the failure of Idoport to provide security for the defendants’ costs of the Commercial List Proceedings.
11 On 29 January 2002, Idoport’s claims in the Commercial List Proceedings were dismissed by reason of Idoport’s failure to provide security for the defendants’ costs of those proceedings. The Court ordered that Idoport pay the defendants’ costs of the Commercial List Proceedings, and further that Idoport and each of the cross-claimants to the second cross-claim (including Negubo) be barred from bringing fresh proceedings concerning any cause of action or the whole or any part of any claim for relief by any of them in those proceedings, until costs of those proceedings have been paid in full (see [2002] NSWSC 18 at [60]-[62]).
12 An application for leave to appeal the decision was filed by Idoport on 25 February 2002. The leave application and the appeal were heard concurrently by the NSW Court of Appeal (Mason P, Stein and Giles JJA) on 25 July 2002. On 15 August 2002 the NSW Court of Appeal unanimously granted leave to appeal and dismissed the appeal with costs.
13 On 11 September 2002 Idoport filed applications for special leave to appeal to the High Court. On 20 June 2003 the High Court (Kirby and Heydon JJ) dismissed Idoport’s special leave applications.
The application for a gross sum order for costs
14 As a means of quantifying Idoport’s liability for the defendants’ costs of the Commercial List Proceedings, in accordance with the orders made on 29 January 2002, the National Parties filed an application in the Commercial List Proceedings on 1 September 2003 seeking a gross sum order for costs pursuant to Part 52A rule 6(2)(c) SCR.
15 Following the filing of the gross sum application, the National Parties wrote to each of Withnell Hetherington (Idoport’s solicitors in the Commercial List Proceedings), OAMPS Ltd [“OAMPS”], Australian International Insurance Limited [“AIIL”], Mr Nicholas F Walker and Mr Robert Porter seeking information in relation to the funding of the Commercial List Proceedings. Each of those parties declined to provide the information sought by the National Parties.
The applications presently before the court
16 There are before the court applications for the making orders for equitable discovery pursued as follows:
· a notice of motion filed by the defendants on 22 April 2004 in proceedings No. 50113 of 1998 and proceedings No. 50026 of 1999 seeks equitable discovery from the plaintiff in those proceedings, Idoport, and the third cross-defendant to the first cross-claim, Negubo; and
· a summons in fresh proceedings No. 2571 of 2004 in which the National seeks equitable discovery from OAMPS, AIIL and Mr Porter in relation to the funding of the Commercial List Proceedings.
Orders against Mr Porter
17 During the course of the hearing of the applications consent orders were made against Mr Porter [a director of OAMPS and AIIL at material times] requiring him within 28 days to make, file and serve upon the solicitors for the National an affidavit disclosing:
- “(a) Mr Porter’s knowledge of:
(1) the purpose of the purchase of shares by Australian International Insurance Limited (“AIIL”) in Idoport Pty Limited (“Idoport”);
(3) any disclosure to the shareholders of North & South Group S.A. (“NSG”) of:(2) the use to be made by Idoport of the funds invested or proposed to be invested by AIIL in Idoport;
- (A) the purpose of NSG’s investment in Idoport;
(B) the terms of NSG’s investment or proposed investment in Idoport; and
(C) the use to be made by Idoport of funds invested or proposed to be invested by NSG in Idoport;
(4) the purpose of the investment or the proposed investment in NSG by the shareholders of NSG;
(5) the terms of the investment or proposed investment in NSG by the shareholders of NSG, including the basis for any return to the shareholders of NSG on their investment in NSG;
(7) the identity of each current and former shareholder of NSG including, in relation to former shareholders of NSG, the date on which each of those shareholders ceased to be a shareholder of NSG;(6) the use to be made of the funds invested, or proposed to be invested, in NSG by the shareholders of NSG;
(b) the basis of Mr Porter’s knowledge of the matters set out in paragraph 1(a)(1) to 1(a)(7) above and exhibiting to the affidavit all documents in Mr Porter’s possession, custody or control relating to those matters.”
18 Mr Porter reserved his right to seek access to any documents discovered by:
“(a) the First Defendant;
(b) the Second Defendant;
(c) the respondents to the Notice of Motion dated 22 April 2004 in Supreme Court of NSW Proceedings No. 50113 of 1998,
for the purpose of complying with the order.”
19 Outside of Mr Porter’s position, the applications have been strongly resisted, the parties producing in excess of 100 pages of written submissions prior to the commencement of the hearing of the applications.
20 Whilst there were a number of issues concerning principle, as for example:
· in relation to the present position in New South Wales as to the circumstances in which equitable discovery may be ordered and as to whether there are any and if so what fixed limits to the Court's power in that regard;
· in relation to champerty and abuse of process [including whether champerty may amount to an abuse of process],
most of the underlying background facts concerning the subject funding arrangements and the events which took place during the hearing of the proceedings were not in issue. For that reason it is appropriate to adopt from time to time summaries which came forward from one or other of the parties in the course of their overview written submissions as to these matters.
Definitions
21 I propose to adopt the definitional approach from this point on of referring to:
· the National and the defendants in the Commercial List proceedings collectively as the "National parties";
· proceedings 50113 of 1998 and 50026 of 1999 as “the Commercial List proceedings”;
· Idoport and Negubo as “the Idoport parties”;
· OAMPS and AIIL as “the OAMPS parties”.
The general context as put by the National parties
22 The National parties summarised their overall approach and the suggested context as follows:
· the National parties are seeking many millions of dollars in costs from Idoport in the Commercial List Proceedings by way of a gross sum in accordance with Part 52A rule 6(2)(c) of the Supreme Court Rules 1970 (NSW) following the dismissal of Idoport’s claims in those proceedings and the awarding of costs in favour of the National Parties on 29 January 2002;
· on the evidence Idoport is not in a position to pay any substantial sum that is awarded by way of costs;
· the prosecution of the Commercial List Proceedings by Idoport was funded by a number of entities, and individuals, none of whom agreed to meet any costs judgment awarded against Idoport;
· unlike rules of court in the Federal Court (see Order 15A of the Federal Court Rules 1976 (Cth)) and in various state Supreme Courts (see for example Order 32 of the Supreme Court (General Civil Procedure) Rules 1996 (Vic)), there is no specific court rule enabling the National Parties to seek so-called “information discovery” in the NSW Supreme Court;
· the provisions of the Supreme Court Rules relating to costs against third parties are narrower than those operating in the Federal Court and various state Supreme Courts, but do enable the Court to award costs against a third party who has committed an “abuse of process” – see Part 52A rule 4(5)(d);
· the National parties commenced the Equitable Discovery applications to obtain information in order to determine whether to seek to recover their costs of the Commercial List Proceedings pursuant to Part 52A rule 4(5)(d) from any or all of the third parties who funded Idoport’s prosecution of those proceedings;
· if successful in their applications the National Parties will also then be in a position to determine whether or not to join any or all of those parties to the gross sum application.
23 It is in that suggested context that the National Parties contend that having regard to the cost orders made against Idoport, orders as sought by the National Parties in the equitable discovery applications be granted.
24 Reliance is placed upon the general jurisdiction of the Court to order discovery to enable the proper protection and administration of the Court's processes as well as the preservation in Part 1 rule 14 of the right of any person to commence proceedings for discovery. Section 23 of the Supreme Court Act gives the court all jurisdiction which may be necessary for the administration of justice in New South Wales. The submission which has been advanced and is accepted as correct is that the general jurisdiction is not limited by the more specific rule-based jurisdiction such as Part 23.
The general context as put by Idoport Pty Ltd and Negubo ["the Idoport Parties"]
25 The Idoport Parties contended in overview written submissions that it is inappropriate for the equitable discovery orders to be made for the reason that there is no arguable case that the National Parties can show the necessary abuse of process to found a non -party costs order. In short the contention was that:
· champerty cannot amount to an abuse of process at common law; and
· there is no reason to treat a company that raises money by raising equity share capital any differently from a company that raises money by borrowing from a bank.
26 At one stage during the course of the submissions being put to the court by the applicants on the question of the proper construction of Part 52A rule 4 (5) (d), Mr Hutley SC, leading counsel for the Idoport Parties made the following observations:
“But that is a matter for debate at the end of the day. Your Honour, the difficulty one confronts in a case like this is that, at the end of the day.. if your Honour finally determines this construction question, your Honour will be determining it not having heard from the parties if my learned friends elect to proceed with the suit…
Well, the people who will be interested in this are NSG, if they sue NSG, the shareholders of NSG. To some extent they will have heard from AIIL and OAMPS and your Honour won't have heard from Efficiency….
This issue may not even arise at the end of the day. They may, in effect, be persuaded by my learned friend's submissions…
We say that is the true meaning of it, but my learned friend says and advances, one might say, a case which the NAB believes is the correct case. They say: This is our case. If there is support without costs obligation, we have a right of suit. Now that may be an abuse of process under that and, if they're right, they have a case. Now your Honour doesn't need necessarily to determine that question. One of the problems we foresee is that if your Honour does determine the question somebody might come along and say, well, your Honour shouldn't participate in our case because we want to advance that question and it has really been determined on an interlocutory basis by uninterested parties and not having heard from us…
The absolute determination of that question, your Honour, we do not see as necessary. “Now, of course, it is a question of law and I accept that that may raise different questions, but your Honour needs to see, as it were, the territory of the debate…
[Transcript 91-92]
27 Ultimately the Court was asked to determine the issues in terms of ‘arguable case’.
28 The further submission was that no need has been demonstrated for the equitable discovery sought.
The general context as put by the OAMPS Parties
29 The OAMPS Parties centrally join in the contention that it is inappropriate for the equitable discovery orders to be made for the reasons that the National is said to already know enough about the funding arrangements between AIIL and Idoport to decide whether to seek a third party costs order against AIIL or OAMPS. The proposition is that this is a sufficient reason to refuse equitable discovery even if it were otherwise available.
30 The OAMPS parties also in overview submissions contended that there are a number of reasons why, as a matter of jurisdiction or discretion, the Court should refuse the equitable relief sought:
· equitable discovery should be refused because it is sought only for the purpose of bringing an application for a third party costs order against OAMPS or AIIL and such an application must inevitably fail for two reasons:
- on the proper construction of Part 52A rule 4(5)(d), the AIIL Agreement is incapable of being characterised as an abuse of process (even if it is champertous and unenforceable between the parties as a matter of public policy);
- the Court has no jurisdiction to make fresh costs orders because final orders have already been made and entered in the Commercial List Proceedings; or
· even if a third party costs application against OAMPS/AIIL is not doomed to failure, it is simply not within the ambit of equitable discovery to obtain information for the purposes of such an application: it is not relevantly a cause of action and it infringes the mere witness rule;
· alternatively, if the above 2 arguments fail and equitable discovery is available in the circumstances, nevertheless the Court should refuse relief as there are other remedies available to the National and it should be left to them.
31 The OAMPS withdrew their submissions relying on delay as a discretionary ground for resisting the present applications.
32 Likewise the OAMPS Parties withdrew their submission that there is no jurisdiction to make further orders in the proceedings against AIIL.
33 The matters ultimately pressed are outlined below.
The funding arrangements
34 It is necessary to focus upon the evidence as to what is the knowledge of the National Parties concerning the funding arrangements. Clearly enough the National Parties by now may be seen to have amassed reasonably considerable detail concerning the funding arrangements. Their proposition is that they are entitled to equitable discovery in order to ascertain matters within the knowledge of OAMPS concerning the purpose for which AIIL purchased the shares in Idoport; the use to be made by Idoport of those funds; and further, communications between OAMPS or its representatives and Idoport, Negubo, Mr Maconochie, NSG, Mr Walker or their representatives relating to various aspects of, and implementation of, the AIIL Agreement.
35 The proposition is that there is a central relevance involved in ascertaining OAMPS’ knowledge of these matters, including its own direct involvement in these matters, for the purpose of giving proper consideration to whether the third party costs order can properly be sought against OAMPS itself, as opposed to merely seeking that order against its subsidiary, AIIL.
36 Whilst it will be necessary to return to these contentions below the convenient starting point is to summarise those matters which are unlikely to be contentious in terms of the present state of knowledge of the National Parties in relation to the funding of the Commercial List Proceedings.
37 In what follows the Court has generally adopted as accurate the summary given in the written submissions of the National Parties. That summary is in part a summary of evidence adduced on the current applications and in part simply a reformulation of the detail given in my judgment [2001] NSWSC 744 [and particularly in Appendix “A” to that judgment]. The following is a particularly useful diagram set out in that Appendix:
38 The National Parties summary submissions in this regard were as follows:
“Funding of the Commercial List Proceedings
· In prosecuting the Commercial List Proceedings, Idoport obtained three tranches of funding from three different sources, namely:
· AIIL;
· North & South Group S.A. (“NSG”) through its shareholders; and
· Efficiency Investment B.V. (“Efficiency”),
- (together the “Funders”).
· Set out below are details of the National Parties’ knowledge of the corporate structure and domicile of each of the Funders, and the nature and terms of the funding of the Commercial List Proceedings.
· It is apparent that the National Parties are not in possession of full information in relation to any of the Funders.
· The funding arrangements do, however, share a number of common features, including:
· all involved the purchase of shares – AIIL and NSG purchased shares in Idoport; Efficiency purchased shares in Negubo;
· all share purchases occurred shortly prior to (in the case of one share issued to AIIL) or after the commencement of the Commercial List Proceedings (in the case of the other shares issued to AIIL and the shares issued to NSG and Efficiency);
· all provided for a disproportionate return on the investment, which could only be met from the claims made in the Commercial List Proceedings;
· none made provision for the Funders to be liable for the National Parties’ costs if Idoport was unsuccessful in its claims in the Commercial List Proceedings.
- Funding of the Commercial List Proceedings by AIIL
· AIIL is a subsidiary of OAMPS, a company listed on the Australian Stock Exchange (“ASX”) (Lovell 1 at para 38-39; Lovell 2 at para 38-39).
· On 16 September 1998, a mere eight days before the commencement of the Commercial List Proceedings, AIIL entered into an agreement entitled Investor Shareholders Agreement (“AIIL Agreement”) with each of Mr Maconochie and Negubo (DGL5 at 681-689; DGL6 681-689). Mr Porter signed the AIIL Agreement on behalf of AIIL. Mr Maconochie signed as a director of Negubo. The AIIL Agreement required AIIL to contribute significant funds to Idoport in return for shares in Idoport, in consideration for which AIIL became entitled to a potentially significant return on its investment which was linked directly to Idoport’s claim in the Commercial List Proceedings.
· In all AIIL contributed an amount of $1.55 million to Idoport pursuant to the AIIL Agreement and in return was issued 16 shares in Idoport (at an average price of $96,875 per share). The average price paid by AIIL per share is to be contrasted with Idoport’s balance sheet as at 30 June 1998 (some three months before the commencement of the Commercial List Proceedings) which showed a net asset position of $10,297. The funds contributed by AIIL were used by Idoport in order to prosecute the Commercial List Proceedings (see affidavit of Mr Maconochie (DGL5 at 532; DGL6 at 532) and judgment of Justice Einstein in relation to the adjournment application ([2001] NSWSC 1081 (DGL5 at 569; DGL6 at 569)).
· The AIIL Agreement made no provision for AIIL to meet any costs orders made against Idoport in the Commercial List Proceedings.
· The AIIL Agreement provided that upon signing the agreement, AIIL was to be issued one ordinary share in Idoport at a price of $50,000 (clause 4.1). Following the issue of the share in Idoport, AIIL was to establish an irrevocable letter of credit at Bank of Western Australia (“BankWest”) in favour of Idoport (clause 2, annexure A (clause 2)).
· Thereafter, upon certain conditions precedent being met, drawdowns against the irrevocable letter of credit could take place in instalments of $100,000 up to an aggregate amount of $1.5 million. For each such drawdown AIIL was to be issued with one ordinary share in Idoport and drawdowns were to be credited to Idoport’s bank account at BankWest (annexure A (clause 2)).
· Part of the subscription price was paid by AIIL in 5 separate tranches between September 1998 and April 1999 as follows (Lovell 1 at para 45; Lovell 2 at para 45):
· $50,000 on 17 September 1998;
· $100,000 on 9 November 1998;
· $100,000 on 23 December 1998;
· $100,000 on 24 February 1999; and
· $100,000 on 14 April 1999.
· The AIIL Agreement was varied by letter of amendment dated 12 May 1999 (DGL5 at 702; DGL6 at 702). The letter of amendment provided for the remaining 11 shares in Idoport to be issued to AIIL in one further tranche for a payment by AIIL of $1.1 million. At the same time it was agreed that those shares would formally be issued in the name of “Permanent Trustee Australia Limited”, as trustee for AIIL.
· The balance of the subscription price was then paid by AIIL on 12 May 1999 ($100,000) and 26 May 1999 ($1,000,000) (Lovell 1 at para 45; Lovell 2 at para 45). Upon the payment of the balance of the subscription price, the remaining 11 shares were issued to Permanent Trustee Australia Limited as trustee for AIIL (DGL5 at 702-706; DGL6 at 702-706).
· Although AIIL was not afforded any express right to control the prosecution of the Commercial List Proceedings under the AIIL Agreement (clause 12.1), Mr Maconochie and Negubo were required to “consult” AIIL about any decision that may have had the effect of “materially varying” Idoport’s income or asset value (clause 10.2). In addition, as AIIL was a joint signatory (along with a nominee of Negubo) to the BankWest account in Idoport’s name into which the AIIL payments were to be made (clause 3.2) and was required to authorise payment from the BankWest account for costs incurred by Idoport (clauses 9.1 and 9.2), it undoubtedly had some measure of influence over the disbursement of the funds from that account. The AIIL Agreement also constrained Idoport from engaging in certain activities without AIIL’s consent (clause 6) and required Idoport to provide regular updates and information to a nominee of AIIL (clause 10).
· The potential return to AIIL on its investment in Idoport operated by way of a “put and call option”. Under the “put and call option”, upon any of the assets of Idoport being realised such that Idoport’s “NTA” (a term that is not defined but presumably means net tangible assets) was to exceed $1.5 million, or alternatively if all of the assets of Idoport were realised regardless of the amount, then either AIIL or Negubo was entitled to call on the other to have AIIL transfer all its shares in Idoport to Negubo at the “agreed price” (clause 13). The “agreed price” was to be the total subscription price paid for the shares plus the lesser of:
· ten times the amount of the irrevocable letter of credit drawdown (namely, $15 million); or
· 15% of the NTA.
- In the alternative, Negubo was entitled to “cause the options to be satisfied by the payment of dividends” to AIIL and the selective buy-back of the AIIL’s shares in Idoport (clause 14).
· As AIIL undertook not to transfer, option or encumber any of its shares to any person (clause 9), in real terms, the put and call option (or the dividend/selective buyback alternative) represented AIIL’s only means under the AIIL Agreement of realising the value of its shares in Idoport.
· It is unclear, having regard to the terms of the AIIL Agreement, as to whether AIIL’s total potential return under that agreement was $15 million or $16.55 million. However, what is clear is that, subject to Negubo’s solvency, AIIL’s entire investment was to be returned together with a profit of up to approximately 1000%. Having regard to the size of the potential return on AIIL’s investment, the price it paid for each of its shares in Idoport (which did not reflect any control premium) and the timing of the purchase of those shares, the inference is open that AIIL’s investment did not represent a purchase of shares at a market price.
Funding of the Commercial List Proceedings by NSG
· A company search of NSG reveals that NSG was incorporated as an “International Business Company” in the British Virgin Islands on 4 January 2000, some 15 months after the commencement of the Commercial List Proceedings (DGL5 at 781-784; DGL6 at 781-784). The company search also shows that:
· NSG’s authorised capital is US$50,000 divided into 50,000 shares each having a par value of US$1.00;
· as NSG is incorporated under the International Business Companies Ordinance, 1984, it is not required to record as publicly available information the identity of its shareholders, directors/officers or “Senior Management” (DGL5 at 781-784; DGL6 at 781-784).
· The National Parties are aware that at least one Australian resident, namely Mr Porter, appears to have been a shareholder of NSG (Lovell 1 at paras 92, 97; Lovell 2 at paras 89, 109-110).
· On 19 May 2000, being approximately:
· 20 months after the commencement of the Commercial List Proceedings;
· 2 months before the commencement of the final hearing of the Commercial List Proceedings; and
· 4 months after its incorporation,
- NSG entered into an agreement with Mr Maconochie, Negubo and Idoport (“NSG Agreement”) (DGL5 at 796-800; DGL6 at 796-800). The NSG Agreement was executed on behalf of NSG by Mr N F Walker as “director”, and by an unidentified person as “secretary” (DGL5 at 800; DGL6 at 800). Mr Maconochie executed the agreement on behalf of both Idoport and Negubo as well as on his own account.
· The NSG Agreement provided for Idoport to issue one ordinary share to NSG at a subscription price of “up to AU$5 million”, with Mr Maconochie and Negubo agreeing to procure that Idoport issue the share in accordance with the NSG Agreement (clause 3). In return for its investment in Idoport, NSG became entitled to a share in the fruits of the Commercial List Proceedings (see below).
· Importantly Idoport’s ability to call on the unpaid proportion of NSG’s share in Idoport was limited to the amount of money subscribed to NSG by NSG shareholders (see paragraphs 2 and 4 of a letter from Idoport (signed by Mr Maconochie) to NSG (for the attention of Mr Walker) dated 5 June 2000 (DGL5 at 805; DGL6 at 805)). The identity of the NSG shareholders was not disclosed. The only shareholder in NSG known to the National Parties is Mr Porter (Lovell 1 at paras 92, 97; Lovell 2 at paras 89, 109-110).
· On 15 May 2000, Idoport issued one share to NW Nominees Ltd, a company resident in Jersey (Lovell 1 at paras 53-54; Lovell 2 at paras 53-54), as trustee for NSG. In exchange for its share, NSG paid a total of $1,850 million to Idoport in four separate tranches as follows (Lovell 1 at para 59; Lovell 2 at para 59):
· $700,000 on 1 June 2000;
· $600,000 on 10 July 2000;
· $500,000 on 21 July 2000; and
· $50,000 on 3 September 2000.
· The NSG Agreement made no provision for NSG or its shareholders to meet any costs orders made against Idoport in the Commercial List Proceedings.
· The funds contributed by NSG pursuant to the NSG Agreement were used by Idoport in prosecuting the Commercial List Proceedings (see affidavit of Mr Maconochie (DGL5 at 532; DGL6 at 532) and the judgment of Justice Einstein ([2001] NSWSC 1081 at [56]) (DGL5 at 569; DGL6 at 569)). In this context, it is also relevant to note that:
· in a letter dated 5 June 2000 to the Directors of NSG, Mr Maconochie expressly acknowledged that Idoport’s “principal activity is the enforcement of that agreement against the National Australia Bank & Anors” (Lovell 1 at para 58; Lovell 2 at para 58);
· the NSG Agreement provided that part or all of NSG’s “investment… may be expended to protect [Idoport’s] assets and its rights in connection with the Consulting Agreement” (clause 13); and
· the funds were provided to Idoport by NSG after the commencement of the Commercial List Proceedings, and immediately prior to the commencement of the final hearing (on 24 July 2000).
· NSG’s potential return under the NSG Agreement was expressed to be proportionate to the price paid for its share in Idoport (clause 11). Accordingly, if Idoport’s net tangible assets (defined as “NTA”) exceeded $10,000,000, and if and when Idoport’s assets became capable of being realised (or if the assets were realised in any event), NSG was entitled to a return on its investment. The return potentially available to NSG, calculated as a proportion of the price paid by NSG for its share in Idoport, was as follows:
· if NSG had paid the full $5 million subscription price by the time the “subscription is closed” (clause 11) then it was to have received 40% of Idoport’s NTA up to a realised asset value of $50 million;
· for a realised asset value of between $50 million and $200 million, NSG would have received 30% of the NTA; and
· for a realised asset value above $200 million, NSG would have received 10% of Idoport’s NTA.
· As NSG had subscribed for less than the $5 million maximum, NSG’s percentage return would have been reduced proportionally, but would still have represented a significant (and disproportionate) return on its investment.
· The agreement did not purport to afford NSG any control over Idoport. The NSG Agreement provided that nothing in that agreement was “to be deemed to give or gives NSG any control” over Idoport or its rights and obligations (clause 8). However, Idoport did warrant that its sole business activity was in respect of the Consulting Agreement (clause 4.1), and also undertook not to expand its business activities without NSG’s written consent (clause 5.3). In addition, clause 6.2 of the NSG Agreement may have been intended to require Mr Maconochie and Negubo to consult NSG about any decision that may have had the effect of materially varying Idoport’s asset value (Mr Maconochie and Negubo were subject to a similar obligation under the AIIL Agreement (clause 10.2)). However, that clause, in fact obliges NSG to consult with itself about any such decision, a provision which, in the context of the NSG Agreement, is meaningless.
· The NSG Agreement in its original form did not expressly restrict NSG from transferring its share in Idoport, but NSG agreed not to encumber its share in Idoport without Idoport’s and Negubo’s written consent (clause 6.1). However, by an amending agreement dated 31 August 2000 (DGL5 at 809), a new clause 6.3 was inserted which prohibited NSG from issuing any options over, or transferring, the share in Idoport.
Funding of the Commercial List Proceedings by Efficiency
· Efficiency was incorporated in The Netherlands on 6 March 1987 as a Private Limited Liability Company (DGL5 at 811-815; DGL6 at 811-815). Efficiency has authorised share capital of EUR45,378.02 (of which EUR18,151.21 is fully paid up) and its current directors are Mr Tom Meganck and Mr Hermanus Ossevoort (Lovell 1 at para 64; Lovell 2 at para 64). As at 30 December 2002, Efficiency had current assets of EUR4,925,782.26, and current liabilities of EUR4,907,631.05 (Lovell 1 at para 64; Lovell 2 at para 64).
· In or about December 2000, approximately five months after the commencement of the hearing of the Commercial List Proceedings, Efficiency entered into a series of interrelated agreements with Idoport and individuals and entities related to Idoport: see Idoport Pty Ltd & Ors v Efficiency Investment BV and Anor [2001] NSWSC 1197. The agreements required Efficiency to fund the Commercial List Proceedings in return for a proportion of the fruits of those proceedings (see Recitals A-D of the Idoport Loan Agreement (DGL5 at 818) and Recitals A-D of the Negubo Loan Agreement (DGL5 at 842)).
· Efficiency’s funding of the Commercial List Proceedings involved five agreements, including back-to-back loan agreements between Idoport and Negubo, on one hand, and Negubo and Efficiency on the other. The agreements were:
· the Negubo Loan Agreement between Efficiency, Negubo, Mr Maconochie and Mrs Mary Maconochie (the “NLA”) (DGL5 at 816-839; DGL6 at 816-839);
· the Idoport Loan Agreement between Negubo and Idoport (the “ILA”) (DGL5 at 840-857; DGL6 at 840-857);
· the Market Holdings Participation Agreement between Efficiency, Market Holdings, Mr John Sheahan as liquidator of Market Holdings, Mr Maconochie and Negubo (“Participation Agreement”) (DGL5 at 858-882; DGL6 at 858-882);
· the Partnership Agreement between Market Holdings, Idoport, Mr Sheahan and Mr Maconochie (“Partnership Agreement”) (DGL5 at 883-909; DGL6 at 883-909); and
· the Shareholders Agreement between Efficiency, Negubo, Mr Maconochie and Mrs Maconochie (the “SA”) (DGL5 at 910-927; DGL6 at 910-927).
- (together the “Efficiency Agreements”).
· The Efficiency Agreements provided two alternative mechanisms for the funding of the Commercial List Proceedings by Efficiency. The first mechanism involved the Participation Agreement and the Partnership Agreement. Those agreements contained certain conditions precedent which, if satisfied, required each ‘partner’ to pay a share of the costs of the Commercial List Proceedings. The second mechanism, applicable in circumstances where the conditions precedent to the Participation Agreement and the Partnership Agreement could not be satisfied, provided for Idoport to obtain funds for the prosecution of the Commercial List Proceedings by making requests for those funds from Negubo under the ILA, with Negubo making corresponding requests for funds to Efficiency under the NLA.
· The conditions precedent to the Participation Agreement and the Partnership Agreement were not satisfied (see National Australia Bank Limited v Market Holdings Pty Limited (in liquidation) [2001] NSWSC 253). Accordingly, the funds contributed by Efficiency for the prosecution of the Commercial List Proceedings were channelled from Efficiency, through Negubo, to Idoport, pursuant to the terms of the NLA, the ILA and the SA. In essence, the Efficiency Agreements operated so that the funds required to prosecute the Commercial List Proceedings were provided by Efficiency to Negubo under the NLA, with the funds then flowing on from Negubo to Idoport.
· Ultimately, Efficiency paid $7,500,000 to Idoport (through Negubo) in two separate tranches as follows (Lovell 1 at paras 67-73; Lovell 2 at paras 66-69):
· $500,000 on 26 September 2000;
· $7,000,000 on 3 October 2000.
· Recital A of the SA provided that Efficiency (together with Mr Maconochie and Mrs Maconochie) already owned one fully paid ordinary share in Negubo. In consideration for Efficiency releasing Negubo from its liability to repay the amount loaned by Efficiency to Negubo under the NLA (namely $7.5 million), Negubo was also required to issue to Efficiency one partly paid share in Negubo (SA, clause 4.1). The new partly paid share had no voting right (SA, clause 7). Ultimately, Efficiency’s shares in Negubo were issued as a result of the judgment of Palmer J in Idoport Pty Ltd & Ors v Efficiency Investment BV and Anor [2001] NSWSC 1197.
· The NLA provided that Efficiency was entitled to receive repayment of the loan amounts together with interest. Efficiency was to receive its share of any successful outcome of the Commercial List Proceedings pursuant to the terms of the SA. In this context:
· Efficiency’s share was taken to be partly paid to an amount equal to the loan amount as at the date of issue, and Efficiency was to pay for calls on the share as made from time to time by Negubo (clause 5);
· while no upper limit was set for such calls, Efficiency could elect to cease paying calls on terms which establish three tiers of funding, namely:
- a) once the share was partly paid to $6.5 million, Efficiency could within 15 days elect to cease paying calls on the share, whereupon it had a continuing obligation to pay a further $1 million but nothing more;
b) once the share was partly paid to $9 million Efficiency could elect to cease paying calls within 15 days, whereupon it had a continuing obligation to pay a further $1 million but no more (in this case Efficiency could also give such notice within 15 days of the end of each subsequent quarter);
c) alternatively, Efficiency might have given no such notice and continued to fund the Commercial List Proceedings.
· The three tiers of funding had significance for the return Efficiency was to achieve on its investment. While Efficiency was entitled to interest on the loan amount under the NLA, (with interest capitalised, becoming part of the loan amount, at the end of each interest period (clause 6.4)), Efficiency was to be rewarded under the SA by its ability to require Negubo to declare a dividend on the share at any time the net tangible assets of Negubo were positive. The SA provided for Efficiency to achieve a substantial return on its investment as follows:
· if a notice was given by Efficiency at $6.5 million, then the dividend was to be declared at an amount equal to 30% of the net tangible assets of Negubo (SA, clause 6.3.1);
· if a notice was given by Efficiency at $9 million, or within 15 days at end of each quarter thereafter, then the dividend was to be declared at an amount equal to 40% of the net tangible assets of Negubo (SA, clauses 6.3.2 and 6.3.3);
· if no notice was given by Efficiency, the dividend was to be declared at an amount equal to 50% of the net tangible assets of Negubo (SA, clause 6.3.4).
Efficiency was also entitled to call upon Negubo to meet this obligation in the alternative form of a share buy back (SA, clause 6.6).
· Idoport was not a party to the SA, and was not required to pay all available litigation proceeds to Negubo. However, presumably the worth of Negubo’s assets was to have been valued to take into account the receipt of any litigation proceeds by Idoport. In this respect, it is to be noted that the SA makes provision for independent valuation of Negubo’s net tangible assets (SA, clause 8).
· In September 2001 Efficiency gave a notice capping its liability to fund, having contributed $6.5 million (see the judgment of Justice Einstein [2002] NSWSC 18 at [47] (DGL5 at 630)).
· The Efficiency Agreements imposed a number of significant restraints and obligations on Negubo and Idoport (and, in certain respects, Mr and Mrs Maconochie), including:
· not to issue securities or enter into any agreement or arrangement to issue securities, or, subject to Efficiency’s consent, pay any dividend, buy back any securities or return any capital (see for example NLA, clause 10.1.2-10.1.3; SA, clause 11.4.2-11.4.3)
· to have regard to the interests of Efficiency and not to prejudice the interests of Efficiency (see for example NLA, clause 10.1.9; SA, clause 11.4.7);
· not to engage in any activities other than that of preserving or realising its Assets (as defined) and any activities required to be undertaken in connection with the relevant agreement (see for example NLA, clause 10.1.1; SA, clause 11);
· in relation to Mr and Mrs Maconochie, not to sell or otherwise dispose of their respective legal and beneficial interests in Negubo (NLA, clause 10.2; SA, clause 11.5).
- (Idoport gave similar (but not identical) undertakings to Negubo (ILA, clause 12)).
· The Efficiency Agreements also:
· imposed restraints on Negubo and Idoport (and Mr and Mrs Maconochie) in terms of their ability to obtain funding from other sources (see for example NLA, clauses 10.1.2-10.1.3, 10.1.7; ILA, clauses 10.1.2-10.1.3, 14; SA, clauses 11.4.2-11.4.3, 11.5, 12); and
· required Negubo and Idoport to provide Efficiency with ongoing information and updates in relation to the business and activities of Idoport and Negubo (see for example NLA, clause 5, 10.1.8; SA, clause 11.4.6).
· Efficiency also retained a degree of practical control having regard to its contractual right to cease paying calls on its partly paid share at certain defined intervals as set out above.
· While Efficiency was contractually obliged to provide funds (up to a limit of $1 million) to satisfy an order for security for costs, the Efficiency Agreements otherwise made no provision for Efficiency to meet any costs associated with any costs orders in the Commercial List Proceedings.”
The OAMPS parties analysis of the AIIL Agreement
39 The OAMPS parties analysis of the AIIL Agreement was as follows:
(a) The Investment
“Analysis of the AIIL Agreement
· The investment was in shares in Idoport, up to a maximum of 16 shares for a total consideration of $1.55M.
· The total amount of issued shares would become 116 if all 16 shares are taken up.
· The investment was, to the parties’ knowledge, in a company which was seeking to enforce a contract, probably by prosecuting an action for specific performance and/or damages.
· If the litigation was successful the company’s assets would increase either through monetary compensation or by the benefit of the profits from a supposedly lucrative contract if specific performance was ordered.
(b) Price Paid for Shares
· The National Parties submissions draw attention to the fact that the average price paid for the 16 shares in Idoport was $96,875. A comparison is then made with the Idoport balance sheet as at 30 June 1998 which showed a net asset position of $10,297.
· If the inference that is being suggested is that AIIL took into account its view of the prospects of the litigation (of course, a non balance sheet item) in determining whether to buy the shares then that must be a correct conclusion.
(c) Control over Litigation
· The aspect of “control” of the litigation is dealt with by clauses 10 and 12. This mechanism goes no further than is usual in a small company and does not surrender the conduct of the litigation. As is acknowledged by the National Parties there is no express right to “control” the litigation. There is a requirement to consult about decisions that may have the effect of “materially varying” Idoport’s income or asset value.
· The aspect of “control” of the subscribed funds is dealt with by clauses 3, 9.1 and 9.2. This mechanism is aimed at making sure that the funds are applied correctly to the objects in clause 9.2. AIIL was bound to procure its nominee to authorise the payment of Idoport’s creditors within 7 days of Idoport requesting it to do so- clause 9.1. There was accordingly no right to control the subscribed funds, provided payment of Idoport’s creditors was requested.
(d) Return on Investment
· The calculation of the call option exercise price is the lesser of-
· the total share subscription plus 10 times the amount of the draw down under the letter of credit up to a maximum of $15M
· 15% of the NTA or if the System IP Rights become the property of JM’s family, not less than the total share subscription price.
· This calculation has to be related to the shareholding of AIIL in Idoport at the time of the AIIL agreement. As at the time of the AIIL agreement there were on issue 100 shares in Idoport owned by Negubo. Under the AIIL agreement 16 more shares could be issued for $1.55M. The percentage of shares held by AIIL could therefore become 16/116 = 13.79%. This is consistent with, or rather not out of proportion to, a 15% interest in the NTA. The cap of $15M has the effect of limiting the maximum return on the investment.
· The analysis of the AIIL Agreement set out in the National Parties submissions fails to appreciate the above point.
(e) Clause 15
· Clause 15 of the agreement is obscure. The terms of the clause are inconsistent with Idoport obtaining the proceeds of the realisation of its assets beneficially as it ordinarily would. Rather, the clause literally contemplates the holding of those proceeds on trust by Idoport. However, it should be recognised that Idoport is not a party to the AIIL Agreement.
· As a matter of construction of the agreement, it is a covenant by Negubo and Maconochie not to deal with the proceeds of realised assets belonging to Idoport other than consistently with the put and call regime.
(f) Mechanism for Exit from Investment
· The AIIL agreement was expressed to continue until the put and call options have been performed.
· The put and call options are triggered by the circumstance that Idoport’s NTA exceeds $1.5M if some of Idoport’s assets are realised or if all of Idoport’s assets are realised whether or not Idoport’s assets exceed $1.5M
· The put and call strategy for exit is common in small companies of two shareholders and no market for shares. One shareholder will buy out the other shareholder as an exit strategy. This will require the purchaser to fund the purchase of the shares. At this time Idoport as an entity will have an increased net value and hence the value of the shares will have increased accordingly. This increased net value will be closely related to although probably not identical with the outcome of the litigation.
· Negubo, upon exercise of the option, would have to fund the purchase of the Idoport shares owned by AIIL. Clause 14 permits this obligation to be satisfied by a payment of dividend or selective buy back of the shares. Given that all shares would then be owned by Negubo such a clause is sensible and unremarkable.”
To what extent is it necessary for the Court to decide particular issues on the present application
40 Clearly it would not be appropriate for the Court to decide on the present applications, issues which will arise for determination on the actual hearing of the gross sum costs application. In that context a question arises as to the extent, if at all, to which it is necessary for the Court to decide the following issues on the present application:
Issue 1
The true construction of Part 52A Rule 4(5)(d),
Issue 2
The elements of champerty in modern times,
Issue 3
Whether champerty per se constitutes an abuse of process within Part 52A Rule 4(5) (d),
Issue 5Issue 4
When champerty becomes an abuse of process within the rules,
Whether the funding of the litigation as a commercial venture, for reward, without assuming liability for any adverse costs orders, is an abuse of process within this rule.
41 Clearly enough issue 1 falls for very extensive examination. But even then the sensitivity of the issue suggests that the matter should be determined in terms of ‘arguable case’ only. The Court must also proceed cautiously in relation to issues 2-5 for the reason that the final hearing of the gross sum applications will be the occasion for determination of those issues. It is not appropriate in terms of the applications presently before the Court for the Court to determine these issues.
42 Presently all that is before the court are the applications for equitable discovery. All that is presently necessary is that the Court be satisfied that it is arguable that:
· the funding agreements/arrangements, as a matter of substance and having regard to their implementation, may constitute champerty and as such may amount to an abuse of process on the proper meaning of Part 52A Rule 4(5)(d); or
· the funding agreements/arrangements, as a matter of substance and having regard to their implementation, may amount to the funding of litigation as a commercial venture, for reward, and in the absence of an assumption of liability for adverse costs orders, may constitute an abuse of process within the rule.
The way forward
43 It would seem convenient to proceed by dealing with each of these issues. However clearly a number of the issues clearly raise overlapping considerations.
Costs against non parties
The construction of Part 52 A Rule 4 (5) (d)
The Court's power
44 It is convenient to next refer to the position in the Supreme Court in terms of the power to make costs orders against non parties. The National Parties summary in this regard may be accepted.
45 The court’s power to order costs is contained in section 76 of the Supreme Court Act 1970 (NSW). It provides:
“(1) Subject to this Act and the rules and subject to any other Act:
(b) the Court shall have full power to determine by whom and to what extent costs are to be paid; …”(a) costs shall be in the discretion of the Court;
46 The power in section 76 is however expressed to be subject to the SCR. Part 52A rule 4 of the SCR relevantly provides that the powers and discretions of the Court under section 76 shall be exercised subject to and in accordance with this Part.
47 Part 52A rules 2 and 4 specifically contemplate that a non-party may be liable for costs only in certain circumstances. These are set out in rule 4(5):
· when an order has been made against a solicitor under Part 52A rule 43 or where a person has defaulted in attendance in proceedings in breach of a court order under Part 42 rule 7;
· for the payment by a relator (who is a person who brings an action in the name of, and with the consent of, the Attorney-General) in proceedings of the whole or any part of the costs of a party to the proceedings;
· for payment by a person who is bound by an order made, judgment given or undertaking given to the court in proceedings and who breaches such order, judgment or undertaking, in which case the person will be liable for the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach;
· for payment by a person who has committed contempt of court or an abuse of process of the court;
· in exercise of its supervisory jurisdiction over its own officers;
· against a person who purports without authority to conduct proceedings in the name of another person;
· against a person who commences, carries on, enters an appearance in or defends proceedings as the authorised director of a corporation or purports to do so.
48 Under this statutory regime the court does not retain any inherent jurisdiction to award costs against a non-party outside of the circumstances set out in Part 52A rule 4(5): Leicester v Walton (unreported, NSWCA, 22 November 1995) (page 12). In Wentworth v Wentworth (2000) 52 NSWLR 602 at 636 [162] Heydon JA (as his Honour then was), with whom the other members of the Court of Appeal agreed, observed that the only remaining categories in which costs may be awarded against a non-party are those expressly stated in Part 52A rule 4(5), since as a matter of construction the rule is intended to confine the exercise of the court’s power to the situations stipulated in rule 4(5).
· There is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities: Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 at 567, per Rogers A-JA.
· The cases merely provide instances in which courts have on the facts refused to be bound by the form or fact of incorporation when justice requires the substance or reality to be investigated: see Theosophical Foundation Pty Ltd v Commissioner of Land Tax (1966) 67 SR (NSW) 70.
· When one company is found to be the agent of an individual, it is often said that the corporate veil has been pierced. Strictly speaking this may not be true. A finding that one party is the agent of another does not require a disregard of the separate entity. It merely imputes the acts of one party to another under normal agency principles.
· An agency relationship of this type may not be inferred from mere control of the company or ownership of shares. Rather, it will depend on an investigation of all aspects of the relationship between the parties: Halsbury’s Laws of England, Volume 7(1) at [93]; Adams v Cape Industries plc [1990] Ch 433 at 536H.
· Although control of a company by its members (or even a sole member) as such does not make the company an agent for the member or members, the additional factor of a failure to provide adequate resources for the company’s function may give rise to the suggestion that the under-resourced company is an agent for its controller(s): see generally Ford’s Principles of Corporations Law at [4.250].
· There may be cases where the Court will “pierce” the corporate veil, not because it considers it just to do so, but because special circumstances exist indicating that it is a mere facade concealing the true facts. In identifying what is a mere facade, the motive of those behind the company will be relevant. The court will go behind the status of the company as a separate legal entity distinct from its shareholders, and will consider who are the persons, as shareholders or even as agents, directing and controlling the activities of the company: see Merchandise Transport Ltd v British Transport Commission [1961] 3 All ER 495 at 517, 518; see generally Halsbury’s Laws of England, Volume 7(1) at [93].
· In these circumstances, the corporate veil may be “pierced” so as to attribute rights or duties to the member as a principal: see generally Ford’s Principles of Corporations Law at [4.250].
Returning to the evidence
145 Turning then to the particular material before the court, I have earlier in this judgment referred to the fact that the price of the shares issued to NSG was tied to the amount subscribed by the shareholders in accordance with an investment summary. The National Parties do not have that document but the court may infer that it likely described how the money would be used for the purpose of funding the litigation and was likely a document on the basis of which a decision was made as to how much money would be placed into NSG. The court has been taken to a letter of 5 June 2000 from Mr Maconochie to the directors of the North and South Group which stated that the issue price of the share in Idoport issued to that group was A$100,000 with an unpaid amount of A$4,900,000. The same letter stated that the share had been issued pursuant to the Shareholders Agreement and that the maximum that Idoport was able to call upon the North and South Group to pay upon the share in relation to the unpaid amount was the lesser of A$4,900,000 or the amount subscribed to the group in relation to the issue of a particular class of shares in accordance with the Investment Summary of 21 March 2000. The share would be at all times fully paid to the amount subscribed to the North and South Group by subscribers to a particular class of shares in that group and that Idoport may only call upon that group to pay up to a maximum amount of a particular class of subscriptions. In short this is evidence satisfying the Court that there is a need for the National Parties to obtain access to the investment summary.
146 It will be recalled that NSG was incorporated in the British Virgin Islands. The evidence before the Court makes quite plain that by reason of the prevailing laws of secrecy, the National Parties have not been able to obtain by search, any detail of significance in relation to ascertaining who the shareholders were. In short the court is able to infer that the vehicle selected for the investment may have been so selected for the purpose of concealing the identity of the shareholders.
147 In the event that shareholders determine to fund litigation indirectly through a company vehicle [approaching the structure of the vehicle by selecting a vehicle incorporated in a place where those laws of secrecy will protect the identity of the shareholders] it is possible, depending upon the particular circumstances and the degree of involvement if any in the litigation, that should there be an abuse of process demonstrated, the court may pierce the corporate veil.
148 It is clear that the National Parties have without material success, approached those persons within the jurisdiction who are likely to have information in relation to these matters.
Whether OAMPS may have been engaged in abuse of process.
149 The materials tendered by the applicants on the instant application were tendered for the purpose of putting to the Court that it was appropriate to make the following findings:
· that OAMPS and AIIL had knowledge of the purposes for which their funding would be used in the action;
· that OAMPS and AIIL had particular knowledge that their funding would be used to prepare damages statements and bring the receivership application;
· that OAMPS and AIIL were let into and shared and acquiesced in the strategic tactics of Idoport in bringing the receivership application;
· that that application was perceived by Idoport and them to be strategically significant;
· that the shared intention was that that application would force an early settlement of the action which would allow OAMPS and AIIL to receive a return on their investment many times the size of that investment;
· that OAMPS and AIIL agreed to an amendment to the funding, in May 99, with the above knowledge and intentions;
· that those parties knew that if the settlement was not achieved through the receivership application then either Idoport would be left to seek out new funders or absent that, there may be difficulties in the matter being pursued through to a final hearing, as in fact occurred;
· that those parties knew that by funding these steps in the action the bank would be put to very substantial costs of defence, as in fact happened, and that there would not be assets in Idoport to meet any costs order subsequently made in the action as occurred.
150 To my mind those and many other of the materials presently before the court on the applications, go a considerable distance towards arguably permitting the court to draw certain [although perhaps not all] of the inferences to the suggested effect. However bearing in mind the manner in which the application was ultimately argued it is unnecessary to make findings on whether an arguable case has presently been demonstrated in relation to the drawing of each of those inferences. Those matters will more properly be the subject of address when the gross sum costs orders are before the court for final hearing and when all of the evidence will be before the Court.
[Particularly noteworthy in relation to other of the materials before the court are the documents (1) which show that OAMPS was placed upon notice of the issue of breaching the laws of champerty and maintenance unless the companies were placed in liquidation and the liquidator's exception to that rule were sought to be availed, (2) which show the clear warnings to the OAMPS interests that a particular method of structuring the action or the funding might breach those doctrines of maintenance and champerty and might lead to the funder being the subject of the very sort of costs application presently threatened, and (3) such as production of the draft statement of claim produced by OAMPS and AIIL dated 16 August 1998, which furnish some evidence that those parties may have had a degree of involvement in the action from its outset beyond that of a mere shareholder].
151 In short the National Parties are entitled to equitable discovery in order to ascertain matters within the knowledge of OAMPS concerning the purpose for which AIIL purchased the shares in Idoport; the use to be made by Idoport of those funds; and further, communications between OAMPS or its representatives and Idoport, Negubo, Mr Maconochie, NSG, Mr Walker or their representatives relating to various aspects of, and implementation of, the AIIL Agreement.
Information held with respect to the conduct of AIIL
152 This is an area where it seems plain that evidence of the involvement or control or intermeddling in the litigation may well be critical to be establishing of any abuse of process which may have occurred. It seems clear that at present the National parties have only partial evidence on this matter.
Information held with respect to the conduct of Efficiency
153 It is clear from the evidence presently before the Court that the National parties have some albeit limited evidence to put before the court. The question is whether or not sufficient has been shown to entitle those parties to have the further discovery which is sought.
154 Insofar as the respondents to the applications strongly contended that there was no sworn evidence of a lacuna in the material available to the National Parties in order to permit the bringing of further proceedings seeking a third party costs order, there is no fixed requirement as to the nature or type of evidence required to be before the Court. The Court on an application such as the present adjudicates in terms of all of the evidence then before the court. To my mind the authorities extend this distance. In Ashworth Hospital v MGN [2002] UKHL 29 Lord Woolf CJ in examining the jurisdiction to order discovery put the matter as follows (at page 209):
"New situations are inevitably going to arise where it will be appropriate for the jurisdiction to be exercised where it has not been exercised previously. The limits which applied to its use in its infancy should not be allowed to stultify its use now that it has become a valuable and mature remedy…"
Ultimate finding
155 Ultimately and notwithstanding the submissions that a close examination of the particular orders sought in the notice of motion and in the summons went beyond that which was appropriate, I am satisfied that there is a real prospect that the orders sought may aid in the administration of justice and that the applicants have shown sufficient of the impediments in their way to justify the proper exercise of the relevant discretion in terms of the making of each of the orders sought.
156 The applicants have demonstrated that there is material available to suggest at least at an arguable case level, that depending upon the precise evidence which becomes available, there is sufficient of a possibility that an application [seeking to establish an abuse of process] may be properly brought under the rules, to justify the making of the orders which are sought. Notwithstanding the submissions put in exhibit 19/2 the applicants, bearing in mind the need to be entirely satisfied of the existence of materials on the basis of which it may be proper to allege abuse of process, are presently entitled to the discovery sought. They have established that there is a need to obtain the further discovery which is sought. The issue may well extend beyond the mere terms of the funding agreements into questions of how the agreements were implemented in practice including questions of control or intermeddling or involvement.
157 The discovery which is sought is shown to be for a purpose which in the particular and unusual circumstances traded by the evidence presently before the court is necessary and proper in the administration of justice
The discretionary defences
158 To my mind none of the discretionary defences is of substance. They amounted to submissions that Mr Hutley's clients could not be expected to give any, or any useful evidence as to the purposes of or state of knowledge of OAMPS or AIIL; that Mr Porter may produce the material information, that Mr Hutley's clients were impecunious in terms of being unable to shoulder the burden of even seeking to comply with the orders sought and that there were other curial processes available to the National Parties. The applicants have discharged the burden of showing that they have exhausted all avenues otherwise available to them; there is no material prejudice demonstrated to prevent either of the clients represented by Mr Hutley or those represented by Mr Robinson SC [leading counsel for OAMPS and AIIL] from being required to give the necessary answers; those answers may be required following Mr Porter complying with the order made against him [the information provided by Mr Porter has been ordered to be furnished to OAMPS and AIIL]; the orders to be made against Mr Hutley's clients will oblige the applicants to pay the reasonable costs incurred in seeking to comply with the orders; and there are no curial avenues otherwise available to the applicants which have been shown to be appropriate presently or which displace the proper exercise of the Court's discretion being to make the orders presently sought.
Questions about efficiency’s assets
159 However in my view the questions that are directed to Efficiency’s assets (part 1(c) to (e) of the notice of motion) should be disallowed. In Beneficial Finance v Price Waterhouse (1996) 68 SASR 19, Perry J stated (at 35):
“… unless a party sued volunteers the information, there is no right in the plaintiff to examine a defendant ahead of the trial in an endeavour to elicit information about the defendant’s means, with a view to deciding whether it is worthwhile to go on with the case or some part of it.”
160 The financial position of Efficiency does not go to any legal issue between the parties, but only to the forensic decision about whether or not proceedings should be brought. I accept as correct the submission that the issue here is analogous to the pursuit of documents effecting insurance arrangements of a party to litigation, in the absence of there being an issue in the proceeding concerning the party’s insurance arrangements.
Short minutes of order and further submissions
161 There are a number of matters of detail which remain for consideration. These were adverted to during the hearing of the applications and include the framing of orders to comprehend the reasonable costs of the parties who are to be the subject of the orders, questions of confidentiality, a question of timing concerning compliance by Mr Porter with the orders made against him and one or two other matters. The proceedings will be before the court for the making of final orders and to deal with all outstanding matters including costs as soon as the parties have had a proper opportunity to read this judgment and to exchange draft short minutes of order. Having carefully examined the proposed orders set out in the notice of motion and the summons to my mind, subject to attention being given to these matters of detail, the proper exercise of the Courts discretion will be to make the orders therein sought.
___________________
I certify that paragraphs 1 - 161
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 13 August 2004
Susan Piggott
Associate
13 August 2004
Last Modified: 08/16/2004
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