In the matter of Tiaro Coal Limited (in liquidation) (ACN 127 936 412)

[2018] NSWSC 828

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Tiaro Coal Limited (in liquidation) (ACN 127 936 412) [2018] NSWSC 828
Hearing dates:	9 May 2018
Decision date:	05 June 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Amended Interlocutory Process filed on 7 February 2018 by the Second, Third, Fourth, Fifth, Seventh and Eighth Defendants is dismissed with costs. The Second, Third, Fourth, Fifth, Seventh and Eighth Defendants to pay the costs of and incidental to the Plaintiff’s Amended Interlocutory Process filed on 9 May 2018.
Catchwords:	PRACTICE AND PROCEDURE – application for orders setting aside Originating Process and service of Originating Process by reason of non-compliance with r 2.7 of the Supreme Court (Corporations) Rules 1999 (NSW) – where delay in serving Originating Process – whether r 2.7 of the Supreme Court (Corporations) Rules applies to the exclusion of Uniform Civil Procedure Rules 2005 (NSW) r 6.2(4) – whether delay in serving Originating Process by reason of delay in securing litigation funding will result in exercise of the Court’s discretion to set aside service of Originating Process – whether service of Originating Process should be set aside or the proceedings dismissed.
Legislation Cited:	- Civil Procedure Act 2005 (NSW) ss 3, 56, 63 - Corporations Act 2001 (Cth) ss 477, 506, 1317H, 1317K - Evidence Act 1995 (NSW) s 136
Cases Cited:	- Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104 - Grain Pty Ltd (in liq) v Laureville Pty Ltd (No 2) [2018] VSC 33 - Hastie Group Ltd (in liq) v Moore [2016] NSWSC 1682 - Horne v Retirement Guide Management Pty Ltd [2017] VSCA 47 - Litmus Australia Pty Ltd v Canty [2006] NSWSC 196 - Re Convector Grain Pty Ltd (in liq) [2017] VSC 473 - Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 - Rich v Long [2008] NSWSC 487 - Tolcher v Gordon [2005] NSWCA 135; (2005) 53 ACSR 442 - Weston v Publishing and Broadcasting Ltd (2012) 88 ACSR 80
Category:	Procedural and other rulings
Parties:	Tiaro Coal Limited (in liquidation) (Plaintiff) Peter Meers (First Defendant) Francis Choy (Second Defendant) Rado Jacob Rebek (Third Defendant) Ibrahim Menudin (Fourth Defendant) Wei Huang (Fifth Defendant) Jianfei Wang (Sixth Defendant) Hudson Resources Limited (Seventh Defendant) Hudson Corporate Limited (Eighth Defendant) Bundaberg Coal Pty Ltd (Ninth Defendant)
Representation:	Counsel: R A Dick SC/D R Sulan (Plaintiff) M Pesman SC/N M Bender (Second, Fifth, Seventh and Eighth Defendants)   Solicitors: Bridges Lawyers (Plaintiff) Baker & McKenzie (Second, Fifth, Seventh and Eighth Defendants)
File Number(s):	2017/137955

Judgment

Nature of the applications and evidence

1. By an Amended Interlocutory Process filed on 7 February 2018, the Second, Fifth, Seventh and Eighth Defendants, Mr Choy, Ms Huang, Hudson Resources Limited (“HRL”) and Hudson Corporate Limited (“HCL”), seek orders setting aside the Originating Process filed by the Plaintiff (“TCL”), the service of the Originating Process or alternatively several orders made adjourning the proceedings from time to time. They also seek a consequential order that the proceedings be dismissed. By Amended Interlocutory Processes filed on the same date, the Third Defendant, Mr Rado Rebek and the Fourth Defendant, Mr Ibrahim Menudin, seek substantially the same orders. The First Defendant in the proceedings, Mr Meers, has not joined in this application and has filed a Defence to the proceedings. By Further Amended Interlocutory Process filed pursuant to leave granted on 9 May 2018, TCL seeks a range of orders directed to validating the service of the proceedings, were it otherwise necessary to do so.

Background facts and the affidavit evidence

2. By way of background, TCL was a company listed on Australian Securities Exchange Limited and had interests in exploration permits in areas in South East Queensland. The Second to Fifth Defendants are former directors of TCL, and HRL and HCL are related corporate entities of TCL. Voluntary administrators were appointed to TCL on 31 March 2015 (Goyal 14.2.18 [8]). On 30 April 2015, the Court made orders under s 439A(6) of the Corporations Act 2001 (Cth) extending the convening period for the second meeting of creditors of TCL to 7 August 2015 (Goyal 14.2.18 [9]).

3. The administrators initially obtained funding from a director of TCL, Mr Aw, to meet, inter alia, some of the costs and expenses incurred in the conduct of TCL’s administration, business expenses of TCL and to enable the administrators to conduct investigations and retain legal advisers to conduct examinations. On or about 28 May 2015, the administrators entered a deed of indemnity with Mr Aw and a side letter which provided that, if the administrators subsequently entered into a funding agreement with a third party for the funding of claims available to TCL, then they undertook to use reasonable endeavours to either procure funding to repay Mr Aw, or procure the third party funder’s agreement for Mr Aw to participate in the funding agreement, on a pro rata basis on terms equivalent to the funding agreement (Ex R4, 1). From 24 June 2015, the administrators communicated with potential litigation funders in relation to the conduct of potential proceedings (Ex R4).

4. By 17 July 2015, the solicitors who now act for the Applicants, Baker & McKenzie, had been retained by HRL to act in relation to allegations of breach of duty of several persons associated with TCL, Messrs Aw, Wang, Meers and Buckley, as distinct from the defence of claims against HRL or HCL.

5. On 3 August 2015, the convening period was further extended to 7 December 2015 (Goyal 14.2.18 [10]).

6. The administrators’ report to creditors dated 2 December 2015, under s 439A of the Corporations Act (Goyal 14.2.18 [11], Ex R1, pp 68ff) recorded that TCL had limited funds available at the date of their appointment and that (as I noted above) the administrators had obtained funding from Mr Aw to meet some of the costs and expenses incurred in the conduct of TCL’s administration, to provide an amount of working capital to apply towards its management and maintenance of its exploration permits for coal and to enable the administrators to conduct investigations and retain legal advisers to conduct examinations. That report also referred to public examinations conducted by the administrators in August, October and November 2015, including of several persons who are now Applicants in this application and Defendants to the proceedings, and noted that:

“As a consequence of the examinations, the Administrators have obtained advice from their legal advisers and Counsel with regard to the potential claims available to a liquidator. A liquidator (if appointed), may (subject to the conducting of further examinations) consider commencing legal proceedings against a number of current and former directors and officers of the Company, the Company’s auditor and counterparties to certain transactions entered into by the Company in and about 2011.”

That report also set out further detail of potential recovery actions, identifying several potential causes of actions. At the second creditor’s meeting of TCL held on 10 December 2015, the then administrators were appointed as liquidators of TCL.

7. Further dealings between the liquidators, their then solicitors, potential litigation funders and Mr Aw continued through 2016 and 2017. It appears that there were delays in that period, with at least one funder following up with the liquidator’s then solicitors in September 2016, noting that it had not heard from them for several months and requesting confirmation whether the liquidators still wished to proceed with an application for funding. The liquidators’ then solicitors responded indicating that they were no longer representing the liquidators in the investigation and funding application and referring the inquiry to the solicitors which are now acting for the liquidators. I pause to note that, in their opening outline of submissions, the Applicants contended for a finding that no attempts were made by the liquidators to secure funding for the proceedings prior to 9 February 2017. The evidence does not support such a finding, and establishes that the administrators had sought funding from Mr Aw immediately after their appointment, that funding arrangement contemplated the provision of third party funding for the potential proceedings and the liquidators had taken steps to pursue funding by third party funds between their appointment in December 2015 and February 2017.

8. By February 2017, Mr Aw had declined to provide further funding to prosecute the proposed claims and, from February 2017, the liquidators of TCL took further steps to seek funding for the proceedings from various sources, and Mr Goyal’s affidavit refers to the progress of negotiations for funding in that period.

9. On 8 May 2017, TCL commenced these proceedings by filing an Originating Process and an affidavit of Mr Goyal sworn 8 May 2017 (Ex A2), which annexed a Statement of Claim and also exhibited documents referred to in that Statement of Claim. The Statement of Claim identified claims arising from transactions occurring between April and December 2011, which are alleged to have involved breaches of duties by several directors and an officer of TCL in relation to transactions associated with exploration permits for coal owned by TCL. TCL also brings claims for knowing receipt in relation to those transactions, as against HCL and HRL; seeks an account of fees paid pursuant to an Executive Service Agreement between TCL and HRL entered into in February 2008, and assigned to HCL on or about 11 March 2011; and contends that HCL and HRL breached duties owed by them to TCL pursuant to that agreement. The proceedings seek orders for compensation under s 1317H of the Corporations Act, equitable compensation or damages. I will address Mr Goyal’s evidence as to TCL’s then financial position and why that Statement of Claim was not served, and the Applicants’ criticisms of that matter, below.

10. In the period from 23 May 2017, the Registrar was advised on several occasions that the Defendants had not yet been served with the proceedings and directions hearings were adjourned on several occasions (Ex A3). The Applicants did not submit that any of that correspondence should also have been copied to them, and I therefore need not address that question.

11. A consultant to HCL and HRL, Ms Tan, became aware of the fact of the proceedings, although not the substance of the claims made, on or about 26 May 2017. I will refer to her evidence as to that matter below.

12. By 20 June 2017, one of the potential funders of the proceedings had reached the point of seeking an independent opinion as to prospects from a partner of Baker & McKenzie, which is now acting for the Applicants, and identifying the claim as a claim against directors and officers and for knowing receipt (Ex R4, 121). On 22 June 2017, that partner advised that that firm had a conflict, presumably by reason of its earlier retainer for HCL or an anticipated retainer for HCL or other Defendants in the proceedings (Ex R4, 122).

13. On 4 July 2017, TCL entered a funding agreement with a third party funder, with which it had been in negotiations for several months. The Applicants criticise the absence of explanation in the evidence for that period of delay, although I have referred above to the documentary evidence of dealings with the funders over that period.

14. By letter dated 17 July 2017 (Ex A3, tab 10), TCL’s solicitors advised the Registrar that:

“On 4 July 2017, an agreement was entered into between [TCL] and a funder (the proposed Funder), in respect of entry into a litigation funding agreement. The agreement includes a due diligence period of 20 days (ie expiring on 24 July 2017, so as to enable the Proposed Funder time to undertake due diligence activities and investigations in relation to the claims the subject of these proceedings. On or before the expiry of the due diligence period, the Proposed Funder may elect to terminate the agreement.

Upon the expiry of the due diligence period, and on the assumption that the Proposed Funder does not terminate the agreement, the Plaintiff shall forthwith seek to obtain approval of the Court under section 477(2B) of the Corporations Act 2001 (Cth).”

That letter requested a further deferral of a listing of the proceedings to 18 August 2017 and again noted that the Defendants had not been served.

15. By letter dated 14 August 2017, TCL’s solicitors advised the Registrar that the due diligence period under an agreement between TCL and the proposed funder of the proceedings had been extended to 31 August 2017, noted that the Defendants had not been served and sought a further adjournment of directions to 28 September 2017 (Ex A3, tab 11).

16. On 6 September 2017, the third party funder with which the liquidators had previously been dealing elected not to fund the proceedings and, from that date, the liquidators progressed discussions with other potential funders. By letter dated 25 September 2017, TCL’s solicitors advised the Registrar of the termination of the agreement with the previously proposed funder and requested an adjournment of directions in the proceedings to 26 October 2017 (Ex A3, tab 12).

17. A litigation funding agreement with another litigation funder and an associated deed was entered into on 16 October 2017 (Goyal 14.2.18 [19]) and the Federal Court of Australia made orders approving the liquidators’ entry into that agreement on 23 October 2017. By letter dated 24 October 2017 (Ex A3, tab 13), TCL’s solicitors advised the Registrar of TCL’s entry into that agreement and associated deed, the approval of that funding agreement given by the Federal Court and of TCL’s intent to serve each of the Defendants in the proceedings; again noted that the Defendants had not then been served; and requested a further adjournment for directions on 2 November 2017.

18. The proceedings were served on the Defendants on dates from 1 November 2017. On 3 November 2017, I made orders in an ex parte application brought by TCL extending the time for service of the Originating Process on each of Mr Rebek and Mr Menudin up to and including 8 December 2017 and orders for substituted service. No challenge was brought to those orders, in this application, apart from the wider application to set aside the Originating Process and consequential orders set out above.

19. By letter dated 14 November 2017 (Ex A5), Baker & McKenzie confirmed their retainer to act for HRL, HCL, Mr Choy, Mr Menudin and Ms Huang in the proceedings. That retainer letter was tendered in redacted form so that the scope of that firm’s retainer was not clear from the evidence.

20. The Applicants rely on an affidavit of Ms Luisa Tan dated 8 March 2018. Ms Tan is a director of a company which previously provided “corporate advisory services, including attending to litigation relating to them” to HCL and now provides such services to HRL. Ms Tan says she makes that affidavit in support of the application by all of the Applicants, although she does not identify any professional relationship with any of the Applicants other than HRL and HCL. Ms Tan’s affidavit indicates that she became aware of the proceedings on or about 26 May 2017, when a director of HRL who is not party to the proceedings had seen a reference to them in the Court list. The solicitor acting for that director apparently made inquiries with the solicitor for TCL when the proceedings would be served, and that solicitor indicated that she would take instructions from the liquidator. Ms Tan’s evidence is that she was then satisfied that HCL was not at risk of having judgment entered against it without having an opportunity to defend the proceedings and she appears to have made no further inquiries. Ms Tan’s evidence (Tan 8.3.18 [19]) is also that, before the proceedings were served on HCL, HRL and Mr Choy on 1 November 2017, she knew that the proceedings existed, in the circumstances set out in the affidavit; she did not know what was claimed in them, or that HRL was a defendant, or the identity of any defendants other than the First Defendant, Mr Meers, and HCL; and she did not know why the proceedings had not been served after they had been filed or whether they would be served and pursued.

21. Ms Tan’s evidence (admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as evidence of her knowledge only) is also that, to the best of her knowledge, HRL and HCL had not been advised of any matter by TCL, other than as set out in her affidavit; she had no knowledge of and had not seen the Statement of Claim or other Court document; and, to the best of her knowledge, none of the other Defendants had done so. I give little weight to that evidence in respect of the knowledge of the Applicants other than HCL and HRL, since there is no evidentiary basis to expect that Ms Tan would have known matters that were known to other Applicants as to the proceedings. The other Applicants do not give any evidence of the extent of their knowledge of the proceedings before they were served.

22. Ms Tan was cross-examined. She accepted that her father, Mr Vincent Tan, who is a current director of HCL and HRL, was present in Court and there was no reason why he could not have given evidence in the application. She also accepted that the Second Defendant in the proceedings, Mr Choy, was the chief financial officer of HCL and HRL and there was also no reason why he could not have given evidence in the application (T14). Ms Tan was also cross-examined, at some length, as to allegations previously made by HRL or HCL as to a lack of impartiality of the administrators, and as to an application for preliminary discovery that had been commenced by HCL and HRL against TCL in the Federal Court of Australia, which was directed to a possible application for removal of the liquidators of TCL or at least a claim against them arising from an allegation of lack of impartiality or independence (T17). Ms Tan accepted that the application for preliminary discovery was commenced in December 2015, amended in March 2016, contested by TCL or by the liquidators and resolved in about April 2016 (T18). I do not consider it necessary to reach any finding in respect of that application to determine this application.

23. By an affidavit dated 22 January 2018, tendered in part by TCL and in part by the Applicants, Mr Menudin indicated that he became aware of the proceedings when he received the Originating Process and associated Court documents in his mailbox, in Malaysia, on or about 7 November 2017 and otherwise had no knowledge of the claim against him until that date. In their written outline of submissions, the Applicants challenged the steps taken to serve the proceedings on Mr Menudin in Malaysia, but that challenge was not pressed in oral submissions. The Applicants, including Mr Menudin, do not now submit that he should be treated differently from the other Applicants in the determination of this application.

24. TCL relies on the affidavit of one of its joint and several liquidators, Mr Goyal, dated 14 February 2018, on which I have drawn in setting out the background to the proceedings above. Mr Goyal also refers to the extent of creditors of TCL and the likelihood that, if the underlying proceedings were ultimately successful, the creditors of TCL would receive a financial return. I will address other aspects of Mr Goyal’s evidence below.

The proper construction of r 2.7 of the Supreme Court (Corporations) Rules

25. The Applicants seek orders under r 12.11(1) of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) and s 63(3)(a) of the Civil Procedure Act 2005 (NSW) setting aside service of the Originating Process by reason of an alleged failure by TCL to serve the Originating Process “as soon as practicable after filing”. The Applicants submit that that is required by r 2.7(1) of the Supreme Court (Corporations) Rules 1999 (NSW) (“Corporations Rules”). The Applicants relied on a lengthy written outline of submissions, of some 23 pages in single spacing, in support of this application. That written outline of submissions did not seem to be wholly consistent with the somewhat narrower, and more balanced, position put by Mr Pesman and Mr Bender, who appeared for the Applicants at the hearing. I have had regard to the entirety of those submissions and Mr Pesman’s oral submissions. However, I have not considered it necessary to address each individual proposition raised in those submissions in order to identify my reasons for dismissing the application.

25. The Applicants point out that the Corporations Rules took effect from 1 March 2000, as common procedural rules adopted by the Federal Court of Australia and the Superior Courts of the States and Territories that apply to proceedings under the Corporations Act. They also draw attention to r 1.3 of the Corporations Rules which relevantly provides that the Corporations Rules apply to a proceeding in the Court under the Corporations Act and other rules of Court apply, to the extent that they are relevant and not inconsistent with the Rules, to a proceeding in the Court under the Corporations Act. The Applicants submit, and I accept, that the Corporations Rules apply to these proceedings where TLC alleges contraventions of ss 180 and 181 of the Corporations Act, and that the proceedings are proceedings under the Corporations Act although they also advance claims that are based on the general law: Litmus Australia Pty Ltd v Canty [2006] NSWSC 196 at [43].

26. Rule 2.7 of the Corporations Rules provides that:

“[a]s soon as practicable after filing an Originating Process and, in any case, at least five days before the date fixed for hearing, the Plaintiff must serve a copy of the Originating Process and any supporting affidavit on:

(a)   Each defendant (if any) to the proceeding; and

(b)   If the corporation to which the proceeding relates is not a party to the proceeding – the corporation.”

28. The Applicants submit that this rule imposes an express obligation on the plaintiff in a proceeding to which the Corporations Rules apply to serve the Originating Process on each defendant as soon as practicable after it is filed. That submission may broadly be accepted, with the qualification that the rule also imposes an additional or alternative obligation that requires service at least five days before the date fixed for the hearing. The latter obligation broadly corresponds to UCPR r 6.15(3) which requires a summons to be served not less than five days before its return date.

29. The Applicants also submit that neither the Federal Court Rules nor the Uniform Civil Procedure Rules:

“contain the additional requirement imposed by r 2.7(1) of the Corporations Rules that the Originating Process be served as soon as practicable after it is filed. That absence highlights the decision of the drafters of the Corporations Rules to include an additional requirement that service be effected as soon as practicable after the Originating Process is filed and r 2.7(1) must be construed in that context.”

I do not accept that submission. It seems to me that the first limb of r 2.7(1) of the Corporations Rules simply makes explicit what would ordinarily be implicit, as a matter of the parties’ obligation to promote the just, quick and cheap resolution of the real issues in dispute in proceedings, namely that proceedings should ordinarily be served as soon as practicable after they are commenced.

30. The Applicants also submit that, absent an extension of the time limit imposed under the first limb of r 2.7(1):

“(a)   The Defendant must be given the maximum practicable notice of the proceedings by service of the Originating Process as soon as practicable after filing, including the facts alleged in support of the relief claimed as set out in the supporting affidavit required by r 2.4(1); and

(b)   The proceeding must thereafter be case managed inter partes towards hearing rather than being stood over for a period of 6 or 12 months prior to service as might be permitted by other rules of Court that apply to other matters …”

31. I also do not accept that submission. First, it does not address the fact that the requirement of service “as soon as practicable” raises questions of what is practicable in the circumstances, which it seems to me are not to be determined only by the time which would be taken to physically serve the proceedings upon a defendant. Second, that submission does not recognise that Court rules should be interpreted to promote the just, as well as the quick, resolution of the matters in issue in the proceedings, in accordance with s 56 of the Civil Procedure Act. Third, the proposition that the proceedings “must” thereafter be case managed in a particular way does not sufficiently recognise the Court’s discretion in the management of the proceedings or its obligations under s 56 of the Civil Procedure Act.

32. TCL responds that, properly construed, r 2.7 provides for two periods by which service may be effected, namely as soon as practicable and five days before the date fixed for hearing, and that compliance with either part of the rule would suffice. TCL also submits that the “date fixed for hearing” means a substantive hearing, and not a directions hearing in the Registrar’s list and no date has been fixed for the hearing of the Originating Process. In oral submissions, Mr Dick, who appears with Mr Sulan for TCL, submitted that the reference to service “at least five days before the date fixed for hearing” in r 2.7 should be read together with the first limb of the rule so as to identify the “outer limits” of “as soon as practicable” (T37). That proposition appears to find support in an observation of the Court of Appeal of the Supreme Court of Victoria in Hornev Retirement Guide Management Pty Ltd [2017] VSCA 47 (at [109]) to similar effect. I now turn to address that decision.

33. The Applicants placed substantial reliance on the decision of the Court of Appeal of the Supreme Court of Victoria in Hornev Retirement Guide Management Pty Ltd above, which they submitted was “consistent” with the construction of r 2.7 of the Corporations Rules for which they contend. That decision is not, as Mr Pesman fairly conceded, authority for that construction, and is consistent with that construction only in the sense that the Victorian Court of Appeal did not need to determine whether to accept or reject that construction and did not do so. TCL responds that the decision of the Court of Appeal in Hornev Retirement Guide Management Pty Ltd above is not on point, and I broadly accept that submission for the reasons that I indicate below. TCL also points out that the Court of Appeal in Horne Retirement Guide Management Pty Ltd above did not have to consider the effect of r 5.12 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), which broadly corresponds to UCPR r 6.2(4)(a), because Counsel in that case had disavowed reliance on that rule, as the Court of Appeal noted (at [75]). TCL also points out that, in that case, the plaintiff’s claim required an extension of time beyond the one year period which was permitted for service under r 5.12 of the Supreme Court (General Civil Procedure) Rules, whereas these proceedings were served (subject to the position of Mr Menudin which I have noted above) within the time specified in UCPR r 6.2(4)(a), which I will address below.

34. In Horne Retirement Guide Management Pty Ltd above, service was effected pursuant to an extension of time granted by an Associate Judge on an ex parte application made by the plaintiff and was only valid if that extension of time was not set aside. That extension was set aside at first instance and that decision was affirmed by the Court of Appeal. The Court of Appeal observed (at [108]–[110]) that the effect of the words “as soon as practicable” in r 2.7 of the Corporations Rules was to fix a time for effecting service, presumably at the earliest point at which service was practicable. The Court of Appeal also observed that the words “and, in any case” in that rule indicates that both elements of the rule do the same work and the second element takes precedence over the first, possibly with the result that service will be effective where it was served not less than five days before the first hearing in the matter, or the final hearing of the matter, depending upon the construction that is given to the second limb of that rule. The Court of Appeal also observed that:

“If a party effects service well after it became practicable to do so, the party being served may attempt to set aside service by establishing that in the circumstances of the case, it had become practicable to serve well before service was effected.”

Mr Dick submitted that the Court of Appeal was in error in that reading of the rule (T38). I am not persuaded by that submission, having regard to the terms of r 2.7, although it does not follow that a Court would be obliged to set aside service by reason of non-compliance with the rule in a particular case. It is not necessary to reach a final view as to that question for the purposes of this application.

35. The Court of Appeal also held (at [115]) that there were several avenues available to a Court to extend the time for service specified in r 2.7, and that the Court:

“may extend the second element of r 2.7 so that service may be effected less than five days before the date for hearing, but leave the first element of r 2.7 in place. Alternatively, the Court might grant an extension that disposes of both elements of r 2.7 and specifies a particular date by which service must be effected.”

36. The Court of Appeal ultimately held that the extension of time, on which the plaintiffs needed to rely in that case, was vitiated by an error in the exercise of the discretion by the Associate Judge who had granted it. As I will note below, no extension of time is required in this case, at least for the purposes of UCPR r 6.2(4). That case also did not give rise to any issue of inconsistency between the position in respect of a cause of action under the general law and in respect of a statutory claim under the Corporations Act, a matter that I will address below, since service in that case was effected outside the time that would have been valid, absent the extension of time under the Supreme Court (General Civil Procedure) Rules as well as under the Corporations Rules.

37. The Applicants submitted that the Court of Appeal in Horne Retirement Guide Management Pty Ltd above construed r 2.7(1) of the Corporations Rules as “prevailing over” the one year period of validity permitted by r 5.12(1) of the Supreme Court (General Civil Procedure) Rules in commenting on the reasoning of the Associate Judge who had granted the extension (at [167]–[168]). I do not accept that submission. The Court of Appeal did no more than there recognise that r 2.7 imposes an obligation to serve an Originating Process as soon as practicable, and then found that the Associate Judge had erred in focussing only on the one year period of validity established by the Supreme Court (General Civil Procedure) Rules to the exclusion of the requirements under r 2.7 of the Corporations Rules. The Applicants also submitted that I should follow the decision in Hornev Retirement Guide Management Pty Ltd above, unless I am convinced that the interpretation adopted in that decision is plainly wrong. It does not seem to me that that question arises in this case, where the issues determined by that case are significantly different from those that arise in this application, and nothing in the determination of this application would involve an approach that is inconsistent with that taken by the Court of Appeal on the different facts in issue in that case.

38. The Applicants also referred to the decision in Re Convector Grain Pty Ltd (in liq) [2017] VSC 473 at [77]–[85], overturned by Robson J on appeal in Grain Pty Ltd (in liq) v Laureville Pty ltd (No 2) [2018] VSC 33. Those decisions do not advance the Applicants’ position, where they establish, not surprisingly, that the Court has power to extend the time limit imposed by r 2.7(1) of the Corporations Rules and regularise service of a liquidator’s application in an appropriate case, although that case involved a much shorter delay in service than this case.

39. It seems to me that, on the face of r 2.7 of the Corporations Rules, and consistent with the reading given to that rule in Hornev Retirement Guide Management Pty Ltd above (to the limited extent that decision is on point), that rule imposes an obligation to serve an Originating Process as soon as practicable, as well as to serve it five days before the date of the hearing. I would be inclined to the view that the latter obligation refers to the final hearing, but it is not necessary to express a final view as to that matter since nothing turns on it for present purposes. It seems to me that that rule is not in terms directed to the validity of service of the Originating Process, a matter that I will address further below. I will assume, without deciding, that the liquidator could have “practicably” served these proceedings at an earlier date, at least by accelerating his efforts to obtain funding of the proceedings, although I do not accept the Applicants’ several criticisms of the liquidators’ conduct which I address below. Even making that assumption, favourable to the Applicants, it seems to me that the relief they seek could not properly be granted for the reasons noted below.

Whether r 2.7 of the Corporations Rules applies to the exclusion of UCPR r 6.2(4)

40. It is common ground that r 6.2(4)(a) of the UCPR would also apply to the Originating Process that commenced these proceedings, which is a process by which proceedings were commenced within the definition of the term “Originating Process” in s 3 of the Civil Procedure Act, unless the application of that rule is excluded by r 2.7 of the Corporations Rules. TCL submits that UCPR r 6.2(4) specifies a time period within which an Originating Process is valid for service, being the six month period within which the Originating Process was served (with the exception of Mr Menudin which I have addressed above) in this case.

41. The Applicants submit that r 2.7 of the Corporations Rules applies to the exclusion of UCPR r 6.2(4) in this case. In oral submissions, Mr Pesman put that r 2.7 was a “code” that applied in matters involving claims under the Corporations Act to the exclusion of UCPR r 6.2(4), but fairly accepted that there was no authority in which a Court had previously expressed that view (T26). On that basis, the Applicants submitted that where (in their submission) it was “practicable” to serve them within a short period after the Originating Process was filed, r 2.7(1) required TCL to do so notwithstanding that UCPR r 6.2(4)(a) would have permitted service of the Originating Process within six months from the date of filing. The Applicants relied, for this proposition, on r 1.3 of the Corporations Rules and r 1.7 and Sch 2 of the UCPR and submitted that:

“The Corporations Rules prevail over the UCPR. That is necessary in order for the Corporations Rules to operate in a harmonised way throughout the Superior Courts of Australia.”

42. It seems to me that this submission overstates the operation of r 1.3 of the Corporations Rules and UCPR r 1.7, which contemplate that the Corporations Rules prevail over the UCPR only in the event of inconsistency between them, and otherwise operate in parallel. Mr Pesman had some difficulty, in oral submissions, in articulating any general concept of “inconsistency” on which he relied to contend that r 2.7 of the Corporations Rules and UCPR r 6.2(4) were inconsistent. He submitted, by way of illustration, that a mandatory obligation to do something by a specified date is inconsistent with an obligation to do the same thing by a different date. However, the analogy with a specification of different dates is of limited utility where service “as soon as practicable” and more than five days prior to a date specified for hearing, as required by r 2.7 of the Corporations Rules, and within a six month period as required by UCPR r 6.2(4), would generally both readily be achievable.

43. It seems to me that there is not a conceptual inconsistency between r 2.7 of the Corporations Rules and UCPR r 6.2(4) where it will be possible, in many or all cases, to serve proceedings as soon as practicable, prior to five days before the hearing, and within six months from the date of filing. That will at least be the case where proceedings are served promptly, or where there are practical reasons, which may extend well beyond physical difficulties in effecting service, that mean that service cannot practicably be effected until later in the six month period specified by UCPR r 6.2(4). Those rules seem to me to impose requirements in somewhat different terms, which will typically operate in parallel, and in circumstances that parties will comply with both of them. Neither rule mandates a consequence that the other would not permit, because non-compliance with either rule simply leads to an exercise of the Court’s discretion as to whether service is to be set aside.

44. It also seems to me that the construction of rr 1.7 and 2.7 of the Corporations Rules and UCPR r 6.2(4) for which the Applicants contend would lead to a result that is inconsistent with promoting the interests of justice, where the obligation for which the Applicants contend would apply, for example, to proceedings advancing claims for breach of s 180 or s 181 of the Corporations Act, or for breach of both s 180 or s 181 of the Corporations Act and the broadly corresponding general law duties of directors, but not to proceedings that sought relief only under the corresponding general law duties of directors. With respect to Mr Pesman’s submissions, I can see no principled basis on which proceedings in the Corporations List that invoke statutory provisions should be managed in a completely different manner from proceedings in the Corporations List or the Commercial List that invoke the corresponding general law duties.

45. The Applicants also submitted that the proposition for which they contend:

“is consistent with the fact that commercial matters generally and corporations matters in particular call for faster resolution than other matters in order to promote the vitality of commerce in Australia.”

TCL responds that, while all matters ought to be dealt with expeditiously and efficiently, cases involving insolvent companies, including claims against directors, auditors or other professional advisers, may be complex and may bring about lengthy litigation, comparable with other commercial cases, and do not involve any special element of expedition that other commercial cases do not also involve. While I accept that the promotion of commercial expediency is a desirable end and the prompt resolution of commercial and corporate disputes is also a desirable end, particularly where insolvency intervenes, that proposition does not answer the question why the strict rule for which the Applicants contend should apply only in matters in which a statutory duty under the Corporations Act is invoked, and not to matters where a corresponding general law duty is invoked, still less why that strict rule should prevail over the range of interests that are relevant to promoting the just, quick and cheap resolution of the real issues in proceedings generally.

46. The Applicants summarised the result of their submissions as follows:

“In short, the Corporations Rules require that proceedings will be filed as soon as practicable after service [sic] and that a plaintiff should not have six months in which to decide whether or when to serve that is permitted by r 6.2(4)(a) of the UCPR.”

I do not accept that submission. It seems to me that a plaintiff should be required to serve proceedings as soon as practicable in any case; but there may be cases where the plaintiff should have six months in which to determine whether to serve the proceedings, which may include circumstances where further investigations are necessary or where significant issues of funding remain to be resolved; and that r 2.7 of the Corporations Rules should not lead to a radically different result, in proceedings in which a statutory cause of action under the Corporations Act is raised, than the position which would apply under r 6.2(4) of the UCPR where a corresponding general law claim is bought.

47. TCL submits that r 2.7 of the Corporations Rules, by contrast with UCPR r 6.2(4), is not directed to the question of validity of service and that no question of invalidity of service can arise, where service is effected in compliance with UCPR r 6.2(4). A view that r 6.2(4) of the UCPR is relevant, and r 2.7 of the Corporations Rules is, at best, of lesser significance in respect of the validity of service finds some support in several cases that have extended the time for the commencement of proceedings, without consideration of whether the proceedings had been served “as soon as practicable” for the purposes of r 2.7 of the Corporations Rules: Tolcher v Gordon [2005] NSWCA 135; (2005) 53 ACSR 442; Rich v Long [2008] NSWSC 487; Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 at [12]. TCL also submits, with considerable force, that r 2.7 of the Corporations Rules is directed to the efficient conduct of corporations matters, and non-compliance with that rule might have the effect that a hearing could not proceed on a date allocated for it, if the relevant Originating Process had not been served in sufficient time before the day fixed for a final hearing, but would not in itself invalidate service of the Originating Process. It seems to me that the Court would, notwithstanding compliance with UCPR r 6.2(4), at least have the power to make orders in respect of any non-compliance with r 2.7 of the Corporations Rules. However, it is not necessary to express a final view as to that matter where I find below that any non-compliance with r 2.7 by the liquidators would not warrant the relief sought by the Applicants in any event.

48. In summary, for these reasons, I am not satisfied that there is an inconsistency in any relevant sense between r 2.7 of the Corporations Rules and UCPR r 6.2(4) and I do not accept the Applicants’ submission that the former operates as a code or to the exclusion of the latter. However, nothing turns on that finding for present purposes, since I have not found that any non-compliance with r 2.7 of the Corporations Rules would warrant setting aside service of the Originating Process or dismissing the proceedings.

Whether service of the Originating Process should be set aside or the proceedings dismissed

49. The Applicants accept that a contravention of r 2.7(1) of the Corporations Rules is an irregularity and does not, in itself, invalidate service of the Originating Process, having regard to s 63 of the Civil Procedure Act. They accept that the Court must engage in a balancing exercise in order to determine whether or not then to set aside service of the Originating Process under r 12.11(1) of the UCPR or s 63 of the Civil Procedure Act, and they accept that the Court may exercise the rectification power conferred by s 63 of the Civil Procedure Act where it can do so without injustice. In oral submissions, Mr Pesman submitted that compliance with r 2.7 of the Corporations Rules is mandatory and that failure to comply with that rule enlivens a discretion to set aside service under UCPR r 12.11 or s 63 of the Civil Procedure Act (T21).

50. The Applicants support the exercise of the discretion to dismiss the proceedings on the basis that:

“The delay was caused by the liquidators’ decision, without good reason, to delay service until a time that was convenient to [TCL] almost six months after service was required by r 2.7(1). [TCL] has offered no reason as to why that occurred beyond the invalid reason that it wished to procure funding. The prejudice is properly characterised as being self-inflicted. During this period, presumptive prejudice accrued to the [Applicants] as a consequence of the liquidators’ decision. That is a sufficient justification for the prejudice to [TCL] arising from the loss of some or all of its causes of action to be discounted entirely.”

51. Mr Dick responds that the Applicants do not assert that TCL’s claims are not seriously arguable, and that the Applicants fairly acknowledged that the relief they seek would bring about a situation where those claims were statute-barred. Mr Dick also submits that the Court would not set aside service of an Originating Process which has been served within the express time period provided for in UCPR r 6.2(4), even if that application had been served in contravention of the timing requirement in r 2.7 of the Corporations Rules.

52. In determining whether service of the Originating Process should be set aside or the proceedings dismissed, I have had regard, first, to the Applicants’ criticisms of the liquidators’ conduct and the delay in service. Mr Goyal’s evidence is that TCL had limited funds at the time the Originating Process was filed in May 2017 and did not then have funding in respect of the proceedings (Goyal 14.2.18 [16]). His evidence is also that, for reasons he sets out, he considered it prudent that TCL commence the proceedings on 8 May 2017 and not serve the Defendants until TCL had obtained funding to conduct the proceedings, and in particular an indemnity for adverse costs and security for costs, and obtained approval for entry into the funding agreement in accordance with ss 477(2B) and 506(1A) of the Corporations Act.

53. The Applicants submitted that the only reason proffered for the liquidators’ delay in serving the Originating Process was a desire on their part to secure litigation funding, and that was an improper or at least an inappropriate basis on which to delay service of the proceedings. In oral submissions, and on the premise that r 2.7 of the Corporations Rules had not been complied with, Mr Pesman addressed the question of the adequacy of the explanation for that breach and submitted that the Court should infer that the decision not to serve the proceedings was made in knowledge of r 2.7 “and in defiance of it” (T30). I would not draw that inference, where Mr Goyal was not cross-examined and that proposition was not put to him to allow him an opportunity to respond to it.

54. TCL responds that, at least in an appropriate case, a need for litigation funding may provide a proper basis for a delay of service. As TCL points out, that proposition appears to have been accepted by Tobias JA (with whom Ipp JA agreed) in Tolcher v Gordon above where his Honour noted a liquidator’s delay in serving proceedings, after funding was withdrawn shortly before the limitation period expired, and observed (at [126(b)]) that:

“The liquidator made a conscious decision not to attempt service of the SLC before 1 August 2003 as he wished the litigation funding to be in place before that occurred.

Although in a sense this was, as the primary judge found, a "commercial decision" by the liquidator, nonetheless in my opinion it was appropriate, prudent and responsible and not a decision for which the liquidator can be justifiably criticised — at least without the benefit of hindsight.”

55. In Weston v Publishing and Broadcasting Ltd (2012) 88 ACSR 80 at [187], Sackville AJA similarly doubted any proposition that a desire to secure litigation funding “can never justify delay in serving initiating process”, although the Court found that the delay in the particular case was not justified. A similar proposition appears to have been accepted by Ball J in Hastie Group Ltd (in liq) v Moore [2016] NSWSC 1682 where his Honour noted (at [58]) that it would have been imprudent for the liquidators in that case to serve proceedings before they had a reasonable degree of confidence that they would be able to meet their costs, including any costs orders made against the company in liquidation. As Mr Dick points out, cases in which reference has been made, without disapproval, to a delay in order to obtain litigation funding involve delays that were significantly longer than the delay that arose in this application.

56. The Applicants relied upon the fact that the liquidators in Hornev Retirement Guide Management Pty Ltd above had been seeking litigation funding, and that the Court of Appeal (at [176]) did not disturb Judd J’s conclusion at first instance that:

“seeking litigation funding did not amount to a good reason for extension in this case.”

His Honour was plainly not there articulating any general rule. As I noted above, the Court of Appeal’s decision was there that the extension of time on which the plaintiffs needed to rely in that case, was vitiated by an error in the exercise of the discretion by the Associate Judge who had granted it, not by reason of any principle in respect of litigation funding.

57. It seems to me that Mr Goyal could properly be concerned that substantial proceedings should not be commenced, and the costs (including costs that would be unrecoverable on an assessment) of defending them not imposed upon the Applicants until TCL was in a position that it had the funding not merely to commence but to continue the proceedings to a determination on their merits. It seems to me that a liquidator may properly be, and very likely ought to be, concerned as to the impact of commencing substantial proceedings that he or she is not funded to continue to their conclusion. This conclusion is a factor tending against the exercise of the Court’s discretion to grant the relief sought by the Applicants.

58. The Applicants also submitted that it would have been open to Mr Goyal to serve the Originating Process and to seek, by agreement or by application to the Court, a stay of the proceedings in respect of any subsequent application for security for costs. That submission impliedly recognises that, had TCL adopted a different procedural approach, the proceedings could properly have been commenced but not progressed during the relevant period, although the Applicants contend that the proceedings should now be dismissed because TCL did not adopt that different approach. With respect, that submission emphasises the absence of detriment suffered by the Applicants by the approach adopted by TCL, by pointing to the fact that the Applicants would be in substantially the same position as they now are had TCL taken that different approach. I have not neglected that that different approach would have drawn the detail of the allegations made to the Applicants’ attention at a somewhat earlier point. However, that highlights the absence of persuasive evidence of any disadvantage suffered by the Applicants, in the particular case, from the delay in drawing the detail of those allegations to their attention. This factor also tends against the grant of the relief sought by the Applicants.

59. The Applicants also submitted that, during the period of the funders’ due diligence from 4 July 2017 until 6 September 2017, the liquidators’ delay amounted to an “impermissible arrogation from the Court to a third party [of] the right to decide the period by which the time for service is to be extended”. That submission adopts the language of Ipp JA (with whom Tobias and McColl JJA agreed) in Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104 at [82]. However, it does not seem to me to be apt in the circumstances of this case. To the extent that any question of the extension of time under r 2.7 of the Corporations Rules arises, or whether the Court should make an order declaring the service of the proceedings invalid, or dismissing the proceedings, nothing done by the liquidators has adversely impacted the Court’s exercise of that discretion, which is to be exercised in this application. This matter does not support the grant of the relief sought by the Applicants.

60. The question of any prejudice to the Applicants arising from the delay in service of the Originating Process after it was filed is also relevant to the exercise of the Court’s discretion whether to grant the relief that they seek. In their written outline of submissions, the Applicants submit that:

“Apart from the knowledge of Ms Tan that proceedings had been issued by [TCL] against [HCL] and [Mr Meers], there is no evidence that any of the [Applicants] had any knowledge of the proceedings prior to being served.”

It seems to me that that submission inverts the onus of proof. The Applicants seek to set aside the Originating Process and seek other relief and it is a matter for them to establish any proposition that they had no knowledge of the proceedings prior to service, if they seek to rely on it to support the relief they seek, not for TCL to disprove a matter that the Applicants have not established. Mr Pesman accepted, in oral submissions, that the evidence did not identify any particular prejudice to the Applicants but submitted that that delay generally involves prejudice, and the relevant events happened some seven years ago, so that there is presumptive prejudice (T33).

61. TCL submits, in its outline of submissions that:

“… the Applicants have identified no material or specific prejudice. For example, they have not specified any witnesses or evidence that is no longer available to them. The issue of prejudice must also be considered by asking: what knowledge did the Applicants have of the proceeding and what level of preparation have they been able to do in the interim period between filing and service. On these two important questions the evidence is sparse. The Applicants have not been forthcoming as to their state of knowledge and the inference ought to be drawn that any evidence which they could call on these topics is unhelpful to their case.”

62. In oral submissions, Mr Dick also points out that none of the individual Applicants, nor any officer of HCL or HRL, gave evidence as to his or her state of knowledge of the proceedings; as to what had been done in the period before filing and serving the proceedings (or, I interpolate, in the period between the appointment of administrators to TCL and the service of the proceedings); or of any identified prejudice arising from the delay between the filing and service of the proceedings. Where the Applicants other than HCL, HRL and Mr Menudin do not seek to give evidence (other than Ms Tan’s evidence as to her knowledge, to which I have referred above) as to their state of knowledge of the proceedings, I infer that any evidence led by them would not have assisted them. I do not, of course, draw any inference that their not having led evidence of that matter establishes that they in fact had knowledge of the proceedings. The lack of evidence of any real prejudice to the Applicants arising from the delay in service weakens the case for an exercise of discretion to grant the relief they seek.

63. The Applicants also advanced detailed submissions as to the policy behind limitation statutes and referred to the concept of “presumptive prejudice” adopted in several of the cases dealing with those statutes. I have noted above that the individual Applicants did not lead evidence (other than Ms Tan’s evidence) to establish their state of knowledge of the relevant proceedings or to identify any prejudice which would arise for them from the continuance of the proceedings; it seems to me that Ms Tan’s evidence did little to advance the position so far as HRL or HCL were concerned and less to advance the position of the individual Applicants; and the proceedings appear to have been commenced, at least in respect of substantial parts of the relevant claims, within the six year period of limitation applicable to claims under s 1317K of the Corporations Act. It does not seem to me that this submission significantly advances the Applicants’ position.

64. The Applicants also advanced detailed submissions as to the principles applicable to an extension of time under UCPR r 12.11 and its predecessors. I have had regard to those principles, so far as they are relevant to the question whether any extension of time should be granted under r 2.7 of the Corporations Rules, although such an extension is not necessary in this case, and no question of an extension of time for the period of service specified in UCPR r 6.2(4) arises in this application.

65. I have not accepted the premises of the Applicants’ submission that service should be set aside and the proceedings dismissed, including that the liquidators did not have good reason to delay service and that a wish to have funding of the proceedings before pursuing them was “invalid” or improper or that significant weight should be given to “presumptive prejudice” arising from a relatively short delay, where proceedings were commenced within the limitation period specified in s 1317K of the Corporations Act, the individual Applicants have not led evidence of any substance of actual prejudice and the evidence of that matter led by HCL and HRL is not persuasive. It also seems to me that that submission does not adequately address the need for balancing between the interests of the Applicants on the one hand, and the interests of TCL and its creditors in obtaining a trial on the merits on the other.

66. It does not seem to me that a basis has been established for the Court to exercise its discretion to set aside service of the Originating Process under UCPR r 12.1(1) or s 63 of the Civil Procedure Act, and all of the relevant considerations support the contrary result. Assuming, without deciding, that non-compliance with r 2.7 of the Corporations Rules was established, and the extension of the time for service sought by TCL, I would not exercise the judicial discretion arising under UCPR r 12.11(1) or s 63 of the Civil Procedure Act so as to set aside service of the Originating Process upon the Applicants or dismiss the proceedings.

The alternative relief sought by TCL

67. By its Further Amended Interlocutory Process filed on 9 May 2018, and in the alternative to its primary position, TCL sought an order dispensing with the operation of r 2.7 or extending the time for service. As I noted above, the Originating Process was served on each of the Applicants, other than Mr Menudin, within the six month period permitted under UCPR r 6.2(4). Mr Menudin does not seek to be treated differently from the other Applicants, and it is therefore not necessary to make an order under r 10.14(3) of the UCPR directing that the Originating Process be taken to have been served on him on 7 November 2017, within that six month period, which TCL had otherwise sought.

68. If it were necessary to do so, although on the findings that I have reached it is not, I would extend the time permitted for service of the Originating Process under r 2.7(1) of the Corporations Rules, so far as it requires that the Originating Process be served as soon as practicable after it is filed, and also extend the time for service prior to any interlocutory hearing of the matter, to validate service of the Originating Process in these proceedings. I would do so because I am satisfied that the interests of justice would not be served by a result that the statutory claims in these proceedings could not be pursued by TCL, in circumstances that corresponding general law claims could have been pursued by it in reliance on UCPR r 6.2(4), and such an extension would otherwise promote the interests of justice for the reasons noted above.

Orders and costs

69. The Applicants’ Amended Interlocutory Processes should be dismissed with costs. They should also pay the costs of and incidental to TCL’s Further Amended Interlocutory Process filed on 9 May 2018, which would have succeeded had the Applicants’ Amended Interlocutory Processes not otherwise been dismissed. TCL indicated that it wished to be heard further on the basis of such a costs order, and I will allow both parties an opportunity to be heard as to the basis on which costs are to be paid.

70. For these reasons, I order that:

1   The Amended Interlocutory Process filed on 7 February 2018 by the Second, Fifth, Seventh and Eighth Defendants be dismissed with costs, reserving the question of the basis on which such costs are to be paid.

2   The Amended Interlocutory Processes filed on 7 February 2018 by the Third Defendant be dismissed with costs, reserving the question of the basis on which such costs are to be paid.

3   The Amended Interlocutory Processes filed on 7 February 2018 by the Fourth Defendant be dismissed with costs, reserving the question of the basis on which such costs are to be paid.

4   The Second, Third, Fourth, Fifth, Seventh and Eighth Defendants pay the costs of and incidental to the Plaintiff’s Further Amended Interlocutory Process filed on 9 May 2018, reserving question of the basis on which such costs are to be paid.

5   The Plaintiffs serve, and send to the Associate to Black J, their submissions as to the basis on which costs are to be paid within 7 days, and the Second, Third, Fourth, Fifth, Seventh and Eighth Defendants serve, and send to the Associate to Black J, their submissions in response as to the basis on which costs are to be paid within 14 days.

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Decision last updated: 07 June 2018