Jeffery & Katauskas Pty Limited v SST Consulting Pty Ltd & Ors

[2009] HCATrans 140

[2009] HCATrans 140

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S14 of 2009

B e t w e e n -

JEFFERY & KATAUSKAS PTY  LIMITED

Applicant

and

SST CONSULTING PTY LTD

First Respondent

PETER SWEENEY

Second Respondent

PAUL SWEENEY

Third Respondent

DENYS TRUMAN

Fourth Respondent

Office of the Registry
  Sydney  No S16 of 2009

B e t w e e n -

JEFFERY & KATAUSKAS PTY  LIMITED

Applicant

and

RICKARD CONSTRUCTIONS PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

First Respondent

RICKARD HAILS MORETTI PTY LIMITED

Second Respondent

ALLIANZ AUSTRALIA INSURANCE LIMITED

Third Respondent

SST CONSULTING PTY LTD

Fourth Respondent

PETER SWEENEY

Fifth Respondent

PAUL SWEENEY

Sixth Respondent

DENYS TRUMAN

Seventh Respondent

Applications for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 19 JUNE 2009, AT 10.53 AM

Copyright in the High Court of Australia

__________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MS J.A. STEELE, for the applicant in each matter.  (instructed by Colin Biggers & Paisley Lawyers)

MR T.G.R. PARKER, SC:   May it please the Court, I appear with my learned friend, MR R.E. STEELE, for the first to fourth respondents in the first matter and for the fourth to seventh respondents in the second matter.  (instructed by Biady & Associates)

GUMMOW J:   Yes.  Now, in S16/2009 there is a submitting appearance for the second and third respondents.  There has been no appearance for the first respondent but the Registrar holds evidence of service.

MR JACKSON:   Yes, your Honour.  I could give an affidavit demonstrating that they intend not to make any submissions today.  May I seek leave in that regard to file in Court an affidavit of Goce Mitrevski sworn 17 June 2009.

GUMMOW J:   Yes, thank you, Mr Jackson.  The affidavit of Goce Mitrevski sworn on 17 June 2009 is filed in Court.  Yes, thank you, Mr Jackson.  We would be assisted to hear first from you, Mr Parker.

MR PARKER:   I start by referring to four factual aspect of the matter.  First, there has been a finding that there has been no misconduct in the conduct of litigation at all, not by Rickard Constructions and certainly not in any way associated with SST, that is the corporate respondent.  That finding is at page 38, point 20 of the application book. 

Second, to the extent that the term “trafficking” is sometimes used in cases in this area usually connotes some form of purchase of litigation, usually when there is no pre‑existing interest in the litigation, for the benefit of being able to run the litigation, in effect, as a business or for commercial benefit quite disparate from any previous interest in the subject matter of it or in the parties to it.  SST is not a trafficker in that sense.  The proceedings were begun in September 2000. 

SST’s funding began pursuant to a deed of company arrangement in December of 2000 and at that point it has been found that it was already a creditor of Rickard Constructions, the litigant, in a sum of more than $200,000.  There is some doubt about exactly how much that debt was.  The relevant finding is at page 18, about line 30 of the application book.  The deed of company arrangement provided for a somewhat complicated order of priority which would see the recovery of SST’s money in part alongside other creditors. 

If the Court could go to 14 of the application book, the Court will find a summary of the order of priorities set up by the deed.  In fact, it starts at page 13, about line 40 in paragraph 28.  So any moneys recovered were to go first in payment to a debt owed to some solicitors who had formally been engaged, that is subparagraph (1).  Then a particular advance of $80,000 made by Mr Rickard who was the director of Rickard Constructions and SST Consulting.  Then thirdly:

Repayment of further fees and expenses incurred in the conduct of these proceedings –

That would, of course, include any costs that were awarded in favour of successful defendants.  Then fourthly:

Payment of outstanding employee entitlements.

Then, thereafter, there was payment to the secured creditor, that is SST, in an amount of $350,000.  That does exceed, perhaps, the amount of the loan that had been made but remembering that at least $200,000 and possibly more than that had in fact been lent.  Then there is a payment to another entity, C&D Rickard, and then there is a payment of 20 cents in the $1.00 for the secured creditor, and also in respect of debts or claims of other creditors other than two named creditors.  Then next, in payment of the creditors, that is other than SST, and finally, the balance of the secured creditor’s claim.

In our submission, one would not get from that that SST was a trafficker in any of the senses in which it has been used in this area of discourse. 

GUMMOW J:   The senses in which it is used have never really been clearly explained, have they?

MR PARKER:   We would not respectfully adopt that, your Honour.  It seems to be used as a somewhat pejorative term, but to the extent that it has any content, it focuses on situations, as I have said, where somebody comes along who has got no pre‑existing relationship at all and as a business venture distinct from any relationship either with the parties or with the subject matter for litigation, takes over the litigation for itself and runs it for its own benefit.  Trafficking, to the extent that it is an idea which has any content, is very closely related to the idea of an assignment or an ineffective assignment.  Now, we would submit that on the findings in the courts below, SST is far from being in that position. 

The next factual matter we refer to is that there has been a finding that SST did not itself give any instructions in the sense of directing the conduct of the litigation and that finding will be found at page 23 at about line 15 of the application book.  Now, it has been said against us that SST, and, indeed, in a sense, found against us, that SST had control of that litigation.  But that control is only in a causative sense, by which I mean that the finding goes no further than saying that if SST had not funded this litigation, then no one else apparently would have been prepared to do so and therefore the litigation would have come to an end.  So it is not control in the sense in which it has been used, for instance, in Knight v FP Special Assets where it is suggested that there is actually some power to direct the conduct of the litigation and a similar power was found in Project 28, which is another one of the cases which our learned friends refer to.

The fourth factual matter we wish to refer to goes to the position of the individual respondents and it is this.  There is a finding that SST operated, as was said, like a partnership.  Could I ask the Court please to go to page 20 of the application book where the Court will find the evidence on which that finding was based.  It is at about line 10.  What Mr Sweeney, who was the person principally responsible for the operations of SST, was saying or doing was describing the way in which SST organised funding for moneys that it wanted to spend.  He said that the directors operated the company in that regard in the same way as a partnership would operate, that is, SST did not itself have substantial assets or cash but when it needed funds the directors would put those funds in in equal shares, being a third each.

Now, there was evidence elsewhere which established that money was put in in the form of loans through loan accounts, as your Honours might expect.  So that all one has is an arrangement which may apply to a number of partnerships but also applies, we would submit, to many proprietary companies, namely, that those concerned in the conduct of the companies lend money to the company to allow it to itself carry out its operations and they do so in a particular proportion representing their shareholding. 

There is nothing in that, in our submission, which would justify the ignoring of the corporate veil between SST and its directors and shareholders and creditors which, in effect, is what is sought to be done in this case.  Because right from the outset what has been sought is an order for so-called third party costs, not only against SST which might be described as the primary third party in the sense that it was the one that actually did the funding, but it has been sought to extend that to the individuals as well. 

Having made those preliminary points, can I deal with the first way in which the case is put against us that is, the submission that there should be recognised a principle that to fund litigation by an insolvent plaintiff is an abuse of process which justifies the making of a third party costs order without more.  The second proposition, of course, being that one adds to that involvement in a failed assignment.  Going to that first proposition, we submit that three considerations support the decision of the court below.  First, one has to start ‑ ‑ ‑

GUMMOW J:   That microphone, Mr Parker, I think you have got it too close.

MR PARKER:   Sorry, your Honour.  Is that better?

GUMMOW J:   That is better.

MR PARKER:    First, one needs to look at the way the proposition has been advanced by the applicant.  The Court will find that at page 122 of the application book.  At about line 40 the proposition is stated in this way:

where a non‑party with a commercial interest in the fruits of a litigation, funds litigation brought in the name of an insolvent plaintiff without providing the plaintiff with an indemnity for a costs order in favour of a successful defendant –

We wish to draw attention to a number of features of that formulation.  First, the nature of the interest in the litigation.  Now, this said, there needs to be a commercial interest, whatever that means.  To be satisfied on the facts of this case, all that needs to be established is that moneys are lent.  Fund the litigation and thereby enable the litigation to take place. 

Merely to draw the cheque or to agree to fund is the abuse of process which is alleged against SST in this case, and one asks, where would that principle extend to?  It would apparently extend to bankers, other financiers, perhaps even those conducting litigation on a no win no pay basis.  It is said that it needs to be a commercial interest.  One asks, why should it be so limited?  What about a family member who lent money?  If not, why not?  This case is said to be based on Bastistatos and the effect on the defendant.  Why does it need to be a commercial interest?  Second, the element of control.  On the case against us, no element of control is required at all.  The only element of control is the control that flows from the fact that one in fact ‑ ‑ ‑

GUMMOW J:   You may ultimately be right about all this, Mr Parker, but the question is whether there is enough at the moment for Mr Jackson to get special leave to agitate these questions.

MR PARKER:   I appreciate that and there are a number of other questions that arise which I will not go into, but all of this is arising, next point, in a context where the case was not quite put in this way below.  If your Honours go back to the notice of appeal ‑ ‑ ‑

HEYDON J:   The Suttor v Gundowda point or a failure of the courts below to be given a chance to offer some ‑ ‑ ‑

MR PARKER:   It is the latter, your Honour.  If your Honours go to the notice of appeal, your Honours will see that the ground as stated appears to be ground 2(a) on page 47 of the application book and your Honours will find that that ground contains not one word about insolvency.  What we say is that in substance what the court is being asked to do is to formulate a new principle for the making of third party costs orders in the context of litigation and that that is essentially a legislative task because of the sorts of considerations to which I have referred. 

It involves making a number of judgments about where the lines should be drawn and these are essentially legislative judgments, in our submission.  That would be so even if one had a blank sheet, but, and this is our second point, there is not a blank sheet.  There has been legislative intervention in the form of a rule of court.  The rule of court has dealt with the matter by saying that one needs to be able to establish an abuse of process.  That is the term that one is using.  So we cannot just start from general principles as to what would be just and fair.  We have to start with the words used by the legislature.  Now, in the Court of Appeal, in prior litigation ‑ ‑ ‑

GUMMOW J:   It is a rule of court, is it not?

MR PARKER:   I am sorry, your Honour?

GUMMOW J:   You are talking about a rule of court?

MR PARKER:   Yes, it is, your Honour.  I have said legislation, I mean regulation, rule of court.  In a prior decision which your Honour Justice Heydon was involved in, Wentworth v Wentworth, it was said that the purpose of this rule was to reverse the effect of the decision in Knight.  Your Honour will find that referred to at page 96 of the application book in the judgment of Justice Gyles who gave the judgement in the Court of Appeal.  It is the quote which appears right at the top of the page.  That was agreed to by the other members of the court.  It is said now in reply that that is contested.  So, in effect, the applicant is asking for that to be overruled.  Again, and as your Honours have already seen in the notice of appeal, the Court of Appeal was not asked to overrule its earlier decision in that regard.

Now, if the applicant is successful in establishing the proposition that it contends for, it is not just a question of, in effect, overruling that decision and restoring Knight.  They seek to go further.  The formulation of the principle in Knight was one which insisted upon practical control of the litigation.  Your Honours will remember the facts of Knight where the party in question was actually the receiver who was giving the instructions.  The facts deny that here, so they need to not only go back to Knight, in spite of the intervening rule of court and the way that that has been interpreted, but they need to expand upon Knight.

The third point we want to make is this.  Abuse of process is linked in the way the rule is formulated with contempt.  It is clear that once the abusive process takes place, or the contempt takes place, that the rule is engaged and an order could been made immediately.  One does not have to wait until the end of the case.  As soon as there has been an abuse of process or as soon as there has been a contempt, then costs which flow from that can be the subject of an order.  The problem with the formulation of an abuse of process which is put against us, we suggest is this.  The abuse of process is the funding, it is the agreement to fund or the drawing of the cheque if there is no prior agreement.  At that point one does not know what the outcome of the case is going to be. 

A supposed unfairness to the applicant is that it will not get its costs back.  At the time the cheque is drawn, one does not even know what the outcome of the case is going to be and one does not even know whether they are going to be entitled to costs.  How can it be, we ask, that under a rule which confers power on the court to award costs as soon as an abuse of process is committed, that one could get an award of costs against a third party before the outcome of the proceedings themselves?

GUMMOW J:   As I understand it, the Supreme Court Rules 1970 started life as a schedule to the statute. They have cut loose, have they not?

MR PARKER:   I think they now have cut loose.  When the new Civil Procedure Act came along they were made a schedule of the statute but they have now cut loose and are under the control of the Rule Committee and that is a relevant factor of course because the Rule Committee is made up of officers of the court and if they saw anything wrong with this interpretation of the rule, it would be open to them to change it.

GUMMOW J:   Is there anything in the rules that purports to exhaust what otherwise is the statutory jurisdiction of the court to control its own procedures?

MR PARKER:   It is the introductory part of rule 4 which says that costs cannot be awarded against a third party except in the following defined circumstances.  So one has the general power in 98 which deals with costs and is in the conventional form, but it is in this particular jurisdiction it is then restricted by this rule which then says but you cannot exercise that power except in defined circumstances.  That is the structure of it.  Now, those are the three reasons which might we say that the broader or more ambitious argument put against us should not be accepted and should not be the subject of a grant of special leave. 

As to the secondary argument which depends in addition upon demonstrating that there has been a failed assignment, we say that quite apart from the factors that I have already mentioned, that would not be a matter which would justify the grant of special leave because it lacks sufficient significance to do so.

GUMMOW J:   Where do we find the failed assignment ground in the draft notice of appeal?

MR PARKER:   Your Honours should find it starting on page 118.

GUMMOW J:   It does not seem to be a ground at the moment, does it?

MR PARKER:   We think it is ground 3, your Honour.

GUMMOW J:   I see, yes.

MR PARKER:   There is a reference there to “(ineffective) assignment”, and that is the secondary way in which was put in the application for special leave.  Now, we simply say first of all, this is a very limited financial significance and the reason for that is because it can only apply to the assigned action and, as we have explained in our submissions, there was not just an assigned action brought by Rickard Constructions against the applicant.  There was a direct action brought against it. 

So all of the facts which went to breach of duty or to the existence of a duty of care and the alleged breach of duty were all common to those two claims.  We are dealing here solely with the separate question of the costs of establishing the assignor’s loss, that is, the main company’s loss and, as we have indicated, that does not seem to have taken up much time at the trial.  It was a four‑week trial and there was a limited amount of rather uncontentious evidence of a financial type which the judge dealt with in the judgment at that point. 

It has been said by way of reply, well, there was also argument about the validity of the assignment itself but, of course, that was just legal argument.  It is not present, in our submission, any substantial part of the costs of a four‑week trial between multiple parties on multiple issues and for that reason it is not of significance, not of great financial significance.  No one sought to quantify the costs, but it would be surprising if we were talking about a sum that was more than $10,000.

Secondly, we submit that the question of whether the same circumstances will recur, that is, that there is funding but the funding is accompanied by what is said to be and at present, but only at first instance, has been held to be an ineffective assignment.  That circumstances are not likely to occur in such a way as to make the outcome of this particular application of significance for the future if the Court was to uphold it only on the second basis on which it is put.

The final point we wish to make is that if the Court were to conclude any part of the case was suitable for the grant of special leave, then there should not be special leave against the individuals.  They have been brought up here now through two appellant levels on the basis of ignoring the corporate veil between them.  In our submission, there is nothing to show that.  All of the corporate acts relied on were all corporate acts of SST itself, to the extent that the individuals were involved ‑ ‑ ‑

GUMMOW J:   The two Messrs Sweeney and Truman.

MR PARKER:   That is right.  Now, everything that they did, and in the case of Mr Truman there is no evidence that he ever had anything to do with this case, but everything that they did they did as directors or shareholders or creditors of SST and, as I have been at pains to point out, there is no finding which would justify the ignoring of the corporate veil. 

So one is faced with a case, as against them, where there is an additional element, namely, whether on the particular facts of the case and

in the absence of any findings on this question below which would advance the applicant’s case, they should also be made responsible at a remoter level for the costs of the applicant.  Those are our submissions.

GUMMOW J:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I say first of all in relation to our learned friend’s submission about the nature of the case, the nature of the case is – and I will take your Honours to the reference in a moment in the Court of Appeal – clearly one where what we are saying is that there can be an abuse of process for the purposes of the rule when you have a combination of two things,  One is that the funder of the litigation is doing so with a view to a success fee, to use a generic term if I can for the moment – and I will come to the detail of it in a moment also – but, secondly, makes no or inadequate provision to pay the defendant’s costs if the proceedings are unsuccessful. 

That the Court of Appeal did not pars and analyse the notice of appeal to that court in quite the same way as our learned friends do now can be seen from the reasons of Justice Gyles at page 82, paragraph 37.  Your Honours would see in paragraph 37 on page 82 that he says:

The basis for the orders sought by J & K was that in the circumstances of the case the funding of the primary proceedings and the appeal by SST Parties without provision of an indemnity –

I am abbreviating it, your Honours –

constituted an abuse of process for the purposes of the UCPR Rule 43.2(3)(c).

He then said that was developed under two headings and I would simply refer your Honours to, just for the moment, the first of those.  So that, your Honours, the nature of the case sought to be agitated in this Court is the same as that which was argued below.  The second thing, your Honours, is I mentioned the success fee.  We are not really talking about something where the success fee was some small amount.  What we are talking about are circumstances where it was a minimum of $580,000 and it may have gone up into the 700s. 

You will see that in two places, your Honours.  Page 18, paragraph 37 where his Honour said “that the principal debt of $930,000 referred to in the deed of charge should be” – and your Honours will see it goes on to indicate the unexplained amounts and, whilst he appears to perhaps have some doubt about the accuracy of the word “success fee”, when one comes to paragraph 52, you will see at page 24 that he said that there is no doubt they stood to benefit, stood to recover whatever was the amount of the initial advances, the success fee and other amounts.  So that, your Honours, it is not just a case where the only moneys that were being expended were ones that might be recovered in the ordinary way.

GUMMOW J:   What do you say about paragraph 53 in the joinder of the two, Messrs Sweeney and Truman?

MR JACKSON:   Well, your Honour, in relation to that, this is not really the usual case, as it were.  My learned friend says you cannot go through the corporate veil, but what one is talking about is a power to look at the conduct – power under the rule I mean – a power to look at the conduct of persons to determine whether there has been an abuse of process by the person whose conduct is in question.  If one is looking to determine that question, it does not follow at all that one looks simply at what is the person who legally is most proximate to the conduct. 

The conduct may be carried out by the company and in circumstances where the company is, in effect, run as a partnership, the activities of the company may be those of the persons who own it, I use the term loosely.  Your Honours, if one had a case where individual directors in a large company that went in the end into liquidation itself, if their conduct were in question, the answer would be likely to be there would not be an abuse of process by them and it does not follow that there can be no case in which there has been an abuse of process by the persons who control the company if they control it directly and are the ones, in effect, putting up the money themselves.  Then any potential exposure they might have under the rule should not be taken away by the fact that they use the intermediary of a company in between. 

Your Honours, dealing with our learned friend’s reference to the fact that there is no contention of control, it is true to say that the finding about control for the respondent was that what they could do was that they could turn the tap off at any time and the litigation would be likely to come to an end.  That, in our submission, is enough because the ultimate test, in our submission, would be that there can be – it does not always have to be – but there can be abuse of process where the fundee is doing so with a view to some commercial profit – that is the sense in which we are talking in the present case – and there is no provision for payment of the costs of the other side if the proceedings are unsuccessful.  Your Honours, those I think are our submissions.

GUMMOW J:   What is this point about “(ineffective) assignments”?

MR JACKSON:   Your Honour, in the end I feel driven to say it does not really add much, I think, in the particular case.

GUMMOW J:   Well, it is ground 3.

MR JACKSON:   I know, ground 3, I think, your Honour.

GUMMOW J:   Do you press the inclusion of ground 3?

MR JACKSON:   No, your Honour.

GUMMOW J:   So if there were to be a grant of leave, the first draft is at page ‑ ‑ ‑

MR JACKSON:   In respect of S16, it is page 147.  In respect of the ‑ ‑ ‑

GUMMOW J:   Page  119.

MR JACKSON:   Yes, your Honour.

GUMMOW J:   It is the same ground 3 in each case.  Yes, thank you.  Will this be a one day case, Mr Jackson?  A bit longer I suspect.

MR JACKSON:   I would have thought it would be a half day case, your Honour, a morning case perhaps, I should say.

GUMMOW J:   All right.  Yes, Mr Parker, is there anything in reply?

MR PARKER:   Only to observe that there is no suggestion that the individuals and there is no finding that the individuals set out to make this loan through the company, as it has been suggested.  In fact, as the evidence shows, the relationship between the company and Rickard Constructions, the plaintiff, was one that was established as debtor and creditor before the alleged abuse of process even began.

GUMMOW J:   There will be a grant of leave in each of these matters which will be heard together, excluding from the grant what is ground 3 appearing in the book in the drafts at pages 119 and 151.  How soon could this be ready, gentlemen?

MR JACKSON:   Your Honour, so far as we are concerned, your Honour mentioned an earlier matter, the August sittings, there would be no difficulty I should think so far as we are concerned at least.

GUMMOW J:   Mr Parker?

MR PARKER:   Apart from personal matters, I cannot put anything else apart from those.

GUMMOW J:   Thank you.  Very well. 

AT 11.24 AM THE MATTER WAS CONCLUDED