Macks v Tucker & Ors & QBE Insurance (Australia) Ltd - [2006] SASC 272

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
MACKS v TUCKER & ORS & QBE INSURANCE (AUSTRALIA) LTD
[2006] SASC 272
Judgment of The Honourable Justice Bleby
1 September 2006
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS - DEFENCES AND COUNTERCLAIM
Application by second defendant for leave to serve counterclaim - Action by plaintiff in capacity as trustee for bankrupt estate - Where proposed counterclaim is against plaintiff in his personal capacity - Application dismissed.
Bankruptcy Act 1966 (Cth) s 86, s 249(3); Supreme Court Act 1935 (SA) s 23(1), s 26(1)(a), referred to.
Re Richardson; Richardson v Nicholson [1933] WN 90, distinguished.
Hiley v People's Prudential Assurance Co Limited (in liq) (1938) 60 CLR 468; Macdonald v Carington (1878) 4 CPD 28; Hurst v Bennett [2001] EWCA Civ 182, considered.

MACKS v TUCKER & ORS & QBE INSURANCE (AUSTRALIA) LTD
[2006] SASC 272
Civil
BLEBY J:
Introduction

The plaintiff is the trustee of the bankrupt estate of James Alistair McGregor (“the deceased”) who died on 11 December 1990. His estate was declared bankrupt on 17 February 1997 by order of the Federal Court of Australia. The present plaintiff replaced an earlier trustee on 19 March 2001.
The first defendant is a legal practitioner and was a partner in the third defendant, a firm of solicitors, from about 1 July 1984 until 6 December 1992. Prior to his death, the deceased had retained the first and third defendants to act for him and companies of which he was a director and/or shareholder. Following his death the first and third defendants were retained to act for his estate by his executors, and did so until December 1992.
The first defendant became a partner of the fourth defendant in December 1992, from which time until about mid 1996 the first and fourth defendants acted for the estate.
The second defendant, of which the first defendant and his wife are and at all material times have been the directors, is the trustee of the first defendant’s family trust.
The plaintiff’s case is that the first defendant acted as solicitor for, and whilst so acting, caused detriment to the estate by virtue of a series of conflicts of interest and duty and conflict of duties. It is alleged that some of the conflicts either subsisted at the date of the retainer or were foreseeable at the date of the retainer and that as a consequence, the first defendant ought not to have accepted the retainer from the executors of the estate.
The various conflicts are pleaded at length in the statement of claim and constitute a number of alleged breaches of fiduciary and contractual obligations on the part of the first defendant. The plaintiff seeks damages or equitable compensation to the extent that the transactions sounded in loss to the estate, and an account of profits to the extent that the first defendant has gained from those transactions. It is not necessary for the purpose of these reasons to identify the particular transactions or alleged losses.
The plaintiff does not allege that all individual transactions pleaded resulted in loss to the estate or to accountable gain by one of the defendants. Some of them are pleaded as “purported” or “proposed” transactions rather than ones which the plaintiff says have any legal effect, as well as being transactions which are alleged to have given rise to the alleged breach of fiduciary duty to the estate. Nevertheless, those transactions are pleaded as being relevant to the existence of conflicts which precluded acceptance of the retainer in the first place and as part of the background against which the Court is asked to find the existence and pursuit of the relevant purposes and objectives of the first defendant.
One of the transactions pleaded relates to the deceased’s interest in the estate of his late father, W.W. McGregor. It is alleged that the first defendant knowingly failed to list in the statement of assets and liabilities of the deceased’s estate the expectant interest of the deceased in the estate of W.W. McGregor. It is alleged that the first defendant prepared and procured a purported assignment by the deceased of his expectant interest in the W.W. McGregor estate to the second defendant as trustee of the first defendant’s family trust. It is said that that purported assignment placed the first defendant in a position of conflict as at the commencement of the retainer, and that the first defendant was in breach of his duty to the estate in failing to advise the estate of the potential challenge to the purported assignment. The plaintiff further alleges that the purported assignment was procured for no or for inadequate consideration and for the benefit of the first and second defendants.
The plaintiff does not allege that the deceased’s estate suffered any loss from that transaction, because ultimately the value of the expectant interest in the W.W. McGregor estate has flowed to the estate of the deceased. The validity of the purported assignment is not called in question by the statement of claim. The transaction is pleaded as part of the course of conduct in which it is alleged that the first defendant engaged in breach of his fiduciary duties to the estate.
The Proceedings
The proceedings were commenced on 24 May 2004. Service of an amended summons and statement of claim was effected on 30 July 2004. The second defendant was ordered to file a defence by 17 November 2004, but on that date the first and second defendants’ solicitors advised the plaintiff’s solicitors that they were embarrassed by the statement of claim and intended to apply to strike parts of it out. This was followed by an application by the second defendant seeking summary judgment or, in the alternative, that the plaintiff’s claim be struck out.
On 28 January 2005, the defence of the second defendant was filed and served.
The second defendant’s application for summary judgment was dismissed by a master on 20 May 2005, but the plaintiff was ordered to file an amended statement of claim, and an amended defence was required to be filed by 1 July 2005. An amended defence was eventually filed and served on 28 July 2005.
An extended process of discovery then followed, and on 6 April 2006, the second defendant applied for leave to amend its defence and to file a counterclaim. It is that application which is now before me for decision.
The proposed counterclaim
The counterclaim proposed to be filed by the second defendant has been amended twice during the course of argument, each amendment requiring further substantial submissions from the parties. Much of the argument addressed in earlier hearings is no longer relevant.
In the plaintiff’s action it is clear that Mr Macks is suing as trustee for the bankrupt deceased estate of James Alistair McGregor. The latest version of the proposed counterclaim names Mr Macks, without any qualification, as the defendant by counterclaim. It is not alleged that he is being sued in his capacity as trustee of the bankrupt deceased estate.
The counterclaim arises out of the alleged assignment by the deceased to the second defendant of the deceased’s interest in the estate of W.W. McGregor. The claim is based on two payments made in November 2003 and July 2004 by the trustees of the estate of W.W. McGregor to Mr Macks in a total amount of $478,411.05, being the amount of the deceased’s interest in the residuary estate of W.W. McGregor deceased. Although W.W. McGregor died in 1945, the residuary estate was subject to a life interest of his widow who died in February 2003, after the death of the deceased.
The proposed counterclaim alleges that by an agreement in writing dated 8 December 1990, three days before the deceased died, the deceased agreed for valuable consideration forthwith to assign to the second defendant the whole of his beneficial interest in the estate of W.W. McGregor. Alternatively, it is alleged that the deceased thereby became a constructive trustee of the interest for the benefit of the second defendant. The second defendant alleges that in or about 1992 the second defendant notified the trustees of the estate of W.W. McGregor of the assignment under the agreement.
The second defendant claims that Mr Macks holds the sum in question on trust for the second defendant. Alternatively, if the amount has been expended, it claims equitable compensation. In the further alternative it claims the amount as money had and received by Mr Macks to the use of the second defendant. Interest is also claimed.
Earlier versions of the proposed counterclaim name the plaintiff as the defendant to the counterclaim, that is in his capacity as trustee of the bankrupt deceased estate. At that stage the plaintiff’s primary argument in opposition to the present application relied on section 249(3) of the Bankruptcy Act 1966 (Cth):
(3)     Except as provided by this Act, after an order has been made for the administration of the estate of a deceased person under this Part, it is not competent for a creditor:
(a)     to enforce any remedy against the estate in respect of a debt provable in the administration; or
(b)     except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceedings in respect of such a debt or take any fresh step in such a proceeding.
The plaintiff’s submission was that, if there was any validity in the second defendant’s claim, it only had a debt provable in the administration of the bankrupt estate. It could not now maintain proceedings by way of the proposed counterclaim without leave of the Federal Court of Australia. No such leave has been sought or given.
The first defendant did not seek to argue against that proposition but then brought in a further amended proposed counterclaim wherein all references to Mr Macks as trustee of the bankrupt deceased estate were removed. In other words, it seemed that the claim was now to be made against Mr Macks in his personal capacity.
In my opinion, if the claim was brought against Mr Macks in his capacity as trustee, the first defendant had no answer to the plaintiff’s argument. He could not bring a counterclaim without leave of the Federal Court. Although this was not argued specifically, it would also appear that he could not claim a set-off under section 86 of the Bankruptcy Act,[1] as such a set-off must have existed at the commencement of the bankruptcy.[2] This one did not it. Would seem that any claim by way of set-off would be in no better position than the proposed counterclaim.
[1] Section 86 applies to the administration of bankrupt estates by virtue of section 248 of the Bankruptcy Act1966 (Cth).
[2] Hiley v People’s Prudential Assurance Co Limited (1938) 60 CLR 468.
Mr Slattery QC, counsel for the second defendant, argued that it did not matter that the proposed counterclaim did not seek to identify the capacity in which Mr Macks was to be sued, and that it was up to Mr Macks to raise any point of defence available to him in whatever capacity he might wish to plead. I disagree. If a counterclaim is to be filed by leave of the Court it must identify the capacity in which the defendant by counterclaim is sued. Given the deliberate changes to the proposed counterclaim and the irrefutable argument of the plaintiff if Mr Macks were to be sued in his capacity as trustee, I can only conclude that the second defendant now seeks to bring the claim against Mr Macks in his personal capacity.
The claim against Mr Macks in his personal capacity
The power of the Court to grant relief by way of counterclaim is both authorised and limited by section 23 of the Supreme Court Act1935 (SA). Subsection (1) provides :
(1)The court shall have power to grant to any defendant, in respect of any equitable estate or right, or other matter of equity, and also in respect of any legal estate, right, or title claimed or asserted to him-
(a) all such relief against any plaintiff or petitioner as the defendant has properly claimed by his pleading, and as the court or judge might have granted in any suit instituted for that purpose by the same defendant against the same plaintiff or petitioner; and
(b) all such relief relating to or connected with the original subject of the cause or matter, and in like manner claimed against any other person, whether already a party to the same cause or matter or not, who has been duly served with notice in writing of such claim, pursuant to any rules of court, as might properly have been granted against that person if he had been made a defendant to a cause duly instituted by the same defendant for the like purpose.
Paragraph (a) requires that a counterclaim be instituted “by the same defendant against the same plaintiff”. The plaintiff brings his claim in his capacity as trustee for the bankrupt deceased estate. In my opinion, section 23(1)(a) does not authorise a counterclaim to be brought against him in an entirely different capacity.
In response, Mr Slattery QC relies on a decision of the UK Court of Appeal in Re Richardson; Richardson v Nicholson.[3] In that case the plaintiff, Mrs Richardson, was the widow and co-administrator under letters of administration with one of her daughters, Mrs Nicholson, of the estate of the deceased. She brought an action against her two daughters, who were presumably potential beneficiaries of the estate, claiming a declaration that certain freehold property and mortgages were her property and not that of the deceased. Such an order, if made, would have been binding on her in her personal capacity and in her capacity as administrator, as well as on the beneficiaries of the estate.
[3] [1933] WN 90.
Mrs Nicholson, the daughter, filed a defence and brought a counterclaim seeking a declaration that a certain business carried on by the deceased was part of his estate and not the property of the defendant Fowler, her sister the other beneficiary. That declaration, it seems, would not have affected the plaintiff in her personal capacity. Nevertheless, if made, it would, of course, be binding on the first defendant (the plaintiff by counterclaim) in her personal capacity and on the administrators of the estate (herself and the plaintiff) as well as on the other beneficiary, Ms Fowler. It was therefore a somewhat unusual proceeding. The counterclaim was objected to but allowed by the Court of Appeal.
In a very much abbreviated report of the case, it appears that Lawrence LJ based his decision on the nature of the proposed counterclaim, holding that it could not be confined to a claim of the same nature as in the original action. Such a proposition has never been in doubt. He relied on the terms of Order 19 Rule 3 of the rules of the High Court, holding that the terms of the rule were “large enough to allow a counterclaim to include any cause raised by way of defence, whether it is or is not connected with or of the same character as the plaintiff’s claim, and whether it sounds in damages or not”. That is not surprising, because both of the orders, if made, would have been binding on the plaintiff in her capacity as administrator of the estate.
Romer LJ also referred to Order 19 Rule 3 and disagreed with an earlier decision of Lindley J in Macdonald v Carington[4] in which it was held that any set-off or counterclaim must be brought against the plaintiff “in the same character in which he sues himself”. Romer LJ considered that those words were not to be found in the Rule or in section 39(1)(a) of the Judicature Act 1925. Section 26 of the Supreme Court Act is in identical terms with section 39 of the Judicature Act. However, I consider that the reference in the section to the “same plaintiff” and “same defendant” provides the strongest implication that the claims are to be brought by and against those persons in the same capacity as in the main action.
[4] (1878) 4 CPD 28.
Re Richardson has only been referred to in passing in one subsequent decision in England,[5] and has not been the subject of any judicial comment in Australia. In any event, it is to be distinguished by reason of the unusual nature of the proceedings and the fact that the relief sought by the plaintiff in her personal capacity and by the defendant in her personal capacity would be binding, in both cases, on the plaintiff in her capacity as administrator of the estate. Because the proposed counterclaim is now sought to be brought against Mr Macks in his personal capacity, I consider that the proposed counterclaim would not be allowed under section 26(1)(a) of the Supreme Court Act.
[5] Hurst v Bennett [2001] EWCA Civ 182.
Paragraph (b) of section 23(1) of the Supreme Court Act deals with third party claims. In that case, however, the relief sought must be “relief relating to or connected with the original subject of the cause or matter … claimed against any other person”. The plaintiff’s claim is for damages and an account of profits in respect of breaches of contract and fiduciary duty. As the plaintiff submits, the relief claimed in the most recent version of the proposed counterclaim is pecuniary relief arising out of the administration of the estate of W.W. McGregor. It is not related to or connected with the subject matter of the plaintiff’s claim.
As the proposed counterclaim does not come within section 23 of the Supreme Court Act the second defendant’s application must be refused on that ground. However, if I am wrong about that, there are other grounds on which the application must be refused.
Paragraph 19 of the proposed counterclaim alleges that the assignment agreement is valid and enforceable against Mr Macks. However, in his personal capacity there is no privity of contract between Mr Macks and the second defendant. Mr Macks is a stranger to the transaction between the deceased and the second defendant. The plea seems to want to treat Mr Macks as acting in his capacity as trustee.
The proposed counterclaim, insofar as it brings a claim against Mr Macks in his personal capacity, is inconsistent with a number of paragraphs of the second defendant’s defence based on an allegation that it was the bankrupt estate which received the full benefit of the expectant interest in the estate of W.W. McGregor.
That internal inconsistency and those inconsistencies with the defence are sufficient to refuse leave to file the proposed counterclaim.
There are other reasons why, in the exercise of my discretion, I would refuse the application. The fact of the purported assignment is pleaded in the statement of claim as part of the facts tending to prove the breaches of contract and breaches of fiduciary duty owed by the first defendant to the estate. The legal effect of the assignment and whether it achieved what the first and second defendants sought to achieve is not in issue.
The effect of the deed of assignment contended for by the first and second defendants is vigorously contested by the plaintiff. So much is clear from the affidavits which have been filed in relation to this application. Litigation of that issue will not assist in the resolution of the plaintiff’s claim and will have no effect on it. It would be litigated as an irrelevant side issue detracting from the sensible and efficient resolution of the issues raised by the parties on their present pleadings. The raising of the issue of the proposed counterclaim has already caused substantial delay in the interlocutory proceedings necessary to resolve the plaintiff’s claim. Allowing the counterclaim to proceed will only aggravate those delays.

It is also relevant that the counterclaim was only made by the second defendant. The first and second defendants have common representation in the proceedings. However, the third and fourth defendants are separately represented, as is the third party who has been joined. As far as I can see they have no interest in the second defendant’s counterclaim, and the intrusion of that claim into the present proceedings can only cause additional delay and the incurring of further costs by those parties in relation to the resolution of their position in the proceedings.
Likewise, litigation of the plaintiff’s claim will not affect or assist in resolution of the second defendant’s foreshadowed claim.
If the second defendant wishes to pursue its claim it can do so by separate action. If further interlocutory proceedings in both actions later require that the actions be consolidated or tried together, that can be the subject of a further application at the appropriate time.
For these reasons, the second defendant’s application by Notice for Specific Directions filed on 6 April 2006, is dismissed.