Mark Silbermann v CGU Inusrance Limited; John Huyshe Greaves v CGU Insurance Limited; John David Rich v CGU Insurance Limited; One.Tel Limited (In Liq) v Rich

[2003] NSWSC 1127

Reported Decision: 48 ACSR 231

Supreme Court

CITATION:	Mark Silbermann v CGU Inusrance Limited; John Huyshe Greaves v CGU Insurance Limited; John David Rich v CGU Insurance Limited; One.Tel Limited (In Liq) v Rich & Ors [2003] NSWSC 1127
HEARING DATE(S):	21 November 2003
JUDGMENT DATE:	3 December 2003
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Bergin J
DECISION:	Application for concurrent hearings dismissed. Application for stay of Insurance Proceedings dismissed. Application for stay of Bonus proceedings dismissed.
CATCHWORDS:	[CONCURRENT HEARINGS] - Applications by CGU for concurrent hearings of civil proceedings with civil penalty proceedings in which there is some overlap of issues of fact and law - Amendment to pleadings removing allegations of offences under the Corporations Act relied upon as a material change to circumstances - [STAY APPLICATIONS] - Plaintiffs' applications to stay civil proceedings pending conclusion of civil penalty proceedings in which they are the defendants - Further application for stay of proceedings by some of the defendants in which the liquidator seeks remedies in relation to alleged bonus payments in the amount of $14 million. Court's approach - Application of guidelines in McMahon v Gould - Balancing of respective rights - Whether just and convenient to stay proceedings
LEGISLATION CITED:	Commercial Causes Act 1903 (NSW) Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Supreme Court Rules 1970 (NSW)
CASES CITED:	Australian Securities and Investments Commission v Drury Management Pty Limited [2003] QSC 246 Australian Securities and Investments Commission v John David Rich & Ors; One.Tel Limited (In Liq) v John David Rich & Ors; John Huyshe Greaves v CGU Insurance Limited; John David Rich v CGU Insurance Limited and Mark Silbermann v CGU Insurance Limited (Unreported, NSWSC, Austin J, 24 June 2003) Australian Securities and Investments Commission v Vines [2003] NSWSC 995 Australian Securities Commission v Kavanagh (1994) 13 ACSR 573 Beecee Group Limited v Barton & Ors (1985) 5 ACLR 33 Briginshaw v Briginshaw (1938) 60 CLR 336 Halabi v Westpac Banking Corporation (1989) 17 NSWLR 26 J Bollinger SA v Goldwell Limited [1971] RPC 412 McMahon v Gould (1982) 7 ACLR 202 MLC Life Limited v Abberwood Pty Limited (Receiver and Manager Appointed) (Unreported, NSWSC, Rogers CJ Comm D, 5 April 1989) Olbers Co Limited v Commonwealth (No 2) [2003] FCA 177 Philippine Airlines v Goldair (Aust) Pty Limited [1990] VR 385 R v Institute of Chartered Accountants; Ex Parte Brindell [1994] BCC 297 Rich & Silbermann v ASIC [2003] NSWCA 342 Rochfort v John Fairfax and Sons Limited [1972] 1 NSWLR 16 Silbermann & Ors v CGU Insurance Limited (2003) 47 ACSR 21 Sogelease Australia Limited v Griffin [2002] NSWSC 1066 State of Western Australia v Bond Corporation Holdings Pty Limited & Ors (1992) 37 FCR 150 Tringali v Stewardson Stubbs and Colletts Limited (1966) 66 SR (NSW) 335 Yuill v Spedley Securities Limited (In Liq) & Ors (1992) 8 ACSR 272
PARTIES :	Rodney Stephen Adler (Fifth Defendant in 50207/02) Australian Securities and Investments Commission (Respondent to Notices of Motion in 50141/01, 50096/02 and 50150/02) CGU Insurance Limited (Defendant in 50141/01, 50150/02 and 50096/02) John Huyshe Greaves (Plaintiff in 50096/02; Sixth Defendant in 50207/02) Lifecell Pty Limited (Second Defendant in 50207/02) One.Tel Limited (In Liquidation) (Plaintiff in 50207/02) John David Rich (Plaintiff in 50150/02; First Defendant in 50207/02) Mark Silbermann (Plaintiff in 50141/01)
FILE NUMBER(S):	SC 50141/01; 50150/02; 50096/02; 50207/02
COUNSEL:	RB Macfarlan QC and JPA Durack (Australian Securities and Investments Commission) MJ Slattery QC, RA Dick and S Wells (One.Tel Limited (In Liq)) BW Walker SC, DL Williams SC and MJ Steele (Silbermann, Rich and Lifecell Pty Limited) AW Street SC and EG Romaniuk (CGU Insurance Limited) JB Simpkins SC and NJ Kidd (Greaves) FG Lever SC (Rodney Adler)
SOLICITORS:	Australian Securities and Investments Commission (Respondent to Notices of Motion in 50141/01, 50150/02 and 50096/02) Rodney Stephen Adler (Swaab Attorneys) CGU Insurance Limited (Colin Biggers & Paisley) John Huyshe Greaves (Watson Mangioni) Lifecell Pty Limited (Joanne Kelly Solicitors) One.Tel Limited (In Liq) (Kemp Strang) John David Rich (Joanne Kelly Solicitors) Mark Silbermann (Joanne Kelly Solicitors)

- 13 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

3 DECEMBER 2003

50141/01 MARK SILBERMANN v CGU INSURANCE LIMITED;
50096/02 JOHN HUYSHE GREAVES v CGU INSURANCE LIMITED;
50150/02 JOHN DAVID RICH v CGU INSURANCE LIMITED;
50207/02 ONE.TEL LIMITED (IN LIQ) v RICH & ORS

JUDGMENT

1 The defendant, CGU Insurance Limited (CGU), in proceedings 50141/01, 50096/02 and 50150/02 (the Insurance Proceedings) in which the plaintiffs, to whom I shall refer as “the directors”, are Mark Silbermann (Silbermann), John Huyshe Greaves (Greaves) and John David Rich (Rich) respectively, applies by Notices of Motion for orders that the Insurance Proceedings be heard concurrently with proceedings 5934/01 in which ASIC is the plaintiff and the directors are the defendants (the ASIC proceedings).

2 This is the second set of applications brought by CGU for such orders, the first having been dismissed on 3 September 2003: Silbermann & Ors v CGU Insurance Limited (2003) 47 ACSR 21. There is in that judgment an analysis of the issues in the Insurance Proceedings and the ASIC Proceedings and I will not repeat it here. I shall however return to that judgment in due course and refer to those applications as “the first application”.

3 On this occasion I also heard Motions by the directors for a stay of the Insurance Proceedings and Motions by Rich, Lifecell Pty Limited (Lifecell) and Greaves for a stay of proceedings 50207/02 in which the plaintiff is One.Tel Limited (In Liq) (OTL) and the defendants are Rich, Lifecell, Bradley William Keeling, Bradley Keeling Management Pty Limited (BKM Pty Ltd), Rodney Stephen Adler and Greaves (the Bonus proceedings).

4 These Motions were heard on 21 November 2003 when Mr AW Street SC leading Mr EG Romaniuk appeared for CGU; Mr BW Walker SC leading Mr DL Williams SC and Mr MJ Steele appeared for Silbermann, Rich and Lifecell; Mr JB Simpkins SC leading Mr NJ Kidd appeared for Greaves; Mr MJ Slattery QC leading Mr RA Dick and Mr S Wells appeared for OTL; Mr FG Lever SC appeared for Mr Rodney Adler and Mr RB Macfarlan QC leading Mr JPA Durack appeared for ASIC.

CGU Concurrent Hearing Applications

5 In my reasons for dismissing the first application, I said:

44. On the evidence before me, I am not satisfied that I should exercise my discretion in the defendant’s favour. Although it appears there are some common questions of fact and law in both proceedings and there are some transactions common to both proceedings which may give rise to respective rights to relief, the plethora of other issues and facts which are not common and the very different criminal misconduct/s184 offence claims made in the Insurance proceedings satisfy me that at this stage it is not desirable to make an order for concurrent hearings.

6 CGU placed reliance on the use of the words “at this stage” to emphasise the interlocutory nature of the decision and claim an entitlement to bring these applications on the basis that there have been material changes since the first application.

7 Mr Street SC submitted that the Further Amended Points of Defence filed by CGU on 3 October 2003 have abandoned the criminal intent claim and the claim referred to as the “s 184 offence part of the proceedings”. It was submitted that the presence of that claim played a significant part in my reasons for refusing the first application. It was also submitted that the amendment amounted to a material change such that would enable CGU to bring the Motions and also removed any impediment to the Insurance Proceedings and the ASIC proceedings being heard concurrently.

8 The second material change referred to by Mr Street was that, unlike in the first application in respect of which there was a paucity of evidence (see par [36]), there is before me on this occasion a large amount of evidence demonstrating an overlap between the evidence to be called in the ASIC proceedings and in the Insurance Proceedings. In this regard, reliance was placed upon the affidavits in the ASIC proceedings of James Douglas Packer sworn 18 June 2002 and that of Lachlan Keith Murdoch sworn 24 May 2002; documents entitled “Outline of Evidence to Be Adduced on Subpoena ad test” to Messrs Packer and Murdoch; a report, apparently undated, of Mr AG Weeks, a partner in the forensic practice of Deloitte Touche Tohmatsu, dealing with inter alia, the topic of “financial information withheld from the Board” and “change in accounting policy-deferred expenditure”; and a further report dated 31 May 2002 of Paul Carter, in the ASIC proceedings, dealing with the topic “actual financial position of the group”.

9 Although Mr Street submitted that it was unnecessary for me to read this material, he submitted that a review of the comparative table provided by him demonstrated that it could not now be said that there is a “paucity of evidence” and it proved that there was a large overlap in the issues and the evidence to be called in both the Insurance Proceedings and the ASIC proceedings; for instance, Mr Street claimed that the Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) issues were the same in both proceedings. It was submitted that the Court is in a much better position than it was in the first application to make the assessment of the nature and extent of the overlap.

10 A further material change alleged by Mr Street is that the evidence called on this application establishes that there has been a total failure by the directors to prosecute the Insurance Proceedings in contravention of their obligations under the Supreme Court Rules 1970 (NSW) (the Rules) and the spirit and letter of Practice Note 100. It was submitted that at the time of the first application, CGU was under the misapprehension that the directors were prosecuting the Insurance Proceedings appropriately. Although the detail upon which such apprehension was based is not in evidence, it is the case that at the first application Mr Simpkins SC indicated that his client would probably bring an application for a stay of the Insurance Proceedings.

11 Mr Macfarlan QC, for ASIC, once again opposed the application for concurrent hearings. A matter of some relevance, although not decisive, is the fact that Austin J has fixed the ASIC proceedings for hearing for three months commencing in July 2004. Mr Macfarlan once again relied upon the fact that the directors in the Insurance Proceedings would have to deal with a far broader field of allegations than those brought against them by ASIC if an order for concurrent hearings is made.

12 Mr Macfarlan also emphasised again the need for procedural fairness to be afforded to the directors in the ASIC proceedings and highlighted the need for the integrity of those proceedings to be kept intact. He referred by way of example to the issues in the Insurance Proceedings, which are not issues in the ASIC proceedings, in which it is alleged that the 1999 Annual Report contained false statements as to governance practices and procedures, the profitability of OTL, EBITDA, assets and officer’s remuneration. He submitted that this was a virtual minefield of issues that if heard at the same time as the ASIC proceedings, would not only extend the hearing time but also expose the fairness of the ASIC proceedings to possible compromise.

13 Mr Walker SC adopted the submissions of Mr Macfarlan on this aspect of the applications and submitted that it was erroneous to describe, as Mr Street had, the claims in relation to EBITDA in the two sets of proceedings as the “same”. He submitted that the different accounting periods meant that there would be different issues in each of the proceedings. He relied upon the following passage of my judgment in relation to the first application:

35. Prima facie a very large part of the Insurance proceedings relating to the alleged conduct of the directors in 1997, 1998, 1999 and in the earlier part of 2000 will not need to be the subject of detailed evidence in the ASIC proceedings. Although Mr Gee QC submitted that it is probable that in the ASIC proceedings there will be evidence in relation to the directors’ conduct at times earlier than the period January 2001 to May 2001, it is at this stage only speculation as to the extent of such evidence and the extent of any overlap with the evidence to be called by the defendant in support of the defence to the avoidance of the contract.

14 Mr Walker submitted that the observations made in that paragraph are pertinent to this application. It is true that on the evidence called in this application it appears that in the ASIC proceedings the evidence extends back to mid-2000, although it would seem the earliest relevant date is October 2000. In any event, it is clear from the evidence called on this occasion that there remains a very large part of the Insurance Proceedings relating to the directors’ conduct in 1997, 1998, 1999 and the earlier part of 2000 that will not need to be the subject of detailed evidence in the ASIC proceedings.

15 Mr Walker also submitted that the fresh circumstances alleged to exist are more apparent than real. In particular, he referred to Mr Street’s submission that the criminal element of the proceedings and the s184 offence part of the proceedings had now been removed by the amendments to the defences. In this regard, he relied upon paragraph [49] of the Further Amended Points of Defence to the claim brought by Rich filed by CGU in the Insurance Proceedings on 3 October 2003 which states:

Further and in the alternative, the Defendant says that it was an express term, and condition that the said Policy does not provide any indemnity against any claim made against any director or officer brought about by, contributed to by, or which involves, the dishonesty or fraudulent act or omission of such director.

16 Allegations of dishonesty are also made in paragraph 62 of this Amended Defence. It was submitted that it is reasonable to assume that in the Insurance Proceedings counsel for CGU will cross-examine to adduce evidence calculated to demonstrate that the directors engaged in the alleged conduct and that they did so dishonestly and for fraudulent purposes. It was submitted that such cross-examination in the ASIC proceedings would only go to credit and that the application of the rules relating to the adducing of evidence on issues of credit, the exercise of the discretion under s135 of the Evidence Act 1995 (NSW) and the application of the principles in Briginshaw v Briginshaw (1938) 60 CLR 336 are likely to be fraught with such difficulty as to compromise the integrity of the ASIC proceedings if an order for concurrent proceedings is made.

17 Another interesting development is the recent decision of Austin J in ASIC v Vines [2003] NSWSC 995 in respect of the admissibility of evidence in proceedings against multiple defendants. In that case, one of the defendants objected to evidence being admitted against him on the basis that it was not relevant to ASIC’s case against him. Austin J said:

22. It is notable that both s 55 and s 56 address the question whether evidence is admissible in a proceeding . Where a plaintiff seeks to make out separate cases against several defendants in a single proceeding, the question to which the Evidence Act provides an answer is whether evidence is admissible in the proceeding, not whether evidence is admissible to prove the plaintiff’s case against a particular defendant. The answer it gives is that if the evidence is relevant, it is admissible. Once it is admitted, it is evidence in the proceeding, and therefore available to be used for any purpose, unless one of the exclusionary rules of the Act or any surviving general law exclusionary rule applies, or the Court makes use of its statutory discretions to exclude admissible evidence or limit its use.

18 After referring to the Court’s powers to limit the use of evidence under s 136 of the Evidence Act 1995 and observing that no additional consideration arose out of the fact that the proceedings before him were civil penalty proceedings, Austin J said at par 25:

… Having listened to the opening and having heard senior counsel for plaintiff explain the relevance of the document presently under review, counsel for the defendants are in quite a good position to assess whether there is any risk that circumstances might change in a manner that would alter the relevance of the document, and thereby require some different forensic response.

19 If such an approach were adopted so that defendants’ representatives were required to keep a watchful eye on every forensic step taken in the proceedings to assess whether a document that had been admitted on such a basis subsequently became relevant, the burden on trial counsel would grow exponentially. If this approach were to be adopted by the trial judge in concurrent hearings of the ASIC proceedings and the Insurance Proceedings, with the presence of allegations of fraud and dishonesty in one but not the other proceeding, the process could become even more exposed to compromise.

20 Mr Simpkins SC also embraced the submissions made by Mr Macfarlan QC and submitted that there were no material changes between the first application and this application as all matters that have been relied upon by CGU were in the contemplation of the parties at the time of the first application. Mr Simpkins also emphasised that his client is in a different position to that of Rich and Silbermann. It is not necessary to deal any further with the submissions made by Mr Simpkins because I have reached the conclusion that even if the matters relied upon by Mr Street amount to a material change which justify me hearing the second application, those circumstances do not dissuade me from the conclusion that it would be unfair to the directors in a civil penalty case to have to meet allegations of dishonest and fraudulent conduct where ASIC is not alleging such conduct. Even though the ASIC proceedings are protective and not punitive: Rich and Silbermann v ASIC [2003] NSWCA 342 (per Spigelman CJ at 114-116, Ipp JA agreeing, McColl JA dissenting at 376-388), there is still the necessity to ensure that the procedure is fair.

21 Even if the dishonest and fraudulent conduct allegations were not present, there are still very large areas of evidence in which there is no overlap between the ASIC proceedings and the Insurance Proceedings, referred to in paragraph [35] of my judgment in respect of the first application. However I am now in a better position than I was on the first occasion to make the assessment, not merely prima facie as I said on that occasion. On this occasion Ms Joanne Kelly, solicitor for Silbermann and Rich was cross-examined about the overlap of issues and the evidentiary overlap between the two sets of proceedings. That evidence included the following:

Q: When you turn to paragraph 52 would you agree with me that if so directed your clients would be perfectly capable of responding in affidavit evidence if they sought to do so to the material that has been put on in the insurance proceedings, correct?
A: No because I mean they go back, CGU proceedings go back through a period of time well before July 2000.
Q: You know, don’t you, that there are issues relating to the alleged fraudulent nondisclosure or misrepresentation in respect of proposals that were put before the defendant in the insurance proceedings, correct?

A: Yes.
Q: You will agree with me, won’t you, that they are a small compass in terms of factual issues raised by the truth or falsity of matters referred to in the proposals?
A: I wouldn’t agree it is a small matter.
Q: You know, don’t you, that there are issues raised in relation to the truth or falsity of information or the disclosure of information in relation to the proposals that were advanced by your client from 1997 and in 1998, 1999 and 2000, correct?
A: Yes.
Q: You will agree with me, won’t you, the facts raised in relation to those allegations of non-disclosure or falsity are in a small factual compass, do you agree with that?
A: I don’t know what you mean by small, Mr Street.
…
Q: It is your understanding that in the ASIC proceedings part of the information raised in the particulars to the ASIC pleadings are complaints relating to the falsity of certain information relating to the EBITDA in certain accounts, correct?
A: Yes.
Q It is your understanding that in the insurance proceedings there are issues raised relating to the falsity of the EBITDA in certain records of Onetel, correct?
A: In a different, in different time periods.

(tr. 14)

…

Q: In paragraph 119 of your affidavit you refer to the possibility of needing to retain separate legal teams?
A: That is right.
Q: The reality is you have had the same legal team involved in both the ASIC proceedings and the insurance proceedings to date, correct?
A: That’s correct.
Q: And if an order was made for a concurrent hearing it would be the same legal team appearing on behalf of your clients, correct?
A: I would anticipate it would be a significantly expanded legal team.
Q: So that, you put on no evidence, have you, as to suggesting any limit in relation to the funds available to your client to so expand the legal team, correct?
A: That’s correct.
Q: And would you agree with me that there really is no basis for your suggestion that it would be oppressive and prejudicial if your client had to retain further lawyers for the purposes of a concurrent hearing?
A: I don’t agree with that.

Q: What is the oppression that you say would flow from having to expand the legal team?
A: Given the size and complexity of each of the proceedings Mr Street, the time involved, myself in management and supervision of a legal team possibly twice the size of the team that we currently have together with the time required of each of my clients, I consider that to be oppressive.

(tr. 16)

22 Although Mr Street submitted that there was no necessity for me to read the evidence that was tendered by CGU on the applications for concurrent hearings, the directors have relied upon that evidence to demonstrate the different issues that will arise in the two sets of proceedings. Reference was made to the Outline of Evidence served on the directors on 26 September 2003 and it was submitted that there had been rolled up into a single paragraph a farrago of substantive topics. That paragraph reads:

Knowledge of or assumption as to the truth of matters in the 1999 Annual Report as to corporate governance practices, Finance and Audit Committee, practice thereof, director’s remuneration review, April 1999 Amendments [to Mr Rich and Mr Keeling’s remuneration arrangements], currency and amount of payments, market capitalization reduced from $3,000,000 to $2,400,000 requirement for sustainability, increase bonus amount against EBITDA, June 1999 remuneration committee resolution as to payments, performance against goals, comparative information and independent advice, positive increases in EBITDA, current assets, cash, net assets, April and June payments/liability to Mr Rich, Mr Keeling, Lifecell Pty Ltd and Bradley Keeling Management Pty Ltd and withheld financial information and the 10 August 1999 Remuneration Committee minutes and August payments as well as disclosure made at board meeting 24 March 2000. Knowledge or assumption as to 31 December 1999 interim accounts as to change in accounting policy, customer acquisition costs, current assets, net assets and change as a result of Remuneration Committee minutes 27 April 2000 and 28 June 2000 and Board minutes 26 May 2000.

23 Whatever all that might ultimately mean or whether it will translate into admissible evidence is a question for another day, save to say that on this occasion, whatever it means it does not overlap with the ASIC proceedings.

24 Reference was also made to Mr Weeks’ affidavit, which contains a one hundred and twenty page report and five lever arch folders of exhibits. That report deals largely with issues relating to the financial information in the 1999 Annual Report for the year ending 30 June 1999 and the conduct of the directors and Remuneration Committee of OTL in relation to bonus arrangements for Rich and Mr Keeling. It is submitted that none of the issues in this report arise in the ASIC proceedings and that responding to that evidence would involve both expert and lay evidence dealing with the financial position, corporate governance practices and accounting and financial systems at OTL from at least 1998. This was contrasted with the position in the ASIC proceedings in which the expert accounting evidence filed, being two reports of Mr Carter comprising over two hundred page and sixteen volumes of appendices, deals almost exclusively with the period 1 January to 17 May 2001.

25 It was further submitted that when one analyses the tables in Mr Weeks’ report, being tables 4 to 7, 15 and 16, it becomes obvious that the scope of the inquiry in the Insurance Proceedings ranges over a much wider field than that to be canvassed in the ASIC proceedings. Reference was also made to an affidavit of Mr Weeks of 25 June 2003 that apparently deals with allegations relating to the remuneration arrangements of Rich and Mr Keeling in 1998 and 1999. Those allegations include a knowing lack of corporate governance and recklessness by Mr Adler and/or Greaves. It is submitted that there is no overlap between this evidence and any evidence in the ASIC proceedings.

26 The directors submitted that when this additional evidence now before the Court is analysed it is clear beyond doubt that the extent of overlap between the two sets of proceedings is “modest”. It was further submitted that apart from the finding in the judgment in respect of the first application of the existence of a “plethora of other issues and facts”, concurrent hearings would add very considerably to the length of the hearing of the ASIC proceedings. The evidence of Nicholas Anthony Di Girolamo, CGU’s solicitor, confirms that the Insurance proceedings will involve three months preparation and the hearing will probably take two to three months.

27 It was submitted on behalf of the directors that it is clear that the factual issues and evidence in the Insurance Proceedings travel very far beyond those in the ASIC proceedings. The following differences were highlighted:

· The allegations in the ASIC proceedings are confined to the financial state of affairs and conduct of the directors in the period between 1 January and 17 May 2001; whereas

· The allegations in the Insurance Proceedings cover not merely the financial state of affairs and conduct of directors in that period but also:

· Whether or not as at the date of the 1999 Annual Report, OTL had in place appropriate corporate governance procedures to monitor compliance with statutory responsibilities and accounting and financial control procedures;
· Whether or not, as at that date, certain financial information was being “withheld” from the OTL Board;
· Whether the 1999 Annual Report misrepresented that there was a positive increase in EBITDA in that year;
· The financial position of OTL in particular respects (including EBITDA, current assets and net assets) as at 30 June 1999;
· Whether or not statements made in the 1999 Annual Report as to director’s remuneration were false;
· Whether or not, if any of the misrepresentations were made in the 1999 Annual Report, the directors knew them to be false or were recklessly indifferent as to their truth;
· Whether the putting in place and amendment of certain remuneration arrangements for Rich and Mr Keeling in 1998 and 1999 constituted a knowing lack of corporate governance and recklessness by Mr Adler and/or Greaves; and
· Whether OTL traded whilst insolvent in the period December 2000 to May 2001.

28 It was submitted that even where there is some temporal overlap between the two sets of proceedings, the allegations made are not identical. For instance, the Insurance Proceedings make allegations of insolvent trading between December 2000 and May 2001, whereas the ASIC proceedings make no such allegation and are confined to a period beginning in January 2001. The Insurance Proceedings allege that the respondents provided false information to the Board and no such allegation is made in ASIC proceedings. The latter proceedings are confined to allegations of information being withheld from the Board. The Insurance Proceedings allege contraventions of s181 of the Act and no such allegations are made in the ASIC proceedings.

29 A further matter, about which submissions were not made, is the exposure of the directors to cross-examination by CGU that may tend to prove that they are liable to a civil penalty. If the proceedings are heard at the same time but are not consolidated, it would mean that objection may be taken by the directors to giving evidence that may tend to prove liability to a civil penalty in the ASIC proceedings and/or liability to a civil penalty in any other proceedings. This is a complexity with which the Court could deal, but it is a complexity that adds to the dangers to which Mr Macfarlan QC referred of exposing the integrity of the ASIC proceedings to compromise.

30 Irrespective of any allegations of dishonest and fraudulent conduct, the large number of issues and large areas of evidence in which there is no overlap; the fact that the ASIC proceedings have been listed for hearing; and the adverse impact that an order for concurrent hearings would have on both the length of the trial and the integrity of the ASIC proceedings lead me to the conclusion that an order for concurrent hearing should not be made. The presence of the allegations of dishonest and fraudulent conduct is a further reason for refusing the applications.

31 The Motions brought by CGU for concurrent hearings are dismissed.

Application for Stay of the Insurance Proceedings

32 Rich and Silbermann relied upon the evidence of Joanne Kelly, solicitor, in support of the applications for a stay of the Insurance Proceedings and Greaves relied upon the evidence of Chris Kintis, solicitor. Both Ms Kelly and Mr Kintis were cross-examined by Mr Street, the former over objection by Mr Walker.

33 In a very detailed affidavit, Ms Kelly described the nature of the various proceedings in which her clients are involved and the steps taken by her clients in those proceedings. In the ASIC proceedings, orders are sought by ASIC pursuant to s1371H of the Act that the directors pay compensation to OTL in the amount of $93 million. Ms Kelly’s unchallenged evidence was that her clients would have to spend upwards of 300 hours solely to finalise their witness statements, including conferences with counsel. That estimate did not include other time required to be spent by and with each of the clients in preparing the matter for hearing.

34 Rich and Silbermann have retained Mr Walker SC, Mr Williams SC, Mr M Steele and Mr S Goodman as counsel to appear on their behalf at the hearing. ASIC has indicated that it is considering the electronic management of the trial and, to the extent that the hearing proceeds on that basis, there will be the need for dialogue and consultation with persons with expertise in electronic case management. In addition to Ms Kelly there are two other solicitors as well as paralegals retained by Rich and Silbermann to assist in the preparation of the ASIC proceedings.

35 Ms Kelly’s evidence continued:

119. In circumstances where each of the ASIC Proceedings, CGU Proceedings and the Bonus Proceedings continue to run in parallel to one another, it is my view that in order to comply with directions made in each of the proceedings, the Defendants would be required to have separate legal teams retained in connection with the preparation of each matter.
120. Both myself and counsel retained by the Defendants have been involved in each of the proceedings and therefore have acquired an intimate knowledge of the facts and issues in each. It would in my view be oppressive and prejudicial to the Defendants if they were required to engage other lawyers without the knowledge and background in order to conduct the CGU and the Bonus Proceedings.
121. It would also place an extraordinary burden on the Defendants individually if they were to be constantly diverted from one set of proceedings to another in order to prepare the matters for hearing and to be in a position to provide instructions.
122. The requirement to deal with each of the proceedings has to date resulted in a considerable diversion of resources away from the preparation of the ASIC Proceedings which will continue unless the CGU and Bonus Proceedings are stayed pending the conclusion of the ASIC hearing.

36 Mr Kintis relied on some confidential evidence in relation to Greaves’ financial position. In that regard, he estimated the costs that will be incurred in preparing the ASIC proceedings, upon which he was not challenged, would be in the range of $1.5 million to $1.7 million. He also gave evidence that such estimate was conservative. Mr Kintis gave the following reasons why a stay of the Insurance Proceedings ought be granted:

(a) since the CGU proceedings was commenced, CGU has added complexity to the dispute with Mr. Greaves, by adding to its original grounds for declining indemnity;
(b) the consequence of the added complexity is that the CGU proceeding is likely to be as long, or longer than the ASIC proceeding, whose past and future costs Mr. Greaves originally sought indemnity for;
(c) the ASIC proceeding has been set down for hearing for 3 months on 5 July 2004;
(d) Mr. Greaves has net assets of $700,000 to $750,000;
(e) if the ASIC proceeding was defended without regard to Mr. Greaves’ net asset position, the legal costs and disbursements would be likely to exceed $1.5 million;
(f) accordingly, to contain legal costs and disbursements it will be necessary, inter alia, for Mr. Greaves to have a very substantial role in the preparation of his defence of the ASIC proceeding (and in the conduct of those proceedings) far beyond that which might usually be expected, probably involving almost daily work over a number of months;
(g) if Mr. Greaves was required to fund the preparation and the conduct of the CGU proceeding before July 2004 he would be likely to be deprived of any personal ability to fund a defence of the ASIC proceeding and hence retain counsel unless the CGU proceeding was resolved in his favour without appeal or stay sufficiently in advance of the July trial date to enable the retainer of experienced and sufficiently senior and junior Counsel to appear and to afford adequate time for preparation by them;
(h) Mr. West QC and Mr. Jones have been retained by Mr. Greaves to act for him in the ASIC proceedings since February 2002;

(i) if Mr. Greaves was required to litigate the CGU proceeding first and was successful, and was forced to retain alternative counsel for the ASIC proceedings, there would be considerable wasted expenditure because of duplicated effort (given the substantial involvement to date of Mr. West QC and Mr. Jones) which would increase the overall costs of Mr. Greaves’ defence;
(j) it is not possible to retain Mr. West QC and Mr. Jones to appear at the ASIC trial for 3 months if Mr. Greaves is required to apply his net assets in the further preparation of the CGU proceeding and a hearing of them and if they are not retained now there is a likelihood that they will not be able to accept a brief to appear at the ASIC trial after the resolution of the CGU proceeding;
(k) if Mr. Greaves was unsuccessful in the CGU proceeding, he would be deprived of any real opportunity to defend the ASIC proceeding;
(l) if Mr. Greaves was deprived of such an opportunity he might suffer not only the compensation order referred to in paragraph 51 above, but also a banning order pursuant to sections 206C and 206E of the Corporations Act which would effect his ability to earn income and damage his professional reputation;
(m) if Mr. Greaves was successful in his defence of the ASIC proceeding, he could expect a favourable order as to costs;
(n) success and a favourable order as to costs in the ASIC proceeding would be likely to reduce the length of the CGU proceeding;
(o) if Mr. Greaves was unsuccessful in his defence of the ASIC proceeding, he would lack the financial resources to prosecute the CGU proceeding and to defend the Liquidator’s proceeding;
(p) Mr. Greaves has retained Mr. John West QC in both the ASIC proceeding and the Liquidator’s proceeding. I am informed by Mr. West that he is unable to appear on a continuing basis in a hearing of the estimated length of the Liquidator’s proceeding if it is set down for hearing during the course of this year or in the first half of next year. Whilst Mr. West has the time to commit to the preparation of the ASIC proceeding for trial, he does not have the additional time to concurrently prepare the Liquidator’s proceeding for hearing. In such circumstances, it would be necessary for Mr. Greaves to retain new Senior Counsel, which having regard to his financial position, would further prejudice his ability to properly prepare the ASIC proceeding for trial;
(q) Mr. Greaves has retained Mr. Jonathan Simpkins SC in the CGU proceeding. I am informed by Mr. Simpkins that he is unable to attend to the preparation of the CGU proceeding for hearing until the second week of March 2004;
(r) further, if Mr. Greaves is able to substantially recoup the costs expended in the ASIC proceeding, he would be in a much better position to adequately fund the Liquidator’s proceeding;
(s) if the CGU proceeding was listed for hearing before the ASIC proceeding and an order made that Mr. Greaves put on his evidence before 15 March 2004, Mr. Greaves may be prejudiced in his conduct of the ASIC proceeding, particularly if the appeal in respect of that order, by Messrs Rich and Silbermann (the first and fourth defendant’s (sic) in the ASIC proceeding) is successful.

37 Mr Walker submitted that although the orders sought in the Notice of Motion used the term “stay”, it should be understood that what was being sought by his clients was a “sequencing” rather than a stay of the proceedings. It was submitted that the directors had commenced the Insurance Proceedings in what he described as the rather “naive” hope of having those proceedings determined prior to the ASIC proceedings to enable the directors to fund their defences to the ASIC proceedings. Once CGU defended the proceedings with allegations that the directors acted with criminal intent and were guilty of criminal misconduct combined with an application for concurrent hearings, a prompt hearing prior to the ASIC proceedings was rendered not only inappropriate but also impossible. It is submitted that the same position pertains notwithstanding the abandonment of those allegations because the allegations of fraudulent and dishonest conduct remain.

38 I have determined that the Insurance Proceedings should not be heard concurrently with the ASIC proceedings for the reasons given above and in my judgment in respect of the first application. The question now is whether it is just, quick and cheap or just and convenient to stay the Insurance Proceedings until the conclusion of the ASIC proceedings. Although the Motion is clearly for a stay of the proceedings I will also consider Mr Walker’s submissions in relation to the “sequencing” of the proceedings in which the question is whether it is just, quick and cheap that the sequence of the proceedings is such that the ASIC proceedings are heard before the Insurance Proceedings.

39 Since the matter was argued, the judgment on the appeal brought by Rich and Silbermann to which reference was made at paragraph [32] of my judgment in respect of the first application has been delivered: Rich and Silbermann v The Australian Securities and Investments Commission [2003] NSWCA 342. One consequence of that judgment is that the heavy burden upon the directors to prepare their discovery and witness statements is confirmed.

40 In this application, reliance was placed upon what Austin J said in the ASIC proceedings: Australian Securities and Investments Commission v John David Rich & Ors; One.Tel Limited (in Liq) v John David Rich & Ors; John Huyshe Greaves v CGU Insurance Limited; John David Rich v CGU Insurance Limited and Mark Silbermann v CGU Insurance Limited (unreported, NSWSC, Austin J, 24 June 2003) at pars 17 and 19 respectively:

… There is at least a substantial risk, if the three proceedings are allowed to run in isolation from one another in the pre-trial phase, that they will be subjected to orders in one proceeding that will make it practically impossible for them to discharge their obligation in another proceeding.
…
… a specific issue that will arise at some stage is whether it would be justifiable for the Court to make orders to produce a sequencing of the hearings of the three proceedings. I do not say at this stage that such an outcome is obviously desirable. That matter will have to be considered if any application for some such order is made. My point is merely that there may a case, in the interests of justice and to avoid undue hardship to any party, for some sequencing of the hearings to be established by orders or directions of the Court.

41 Mr Street submitted that the application to stay the proceedings runs counter to the operation of the Commercial List and the ideals of the operation of the List instilled one hundred years ago by the introduction of the now-repealed Commercial Causes Act 1903 (NSW); that is, speedy resolution of commercial causes. There is absolutely no doubt that the Commercial List is, and is seen to be, a fast track in the litigation process to facilitate the speedy resolution of commercial causes. However that speedy resolution may be decelerated if fairness or justice dictates that outcome.

42 The Court has inherent jurisdiction to stay proceedings in the interests of justice: Tringali v Stewardson Stubbs & Colletts Ltd (1966) 66 SR (NSW) 335 at 344; Rochfort v John Fairfax & Sons Ltd [1972] 1 NSWLR 16 at 21. The discretion to stay proceedings will be exercised with justice and convenience in mind: J Bollinger SA v Goldwell Ltd [1971] RPC 412 at 424, and will include consideration of the impact on resources in circumstances where the outcome of the proceedings may have an impact on the parties’ capacity to continue to practice or work in their chosen profession or career: R v Institute of Chartered Accountants in England and Wales; Ex Parte Brindle [1994] BCC 297.

43 Analysis of the case law does not yield any case in which application has been made to stay civil proceedings whilst civil penalty proceedings continue. Much of the case law involves applications to stay civil proceedings pending the hearing of criminal proceedings: Beecee Group Ltd v Barton & Ors (1985) 5 ACLR 33; Halabi v Westpac Banking Corporation (1989) 17 NSWLR 26; Yuill v Spedley Securities Limited (In Liq) & Ors (1992) 8 ACSR 272; ASIC v Drury Management Pty Limited [2003] QSC 246; MLC Life Limited v Abberwood Pty Limited (Receiver and Manager Appointed) (unreported, NSWSC, Rogers CJ Comm D, 5 April 1989); State of Western Australia v Bond Corporation Holdings Pty Limited & Ors (1992) 37 FCR 150; Philippine Airlines v Goldair (Aust) Pty Limited [1990] VR 385; ASC v Kavanagh (1994) 13 ACSR 573; Sogelease Australia Limited v Griffin [2002] NSWSC 1066; Olbers Co Limited v Commonwealth (No 2) [2003] FCA 177.

44 Mr Street emphasised that the directors have brought these proceedings and they have chosen to bring them in the fast track Commercial List. It was submitted that CGU is entitled to rely upon what Wootten J said in McMahon v Gould (1982) 7 ACLR 202 at 206, that prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the Court, as if it applied to a defendant. It is submitted that the prejudice to CGU in not having the Insurance Proceedings continue is the loss of the entitlement to have its defence to the actions tried in the ordinary course of the procedure and business of the Court.

45 Mr Street also submitted that the directors, particularly Rich and Silbermann, have not suggested at any stage of the evidence before me that they are unable to finance an additional legal team to prepare and conduct the Insurance Proceedings. Ms Kelly’s evidence indicates that the size of the legal team would have to be doubled and there is no issue that the documentary material and the preparation of evidence in defending the ASIC proceedings will cast heavy burdens upon the directors.

46 In deciding whether the sequence of the proceedings should be such as to accommodate the ASIC proceedings being heard before the Insurance Proceedings, it is important to decide whether the prejudice to CGU is such as to require the directors to prosecute the Insurance Proceedings concurrently with the ASIC proceedings. Apart from the loss of an entitlement to have the defence to the action tried in the ordinary course, assuming that is an entitlement, there is no evidence demonstrating any prejudice to CGU if the Insurance Proceedings are heard after the ASIC proceedings. On the other hand, the prejudice to and burdens upon the directors to have a three month hearing in the Insurance Proceedings whilst preparing for and having to be present at the ASIC proceedings that are fixed for hearing in July 2004 for three months, in my view outweigh any prejudice to CGU.

47 Mr Street submitted that the appropriate course for the directors to take is to seek leave to discontinue the proceedings under Part 21 of the Rules. In this regard Mr Street submitted that CGU could then be protected by an appropriate costs order. Discontinuance does not seem to me to be the preferable course because it would mean that extra costs would be incurred in re-commencing the proceedings. That may be a choice the directors make in due course however, at the moment they make the claims under the policy but do not wish to litigate them prior to the hearing of the ASIC proceedings.

48 Although there is a date fixed for the hearing of the ASIC proceedings, the vagaries of litigation are such that the hearing date might be vacated. If that occurs, CGU might press for a hearing date and consideration will have to be given to changed circumstances if that occurs.

49 The indulgence sought by the directors is to case manage the Insurance Proceedings in such a manner that they will be heard after the ASIC proceedings. It has to be the case that in circumstances where fairness and justice dictates, the Court has power to and should exercise its discretion in favour of an adjustment to the usual way in which proceedings in the List are case managed. CGU has not called any evidence of real prejudice to be suffered by the adoption of this course and I am satisfied on balance that the just, quick, convenient and cheap course is to allow the Insurance Proceedings to be heard after the ASIC proceedings, subject to the date of the ASIC proceedings remaining secure. However I am also satisfied that interlocutory steps should continue to enable the Insurance Proceedings to be heard promptly after the ASIC proceedings or possibly at some other time if for any reason the hearing date for the ASIC proceedings is vacated.

50 I dismiss the applications for a stay of the Insurance Proceedings. I will give directions after hearing further submissions from the parties in respect of the preparation of the Insurance Proceedings to accommodate the interests of the directors whilst they are preparing for the ASIC proceedings. The Insurance Proceedings are listed for directions on 12 December 2003 and, if the parties are unable to agree on a costs order, I will hear argument as to the costs of this application and the application for concurrent hearings.

Applications to Stay the Bonus Proceedings

51 The Bonus proceedings were commenced in December 2002 after OTL had gone into liquidation. OTL seeks to recover from the defendants, including Rich, Lifecell and Greaves, an amount (approximating $14 million) equal to the total payments by OTL of certain alleged “over-achievement” bonuses paid in July and August 1999 and February 2000. It is alleged that those payments were made to Rich and Lifecell and other defendants, including Messrs Keeling and Adler and BKM Pty Ltd. An important feature to the Bonus proceedings is the presence of defendants other than the directors.

52 The plaintiff was originally to have filed and served its evidence by mid-June 2003. Some evidence was filed and served in September 2003 however more is expected, including a report from a remuneration expert. There are presently no directions in place for the filing of evidence by Rich, Lifecell or Greaves. Discovery and inspection are occurring and Ms Kelly estimated that at least forty hours would be required to complete the inspection of the documents discovered by OTL. The evidence before me establishes that the hearing of the Bonus proceedings will take two to three weeks, with approximately three months preparation. When the ASIC proceedings were set down for July 2004 such fixture was made with the consent of the directors on the basis that the Insurance Proceedings and the Bonus proceedings “will not be heard prior to the hearing date allocated” to the ASIC proceedings.

53 Mr Slattery QC submitted that what is being sought by OTL is that the interlocutory steps preparatory to trial continue. It is submitted that there is no proper basis for staying proceedings in which other parties are affected and in which the public interest dictates a continuation of the interlocutory regime. There are many creditors affected and the Bonus proceedings are aimed at recovery of approximately $14 million which, if successful, will be to the benefit of the creditors: McMahon v Gould at 209 and MLC Life Ltd v Abberwood Pty Limited (Receiver and Manager Appointed).

54 It is alleged that Rich and Lifecell received approximately half of the total amount of the bonus payments and that Greaves was the Chairman of the OTL Remuneration Committee and as such had a fundamental responsibility for the improper bonus payments. Mr Adler was the other member of the Committee. Greaves was also Chairman of the Board of Directors of OTL during the period during which the agreements pursuant to which the bonuses were paid were amended and during which the bonuses were actually paid.

55 OTL has now filed and served nearly all of the documentary and expert evidence it intends to rely upon in chief which comprises a tender bundle of documents together with experts’ reports. Those experts include Mr Carter, an accountant whose reports deal with the non-disclosure of the over-achievement bonuses and related matters in the 1999 OTL Annual Report, and Mr Costello, a remuneration consultant. It is also proposed to file an expert report from Mr Moss, a non-executive director and chairman of remuneration committees of various listed companies. It is envisaged that report will deal with industry practice in relation to the negotiation of executive remuneration and will be filed by 5 December 2003.

56 OTL submitted that the directors should not be able to take advantage of their inactivity in respect of their preparation in the ASIC proceedings. Heavy reliance was placed upon the fact that the directors have been in possession of Mr Carter’s first report in the ASIC proceedings for eighteen months and his second report for eleven months. To now complain that there is so much to do in the ASIC proceedings whilst they have had those reports for that period is, in OTL’s submission, both unfair to OTL and forensically flawed. Mr Slattery QC relied particularly upon French J’s decision in State of Western Australia v Bond Corporation Holdings Pty Limited & Ors, a case that involved an application to stay civil proceedings pending the hearing of criminal proceedings. French J was satisfied there was a significant overlap of issues between the proceedings and that there was a need to devote substantial time and resources to the preparation of the defence to the criminal proceedings. His Honour analysed what Wootten J said in McMahon v Gould and referred to the “guidelines” relevant to the exercise of the power to stay proceedings (at 171). The guidelines relevant to this application are:

1. Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the Court;
2. It is a grave matter to interfere with this entitlement by a stay of proceedings, which requires justification on proper grounds;
3. The burden is on the defendant in a civil action to show that it is just and convenient that the plaintiff’s ordinary rights should be interfered with;
4. The Court’s task is one of “the balancing of justice between the parties”, taking account of all relevant factors;
5. Each case must be judged on its own merits, and it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors;
6. The effect on the plaintiff must also be considered and weighed against the effect on the defendant in which regard it may be relevant to consider the nature of the defendant’s obligation to the plaintiff; and
7. In an appropriate case, the proceedings may be allowed to proceed to a certain stage, eg setting down for trial, and then stayed.

57 French J said at 172:

… the Court will ordinarily allow proceedings in which its jurisdiction has been properly invoked to progress to trial and determination unless the legitimate interests of the parties and the administration of justice require otherwise. The judgment to be made is essentially normative and requires a balancing of factors of the kind referred to in the judgment of Wootten J.

58 His Honour concluded that in that case the preferable course was to keep the interlocutory process going and to accommodate, “so far as is reasonable and practical” the special interests of the defendants (at 175). In accommodating those interests, his Honour took the view that he would not, at that stage, entertain orders for general discovery nor did he anticipate leave would be granted to interrogate until after the completion of the criminal proceedings. He also concluded that the programming of particular interlocutory steps would be dealt with on a case by case basis.

59 OTL submitted that there is no overlap between the Bonus proceedings and the ASIC proceedings and that the subject matter and time period of the ASIC proceedings and the Bonus proceedings are entirely different. It was submitted that in the ASIC proceedings the Court will be required to make findings as to the financial position of OTL in the period from about January 2001 to May 2001. In the Bonus proceedings, the Court will be concerned with amendments to consultancy agreements in August 1998 and April 1999 and with payment of over-achievement bonuses pursuant to the amended agreements in July 1999 and February 2000.

60 It was submitted that although the relief sought by ASIC involves the payment of substantial compensation by the directors and potential banning orders, those sanctions were not criminal in nature and the potential prejudice to the directors in having to defend the Bonus proceedings concurrently with the ASIC proceedings is much less substantial than if criminal proceedings were involved. I agree with that submission but at the same time it must be understood that the evidence demonstrates that there is a heavy burden on the directors in preparing their defences to the ASIC proceedings. There is no evidence that Rich or Lifecell are unable to fund the Bonus proceedings and although Greaves’ circumstances are apparently such that financial strain will occur if any of these cases proceed, they are not such as to persuade me that OTL’s entitlement to have the matter proceed in the ordinary course should be displaced.

61 The Bonus proceedings are different to the Insurance Proceedings and the ASIC proceedings. Mr Lever SC for Mr Adler, submitted that it would be a peculiar position for his client to have to fund and conduct the Bonus proceedings in the absence of other defendants because the proceedings were stayed against them. That submission has some force.

62 In balancing justice between the parties there is a requirement to have regard to the public interest in allowing the Bonus proceedings to go forward. It seems to me that the longer these proceedings are delayed the greater the potential detriment to OTL in its pursuit of its remedies against the defendants. In my view the relationship between the defendants in the Bonus proceedings and OTL was such that requires the ascertainment of the propriety of the $14 million over-achievement bonus payments as promptly as possible.

63 The unchallenged evidence called by the directors is that the proceedings will take two to three weeks. It seems to me that the legal teams presently retained by the directors are aware of all the issues in the Bonus proceedings. There may well be a point reached where accommodating the directors’ position will change the way in which interlocutory steps are ordered or alternatively, change the timing of the trial of the proceedings. However I am not satisfied that it is appropriate to stay the Bonus proceedings. The timing of the trial will be assessed in the light of the preparatory steps that will need to be taken.

64 I dismiss the applications for a stay and the Bonus proceedings are listed for directions on 12 December 2003. If the parties are unable to agree on a costs order in respect of this application I will hear argument on that occasion.

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Last Modified: 12/03/2003