NICOLS v GARDNER

[2005] FMCA 122

FEDERAL MAGISTRATES COURT OF AUSTRALIA

NICOLS v GARDNER & ANOR [2005] FMCA 122

BANKRUPTCY – Interlocutory hearing – applicant seeks to amend the original application in two ways: by adding additional parties and by seeking further orders.

Bankruptcy Act 1966, ss.120; 121; 122
Federal Magistrate Court Rules 2001, R. 703; 1102; 1102(2); 13.10

Rogers v The Commissioner of Taxation (1998) FCA 1296
Darcy v Medtel Pty Limited Number 3 (2004) FCA 807
Weldon v Neal (1887) 19 QBD 394
McGee v Yeomans (1977) 1 NSWLR 273
Australian Building Industries Pty Ltd v Stramit Corporation Limited (1977) FCA 1318
Linden v The Commonwealth of Australia (No.2) 136 ALR 251

Applicant: STEVE NICOLS

First Respondent: CHARLES ANTHONY LESLIE GARDNER

Second Respondent: SHAREN GARDNER

File No: SYG 276 of 2004

Delivered on: 25 January 2005

Delivered at: Sydney

Hearing date: 25 January 2005

Judgment of: Scarlett FM

REPRESENTATION

Solicitors for the Applicant: Koffels Solicitors & Barristers

Counsel for the Respondent: Ms Glover

Solicitors for the Respondent: Rod J Barnett & Associates

ORDERS

1. Leave is granted to the applicant to file an amended application in the form annexed to the application filed on 18 January 2005 and marked with the letter B.

2. That the amended application have effect from the date of commencement of these proceedings.

3. The Respondent is to file and serve a response to the amended application by 4.00pm on 15 February 2005.

4. The Respondent’s are to file and serve further affidavit material stating the facts upon which they seek to rely by 4.00pm 29 April 2005.

5. The application is adjourned to Tuesday 3 May 2005 for further directions at 10.15am.

6. The applicant is to pay the Respondent’s costs up to today and for part of today’s proceedings fixed in the sum of $6,000.00.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2276 of 2004

STEVE NICOLS

Applicant

And

CHARLES ANTHONY LESLIE GARDNER

First Respondent

And

SHAREN GARDNER

Second Respondent

REASONS FOR JUDGMENT

Application

1. The matters before the court today consist of two interlocutory applications. They concern an application brought under the Bankruptcy Act. The applicant seeks to amend the original application in two ways: first, by adding additional parties; second, by seeking further orders.

2. The respondents oppose these applications. Indeed, the respondents, not only by their response but also by a separate interlocutory application, seek summary dismissal of the application, whether amended or not, under Part 13(10) of the Federal Magistrates Court Rules 2001 on the grounds that no reasonable cause of action is disclosed.

3. The substantive proceedings before the court were commenced by means of an application and an affidavit filed on 20 July 2004. The application was brought by the applicant as trustee of the bankrupt estates of the two respondents under sections 120, 121 and 122 of the Bankruptcy Act. The orders that were originally sought were, in very general terms, orders that transfers of assets and property made by one or other or both of the respondents were void pursuant to sections 120, 121 and 122 of the Bankruptcy Act. Certain ancillary orders were sought in addition.

4. The application was accompanied by a somewhat terse affidavit of the applicant, who described himself as an official liquidator and indicated that he became trustee of the bankrupt estate of the first respondent on 21 July 1998, and a trustee of the bankrupt estate of the second respondent on 19 March 2001.

5. He sets out in his affidavit his view, as a result of examining certain records, that a number of transactions took place between 6 July 1992 and 12 April 1996 in respect of the business operated by the respondents, which was sold around 12 April 1996 and the moneys were disbursed in certain ways, but some of the moneys were received by the two respondents.

6. He indicated that the Environmental Protection Agency commenced legal proceedings against the respondents and those proceedings culminated in a custodial sentence, at least for a respondent, a penalty order and a costs order. He made the claim that most of the sale proceeds were transferred to several entities pursuant to transactions offending sections 120 and/or 121 and/or 122 of the Bankruptcy Act.

7. It is quite clear and indeed it was always apparent that any claims under sections 120 and 122 of the Bankruptcy Act were due to become subject to a limitation period under section 127 of the Act on 21 July 2004. It appears from the affidavit of Mr Ross Koffel, solicitor, that the Environmental Protection Agency was a substantial creditor in respect of the bankrupt estate of the first respondent.

8. According to Mr Koffel's affidavit, as late as 24 June 2004 the Environment Protection Agency, or EPA for short, advised him that it had decided not to bring or provide funding to bring proceedings against the respondents. 

9. Mr Koffel deposes in his affidavit that there were a number of conversations with the liquidator, who was the applicant, subsequent to that date, but on 16 July 2004, a mere five days before the limitation period in respect of sections 120 and 122 of the Bankruptcy Act was to come into force, he received totally different instructions. These were instructions to commence proceedings to attempt to recover certain property alleged to be transferred by the respondents. Accordingly, the application and affidavit in support were hurriedly put together. They were filed on 20 July, almost at the last moment, so it would appear.

10. Since then the matter has been before the court on 10 August, where it was adjourned until 12 October. A considerable amount of correspondence has taken place, and communications between the solicitors.  The matter was adjourned until apparently 9 November. 

    
    

    A further timetable was set down to provide further material by the applicant.

11. The respondent has consistently said that the claims lack particularity, to the extent that the respondent has been unable to prepare and file a response to the substantive application.  What then happened was that the applicant filed a fresh affidavit on 2 December 2004 in considerably greater detail.  Exhibited at the time of deposing that affidavit were a considerable number of documents, including company searches.

12. On 18 January the applicant has filed a further interlocutory application seeking leave to file not one but two applications: an amended application marked (a), and then a further amended application marked (b).  The respondent has filed a response seeking that the application has been dismissed according to rule 13.10.  That application is accompanied by an affidavit of the respondent's solicitor, Mr Barnett.  Quite clearly, the respondent's application for summary dismissal cannot be considered until the application to file the amended applications has been disposed of.  As I indicated the applicant has taken the somewhat unusual course of seeking to file what the solicitor, Mr Neggo, has described as cascading applications.  The first one which is marked with the letter A seeks to add three respondents.  Respondent 3 is a company called Toshka Pty Limited. 

13. The second, respondent 4, is a company called St Catherine's Hawkesbury Pty Limited.  The fifth respondent is the trustee of the "Brooklyn on Hawkesbury Discretionary Trust".  I note that the two companies, Toshka and St Catherine's Hawkesbury, have an address care of presumably an accountant whose address is given as

    
    

    36 Bombala Street Cooma.

14. The second application, known as the further amended application, not only seeks to add the three extra respondents, but seeks a significant number of orders including and in the alternative an order that the respondents pay damages for breach of contract.  In other words, there is an additional cause of action being added.  It is hardly surprising that the original respondents have objected to the filing of these amended applications, not just from a procedural point of view, but also from a substantive point of view.

15. Ms Glover, counsel for the respondent, takes particular issue with the admittedly unusual course of getting leave to file an amended application and simultaneously getting leave to file a further amended application. She attacks this as a means of getting round what she says is the obligations set out in the Federal Magistrates Court Rules. Her objections from a procedural point of view could perhaps be summarised as that by seeking to amend the application in small bites rather than one large whole, the applicant is seeking to find an easier path to getting the material on, rather than complying with the stringent requirements of the rules.

16. For the applicant, Mr Neggo denies this, pointing out that whilst the applicant would clearly prefer that the further amended application, a copy of which is marked B, should be the application which would initially proceed, that the intermediate step, the amended application marked A, is of value of itself and if that was as far as the applicant was able to get, then indeed, the applicant would definitely be in a better position than beforehand.  It seems clear to me that, in any event, the alleged further amended application, application B, is really the one that is the application that the applicant would wish to bring to trial, that application A is, in effect, a fall-back position or an alternative.

17. In my view the matters cannot be considered as two separate steps.  The court, in the exercise of its discretion, must consider the final outcome which is the second application and unless the application to file that document is unsuccessful, the court need not fall back on the half way step.  Indeed, once that position has been clarified, then, and only then, can the court look at the application for summary dismissal brought by the respondent. 

18. In considering the matters before me, I have had regard not just to the original affidavit, but to the affidavit of the applicant sworn and filed on 2 December and the affidavit of Ross Koffel sworn on the 17th and filed on 18 January.  The intention in filing the amended application or applications is so that the trustee may attempt to set aside certain transactions whereby the trustee is of the view that monies have been transferred to the two companies and the discretionary trust in respect of substantial sums of money – $68,819 in respect of the company Costa Pty Limited, $58,937 in respect of the company St Catherine's Hawkesbury Pty Limited and $94,552 in respect of the Brooklyn on Hawkesbury discretionary trust.

19. Mr Neggo for the applicant has pointed out that without the addition of these two companies and the trust and without the further orders sought that the proceedings against the first and second respondent would be of very little value.  If indeed the investigations that these monies have been transferred to these entities said to be connected to the first and second respondents, unless those entities can be party to the proceedings any order against the first and second respondents, any judgment, would be rendered nugatory.

20. Leaving aside the procedural objections. Ms Glover for the respondents has raised concerns. Generally she concedes that there is no limitation period in respect of section 121 matters even though there are in respect of matters of sections 120 and 122. She submits that by allowing the amendments at this stage in whatever form, the applicant is getting what she described as a second kick. That joining the parties at this stage, or joining the companies as parties at this stage, and the other amendments seeks in fact to join a party after the limitation period has expired.

21. She went on to point out that the application does not disclose a reasonable cause of action.  That there are no facts only assertions.  In fact she described them as a series of assertions and allegations.  The respondent as she said cannot respond to the claim because there is only a series of blanket allegations.  In particular she questions the damages sought for breach of contract and I am inclined to agree that even the latest affidavits contain relatively little, if anything, about what sort of contracts were appropriate.

22. I raised with Ms Glover the question as to whether these matters would better be remedied by way of an order for costs and Ms Glover put to me that there was a prejudice to the respondents in this eleventh hour transaction not only in respect of the existing respondents but also in the entities proposed to be added as respondents.  I have no difficulty seeing that companies that were not respondents to the litigation now becoming respondents, especially where orders are sought against them relating to financial transactions, would be prejudiced.  I must of course balance that against a number of other factors.  Mr Neggo pointed out that costs were the appropriate discipline rather than striking the matter out. 

23. I have had a number of references given to me to the Federal Magistrates Court Rules 2001 and it is important to look at what the rules say. Part 11, division 11(1) relates to parties and litigation guardians.  Rule 11.02 provides that a party may include another person as a party.  However rule 1102(2) says that a party may not include a person as a party after the first court date without the leave of the court.  Now quite clearly that applies in this case in that the parties for the first six months of these proceedings have been the applicant and the two respondents.  I look to it, amending documents, part seven, division 7.1 provides in rule 701:

    At any stage in the proceeding the court or a registrar may allow or direct a party to amend a document other than an affidavit in the way of the conditions the court or the registrar thinks fit.

Subrule (2) says:

Subject to rule 703 the court or a registrar may allow an amendment even if the effect would be to include a cause of action arising after the proceeding has started.

1. Rule 703 which applies specifically to general Federal Law proceedings is headed, amendment after limitation period.  It is clearly applicable to the situation before the court today.  Subrule (2), subrule (3) and subrule (4) set out examples of how the court may give leave to make an amendment after the end of a relevant period of limitation.  Mr Neggo submitted and in my view correctly that whilst subrule (1) sets out what happens in an application where there is leave sought to make an amendment after the end of the relevant period of limitation current to the date the proceeding started, the requirements in subrule (2), (3) and (4) are not cumulative.  A party may seek to make an amendment under any one of those subrules without having to comply with all three of them.

2. The situation is that the subrules are separate subrules.  They are complete within themselves, for instance, while subrule (2) speaks of a mistake being made, clearly, there is no mistake made here but subrule (2) is not the applicable subrule.  Subrule (3) relates to leave to make an amendment changing the capacity in which a party seeks orders but that is not relevant here either.  It is subrule (4) upon which the applicants rely and the court may give leave to make an amendment, even if the effect is to include a new course of action of (a) the court considers it appropriate and (b) the new cause of action arises out of the same or substantially the same facts as a cause of action for which relief has already been claimed in the proceeding by the party seeking leave to amend.  So it is that subrule upon which the applicant relies.

3. The documents exhibited to the applicant in respect of his affidavit of 2 December 2004 relate to company searches in respect of the proposed third respondent, Toshka Pty Limited and St Catherines Hawkesbury Pty Limited, the proposed fourth respondent and there is also, a copy of a family trust.  It is clear from the perusal of these documents that the entities sought to be added as respondents are related entities, they are companies in which the respondents or one or other of them are members or former members or directors or secretaries.  They are quite clearly entities connected with the two respondents and they are the entities to which it is alleged that certain amounts of money were transferred after a sale in 1996.

4. I have also been referred by Mr Neggo for the applicant to the decisions of the Full Court of the Federal Court in Rogers v The Commissioner of Taxation (1998) FCA 1296 handed down on 16 October 1998 and Darcy v Medtel Pty Limited Number 3 (2004) FCA 807. In Rogers the legislative history of section 59 of the Federal Court of Australia Act and order 13 of the Federal Court rules relating to the court's power to allow amendments to existing applications, is set out. There is reference to the old decision of Weldon v Neal (1887) 19 QBD 394 and a reference also, to a decision that has been referred to me, the decision of Glass J in the Supreme Court of New South Wales in McGee v Yeomans (1977) 1 NSWLR 273.

5. It is clear from McGee v Yeomans in the decision of Glass J that a similar provision in the New South Wales Supreme Court rules displaces the settled rule of practice laid down in Weldon v Neal.  That line of reasoning was adopted by the Full Court in Darcy v Medtel Pty Limited in which reference is made to Rogers v The Commissioner of Taxation and in which it is made quite clear that the scope of Order

   
   

   13 Rule 2(7) of the Federal Court rules which is similar to the appropriate rule in the Federal Magistrates Court rules should be the scope is not to be limited by any narrow approach to the language of the subrule. I am not of the view that that is necessary quite frankly.

6. In my view the amendment to the application involving the adding of the three respondents and the adding of the additional orders sought is one which is within the jurisdiction of the court to make and one which in the exercise of the court's discretion the court ought to make.  My only caveat to that is that I have some difficulty in identifying a breach of contract as such, a point specifically raised by Ms Glover I note, but in other respects, I propose to allow the amendments.

7. I do not propose to follow the unusual approach of the cascading applications as I believe, with respect, that it is artificial and in the long run unhelpful.  The real application which is sought to be heard is the one that is annexed and marked B, which sets out not only the five respondents against whom proceedings are sought to be made but the nature of the relief sought against those various respondents.  Approaching at this step through the intermediate step of the application marked A is to my mind, of little value to the court and I propose to disregard that.

8. However, what there is now is an application for summary dismissal of the application in its amended form on the basis that no cause of action has been shown.  The rules provide for just such an application under Rule 13(10), I note the response correctly refers to Rule 13(10) as the source of power to do so.  There was a separate application seeking the same result, in my view that is superfluous, holding up one's trousers with both belt and braces, in my view the order for dismissal sought and the response was and is sufficient for the application to be properly before the court.

9. Rule 13(10) provides that the court may order that a proceeding be stayed or dismissed generally or in relation to any claim for relief in the proceeding if it appears to the court that:

   (a)  No reasonable cause of action is disclosed in relation to the proceeding or claim for relief, or,

   (b)  The proceeding or claim for relief is frivolous or vexatious, or,

   (c)  The proceeding or claim for relief is an abuse of the process of the court.

10. Well, (b) and (c) were not argued before me nor are they appropriate.  The thrust of the respondent's claim lies squarely in part (a), no reasonable cause of action.  The solicitor for the applicant, Mr Neggo, conceded that the original application was somewhat sparse or the original affidavit of the applicant was somewhat sparse but quite clearly that was an affidavit cobbled together in order to beat the limitation period.  The affidavit of the applicant sworn and filed on

    
    

    2 December is a far more substantial document with a considerable amount of documentary evidence annexed.  It is clearly on that later affidavit that the applicant's case will stand or fall, at least as far as today's proceedings are concerned.

1. The second part of the affidavit from paragraphs 8 through to 13, sets out the creation of certain entities which include the three entities sought to be added as respondents.  Further in the affidavit is a description of the net proceeds for sale of a tourism business referred to in paragraph 17 and more particularly described in paragraph 18 and 19 through to 23 and 24 through to 26.  There is a considerable amount of information contained there including what are factual statements relating to what the applicant says has been done with the money.  Is this sufficient to show that there is a reasonable cause of action or is indeed, the respondent correct in submitting that the application should be dismissed at this point.

2. Mr Neggo pointed out that Part 13 of the Federal Magistrates Court Rules does not refer to a failure to plead and distinguished between an application in the Federal Magistrates Court and pleadings in other jurisdictions. The application he described as being similar to a summons in the Supreme Court. It is noteworthy that Part 4 of the Rules headed Starting Proceedings prescribes that proceedings are commenced by filing an application in rule 4.01 and that 4.05 makes it clear that an affidavit is to be filed both with an application and with a response. In order to consider whether there should be summary dismissal of an application, the Federal Magistrates Court can only proceed by examining not just the application but the affidavit in support.

3. That is why the Federal Magistrates Court has insisted on applications and responses, not only in the Bankruptcy jurisdiction but right throughout the court's jurisdiction being accompanied by affidavits because the court needs to see a statement on oath or affirmation by a party setting out what the party's case is right on the first day.  So in my view, the application before me can only be resolved by looking at the affidavit material.  True it is that the original affidavit was not of much help.  The affidavit of 2 December is far more complete although again I question the breach of contract.

4. I have had opportunity previously to look at summary dismissal in the Federal Magistrates Court in another jurisdiction and whilst the rules vary from one jurisdiction to another, there are certain principles that should be considered and they apply to all such matters.  I refer to the decision of the Full Court of the Federal Court in Australian Building Industries Pty Ltd v Stramit Corporation Limited (1977) FCA 1318. Their Honours said, and I quote:

   A proceeding should not be dismissed summarily merely on the ground that it appears at an early stage of the hearing of the motion brought for that purpose to advance a highly implausible claim which will very probably fail.

5. I would not in any event go so far as to describe the applicant's case as being highly implausible which will very probably fail.  To my mind, one of the best all round guides to a court in the summary dismissal application, be it in fact in any of the jurisdictions which the Federal Magistrates Court now has is set out in the decision of Kirby J in Linden v The Commonwealth of Australia (No. 2) reported in 136 ALR 251. That case arose out of a statement of claim issued by the plaintiff seeking declarations that the threat or use of nuclear weapons in any circumstances was not permitted under municipal, international or trans‑national law.

6. The respondent, Commonwealth of Australia, issued a summons to challenge the statement of claim on the following bases, that the statement of claim was incompetent, that the plaintiff lacked standing, that the statement of claim did not disclose a reasonable cause of action or was on its face frivolous and vexatious and that the subject matter of the proceedings was not justifiable.  In the High Court, Kirby J set out a number of principles derived from the authorities which set out a guide.  I will set them out at this stage:

   A.  The parties seeking the relief must show that it is clear on the face of the opponent's documents that the opponent lacks a reasonable cause of action or is advancing a claim that is vexatious.

   B.  The opinion of the court that a case appears weak and such that it is unlikely to succeed is not alone sufficient to warrant summary termination.

   C.  Summary relief of the kind provided for by order 27, rule 18 of the High Court rules for absence of a reasonable cause of action is not a substitute for proceedings by way of demurrer.

7. That I comment is of not much assistance in the Federal Magistrates court.

   D.  If, notwithstanding the defects of pleading it appears that a party may have a reasonable cause of action which it failed to put in proper form a court will ordinarily allow that party to reframe its pleading.

   E.  The guiding principle is as stated in order 26, rule 18(2) doing what is just.

8. In my view an application of those principles which do of course bind this court is that on the face of it I am not satisfied that the application does not disclose a reasonable cause of action.  Whether the applicant will ultimately be successful on a final hearing is not a matter upon which I propose to comment.  Kirby J did comment in Linden that even a weak case deserves its time in court and the principles that should be remembered is that it is a serious matter to deprive a person of access to the courts of law for it is there that the rule of law is upheld.

9. In my view this is a case that should proceed to a hearing, which should proceed in its amended form and whether the applicant is successful will be a matter for a hearing.  The respondent should be allowed a sufficient time to file a response to the substantive matters contained in the affidavit material and I will allow that time. 

10. There is one other issue, however, and that is the matter of costs. It is quite clear to me that the original application was cobbled together in great haste shortly before the limitation period applying to sections 120 and 122, the limitation period set out in section 127. The material provided in order to get the application on at the eleventh hour, almost at a minute to midnight, was sparse to say the least. It has taken several adjournments, numerous conversations and items of correspondence even to get the matter to where it is now and it is only now that an amended application is in place which will allow the respondent time to file a considered response.

11. I am mindful of the fact that a period of nearly six years elapsed from the bankruptcy of the first and second respondent.  As late as the

    
    

    16 June the Environmental Protection Agency was not of a mind to proceed further and that that party apparently changed its mind with very little time to spare.  It is quite clear to me that the respondents in attempting to deal with the case that has largely been put together as it has gone along has been placed at a particular financial prejudice. 

    
    

    Mr Neggo quite properly conceded that this is a matter where the applicant was at some jeopardy as far as an order for costs was concerned.  He is of course quite right and it is to his credit that he did not shy away from such an unpalatable truth.

12. This is a case where the rules of the Federal Magistrates Court allow me to make an order for costs on an interlocutory basis if such an application is to be made.  I will leave it to Ms Glover to obtain instructions.

13. In bankruptcy proceedings as a whole I am mindful of the fact that costs, rule 29.08 says that costs under the Federal Court rules are appropriate.  As this is an interlocutory application it does not really matter whether it was bankruptcy or anything else, in my view this is a matter where I should make an order for costs in which I will take into account that there should have been. There was, an appearance before the Registrar today which is not clearly a matter where I should award costs, but I do propose to make an order for costs from the first return date up to and including today with the exception of one hour before the Registrar which in my view is properly all the time that the matter should have taken.  I propose to assess those costs, bearing in mind that it is all interlocutory, on the basis of schedule 1 of the Federal Magistrate Court Rules 2001 and in my view it is more appropriate to adopt the procedure that this court does of setting the costs in a fixed sum.  This is not a matter where costs should be reserved.  This is a matter where there should be an order for costs today and that should be in a fixed sum today unless either party seeks to persuade me otherwise.

14. Leave is to be granted to the applicant to file an amended application in the form annexed to the application filed on 18 January 2005 and marked with the letter B.

15. That the amended application have effect from the date of commencement of these proceedings.

16. The respondent is to file and serve a response to the amended application by 4pm on 15 February.

17. The respondents are to file and serve further affidavit materials upon which they seek to rely by 4pm on 29 April.

18. The application is adjourned until Tuesday, 3 May 2005 for further directions at 10.15am.

19. The applicant is to pay the respondent's costs up to today and for part of today's proceedings fixed in the sum of $6,000.

I certify that the preceding fifty-two (52) paragraphs are a true copy of the reasons for judgment of Scarlett FM

Associate:  S. Polley

Date:  2 February 2005