Paramount Lawyers Pty Ltd v Haffar (No 2)

[2016] NSWSC 906

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Paramount Lawyers Pty Ltd v Haffar (No 2) [2016] NSWSC 906
Hearing dates:	9, 14, 15 and 16 June 2016
Decision date:	30 June 2016
Jurisdiction:	Equity
Before:	Stevenson J
Decision:	Third party costs order made against sole director and shareholder of incorporated legal practice; freezing orders dissolved in light of undertakings proffered to the Court
Catchwords:	COSTS – against non-party – whether solicitor sole director and shareholder of incorporated legal practice should pay costs of unsuccessful application to remove to this Court proceedings pending against that company in District Court including proceedings already listed for hearing – whether solicitor funded litigation – whether conduct of litigation was unreasonable – whether solicitor had an interest in the proceedings – whether company was insolvent or a “person of straw”; PROCEDURE – interlocutory orders – whether freezing order made on an ex parte basis should be dissolved on basis of non-disclosure by moving party – whether freezing order should be extended against solicitor who has given an undertaking to the Court not to dispose of assets
Legislation Cited:	Civil Procedure Act 2005 (NSW) Motor Accidents Compensation Act 1999 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Aristocrat Technologies Australia Pty Ltd v Allam [2016] HCA 3; 90 ALJR 370 Commercial Bank of the Near East Ltd v A, B, C and D [1989] 2 Lloyd’s Rep 319 Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014 Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39; 1 WLR 2807 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Garrard (t/as Arthur Anderson & Co) v Email Furniture Ltd (1993) 32 NSWLR 662 Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 Jones v Dunkel [1959] HCA 8; 101 CLR 298 Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178 Kuhl v Zurich Financial Services Australia Limited [2011] HCA 11, 243 CLR 361 National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271 Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG; The Nidersachsen [1984] 1 All ER 398 Paramount Lawyers Pty Ltd Haffar [2016] NSWSC 651 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 Thomas A Edison Ltd v Bullock (1912) 15 CLR 679 Victoria University of Technology v Wilson [2003] VSC 299 Yu v Cao [2015] NSWCA 276
Texts Cited:	I Spry, The Principles of Equitable Remedies (9th ed 2014, Lawbook Co)
Category:	Procedural and other rulings
Parties:	Bruce Adams (First Applicant) Elizabeth Adams (Second Applicant) Anna Ciliegi (Third Applicant) Laila Haffar (Fourth Applicant) Jennifer McCarthy (Fifth Applicant) Darren Moran (Sixth Applicant) Daniel Murphy (Seventh Applicant) David Marocchi (First Respondent) Paramount Compensation Lawyers Pty Ltd (Second Respondent)
Representation:	Counsel: D A McLure SC with G O’Mahoney (Applicants) T G R Parker SC with M Castle (Respondents)   Solicitors: Firths – The Compensation Lawyers (Applicants) Barton Lawyers (Respondents)
File Number(s):	SC 2016/104582

Judgment

1. Paramount Lawyers Pty Ltd (now in liquidation) was an incorporated legal practice.

2. On 4 May 2016, Rein J dismissed an application made by Paramount that seven proceedings pending against it in the District Court of New South Wales by its former clients (who are the defendants in these proceedings, and who I will refer to as “the Clients”) be transferred to this Court (Paramount Lawyers Pty Ltd v Haffar [2016] NSWSC 651).

3. Rein J ordered that Paramount pay the Clients’ costs of the proceedings.

4. Seven days later, on 11 May 2016, the sole director and shareholder of Paramount, a solicitor, Mr David Marocchi, caused Paramount to go into liquidation.

5. The Clients now seek an order that Mr Marocchi, and another company, Paramount Compensation Lawyers Pty Ltd (“PCL”) pay those costs.

6. A similar application has been made, or foreshadowed in each of the District Court proceedings.

7. In aid of those applications the Clients sought, and obtained from Sackar J on 17 May 2016, an ex parte freezing order against Mr Marocchi and PCL. I have extended the freezing orders until 5.00pm today.

8. The questions before me are whether such a costs order should be made in these proceedings and whether the freezing order should be extended.

Decision

9. I propose to order that Mr Marocchi, but not PCL, pay the Clients’ costs of 4 May 2016 and, in light of undertakings now given to the Court by Mr Marocchi, to dissolve the freezing order.

Background

10. Mr Marocchi was admitted as a solicitor on 9 October 1998.

11. Each of the Clients sustained personal injuries in motor vehicle accidents and retained Mr Marocchi to act for them on a claim for damages under the Motor Accidents Compensation Act 1999 (NSW) arising from those injuries.

12. Paramount was incorporated on 23 January 2009 and each of the Clients then retained that company to act for them in relation to those claims. Two of the Clients had earlier retained Mr Marocchi when he worked at Keddies Lawyers.

13. At the time of its incorporation, Mr Marocchi, and another solicitor, Mr Jason Di Michiel, were joint directors and equal shareholders of Paramount. When new instructions were received by Paramount, matters were assigned to one or the other of them. In effect, they had discrete practices within the firm.

14. By a Deed dated 1 April 2014, Mr Marocchi and Mr Di Michiel agreed that, with effect from 31 March 2014, they would divide Paramount’s practice between them and thereafter conduct independent practices. Mr Di Michiel resigned as a director of Paramount, transferred his share in Paramount to Mr Marocchi and commenced practice as Premier Compensation Lawyers. Thereafter, Mr Marocchi was the sole director and shareholder of Paramount.

15. Between August 2009 and July 2012, each of the Clients’ claims was settled with a payment of compensation in favour of the relevant Client.

16. Paramount deducted an amount on account of its fees from the settlement amount.

Commencement of the District Court proceedings

17. Between 18 February 2015 and 22 June 2015, each of the Clients commenced proceedings in the District Court against Paramount claiming damages for breach of contract.

18. In each case, the Client alleged he or she had been grossly overcharged by Paramount.

19. To take the proceedings commenced by Mr Daniel Murphy against Paramount as an example, Mr Murphy’s proceedings were settled on 11 August 2009 for $647,000 inclusive of costs. From that sum Paramount deducted $129,441.32 for its professional costs and disbursements. According to the expert costs assessor who produced a report for the purpose of Mr Murphy’s proceedings, the amount of costs properly chargeable by Paramount was no more than $11,000.

Progress of the District Court Proceedings

20. In each of the District Court proceedings, the relevant Client swore an affidavit and served an expert costs consultants’ report.

21. Paramount did not file any evidence in any of those proceedings.

22. In November 2015, four of the District Court proceedings were, by consent, listed for trial. Mr Murphy’s proceedings were set down for two days commencing 12 May 2016. The other three matters were set down for hearing in June and August 2016.

23. On 11 December 2015, Paramount filed a notice of motion in the District Court in the Murphy matter seeking vacation of the 12 May 2016 hearing date and seeking leave to file a cross-claim against Mr Di Michiel.

24. The draft cross-claim is not before me but Mr Parker SC (who appeared with Ms Castle for Mr Marocchi and PCL) did not dispute the accuracy of the description given by Mr McLure SC (who appeared with Mr O’Mahoney for the Clients), of the proposed cross-claim as:

“…an allegation that Mr Di Michiel should be held to be equally liable to Mr Murphy, because as a former 50% shareholder of Paramount, he had derived a 50% benefit from the fees charged.”

25. Paramount’s motion in the Murphy matter was first returnable on 5 February 2016 and was ultimately stood over to 9 May 2016 (to abide the outcome of these proceedings).

Incorporation of PCL

26. In the meantime, on 1 May 2015, midway in the period during which the Clients commenced the District Court proceedings, PCL was incorporated. Paramount then ceased accepting new clients from that date.

27. PCL commenced trading from the same address from which Paramount formerly traded. Paramount transferred the relevant lease to PCL as at 1 May 2015 and adopted the same logo, get-up, and telephone number as was formerly used by Paramount. Paramount’s website was altered so that a search directed the enquirer to the “Paramount Compensation Lawyers” website. In substance, PCL continued to trade as Paramount had before it.

28. Mr Marocchi, and his de facto wife, Ms Anna Merlo, are the directors of PCL. The sole shareholder of PCL is Marocchi & Merlo Management Pty Ltd. Ms Merlo is the sole director and shareholder of that company. Thus, on the face of it, Mr Marocchi has no interest in PCL.

Transfer of files from Paramount to PCL

29. Between May and December 2015 Paramount transferred all its clients to PCL. Paramount then ceased to trade.

30. No sale of business agreement was executed by Paramount and PCL setting out the basis on which this was to occur.

31. At the time each of the files was transferred from Paramount to PCL, work had been done on the files for which an account had not yet been rendered. Paramount had also paid disbursements (for example, for medical report fees) on each of the files. I will refer to these matters collectively as “work in progress”.

32. PCL made some payments to Paramount for this work in progress.

33. It is not clear on the evidence before me how much has been paid and whether the amount shown to have been paid represents the total value of the work in progress attached to the transferred files.

34. In an affidavit, the solicitor for the Clients, Mr Stephen Firth, referred to, but did not annex, a document he said had been produced on subpoena entitled “Paramount Compensation Lawyers Aged WIP report at date 1 May 2015” which was said to record over 900 matters with a total work in progress of some $4 million as at 1 May 2015. As PCL was only incorporated on 1 May 2015, that figure evidently relates to work in progress in files Paramount transferred to PCL, backdated for some reason to 1 May 2015.

35. Bank statements produced by Paramount’s liquidator on subpoena show that between 15 December 2015 and 2 May 2016 (the day before the hearing before Rein J) PCL paid some $1.2 million to Paramount, evidently on account of such work in progress. Paramount’s bank statements prior to 15 December 2015 were not in evidence before me.

36. As soon as Paramount received these payments from PCL, it paid corresponding amounts out to an unidentified account. Mr Parker accepted that I should infer that these payments were either made to Mr Marocchi or to an interest associated with him. To use Mr Parker’s language, Mr Marocchi “swept” the account so that, at least between 6 April 2016 (when proceedings were commenced in this Court) and 4 May 2016 (when Rein J gave judgment), as soon as funds were deposited to Paramount’s account, corresponding amounts were withdrawn so as to leave a negligible credit balance. I will return below to the run of the account after Rein J gave judgment.

37. Between 1 February and 6 May 2016, Paramount sent some 90 invoices to PCL for “professional costs” and disbursements in individual client matters. Argument before me proceeded on the basis that I should treat these invoices as being for the value of work in progress in the files. All but three of these invoices were dated in April 2016. The evidence did not explain why these invoices were not sent earlier, or how their total quantum related to the payments referred to in [35].

38. According to a Summary of Affairs signed by Mr Marocchi on 11 May 2016 (the day of Paramount’s liquidation), Paramount then had work in progress with an estimated realisable value of only $15,000.

Liabilities of Paramount

39. Mr Marocchi has informed the liquidator of Paramount that PCL “has assumed certain liabilities of Paramount…such as employee entitlements and leased equipment”. Presumably, such liabilities were “assumed” as at 1 May 2015.

40. PCL did not assume liability for any other of Paramount’s liabilities, including such liability as Paramount had to the Clients by reason of the District Court proceedings, or for Paramount’s trade creditors, which Paramount’s liquidator estimates to be some $472,000 (leaving aside the Australian Taxation Office and contingent creditors).

Goodwill of Paramount

41. Although PCL is, for all intents and purposes, now carrying on the same business as did Paramount, it paid nothing to Paramount for any goodwill associated with Paramount’s business. The value of work in progress at PCL as at its date of incorporation (see [34]) suggests that there is good reason to believe such goodwill was of value.

Proceedings in this Court

42. On 6 April 2016, Paramount commenced these proceedings seeking an order that the seven District Court proceedings be removed to this Court, and also seeking leave to issue a cross-claim against Mr Di Michiel.

43. On 26 April 2016, Paramount filed a statement of claim in separate proceedings in this Court naming Mr Di Michiel as defendant. The statement of claim makes similar allegations to the draft cross-claim in the Murphy proceedings in the District Court, but also claims that Mr Di Michiel took confidential client information in relation to a large number of former clients of Paramount (including each of the Clients) and, in the case of the Clients (and others), encouraged them to sue Paramount for overcharging.

The hearing before Rein J

44. Paramount’s 6 April 2016 summons was listed for hearing before Rein J on 3 May 2016. As I have mentioned, Rein J dismissed the application with costs (see [2] above).

45. Rein J summarised his conclusions as follows (at [18]):

“In my view the former Clients should not be forced to become involved in a tussle between Mr Marocchi and/or Paramount on the one hand and Mr Di Michiel on the other. They have conducted their litigation in the District Court efficiently and should not be penalised because Paramount has been dilatory in considering whether to file a cross claim or bring fresh proceedings in the Supreme Court against Mr Di Michiel. There may be an ‘overlap’ between the Client cases and the Deed case but it is a one-way overlap because the Clients have no interest whatsoever in the Deed case and the relevance of the Clients’ case is that it will determine what amount Paramount will have to repay (if any).”

46. In the course of argument, Mr Parker, on instructions, gave Rein J an assurance that if his Honour dismissed Paramount’s application “there will be no application to adjourn” Mr Murphy’s proceedings (to be heard the following week, on 12 May 2016).

Events thereafter

47. On 9, 10 and 11 May 2016, Mr Marocchi made further deposits to the Paramount account which enabled Paramount to make a payment to the Australian Taxation office of some $82,000, a payment to the proposed liquidator of Paramount of $7,000 and a payment of some $44,000 to Mr Firth in satisfaction of an overcharging claim made against Paramount by another former client, a Mr Mathers.

48. On 5 May 2016, Mr Firth wrote to Paramount demanding that in light of Mr Parker’s statement to Rein J, that Paramount would make no application to adjourn Mr Murphy’s proceedings (see [46] above), Paramount withdraw its motion (then returnable on 9 May 2016) to vacate that hearing.

49. Paramount (by an employed solicitor, Mr Ho) replied on 6 May 2016 stating that Paramount consented to the dismissal (with costs) of its motion to vacate the Murphy hearing and reserved its “right” to seek an adjournment of those proceedings “if the plaintiff attempts to adduce any evidence that has not been served in compliance with previous orders”.

50. Paramount did not appear on 9 May 2016 when its motion to vacate the Murphy proceeding’s hearing date came on for hearing in the District Court. The motion was dismissed.

51. As I have said, on 11 May 2016, Mr Marocchi caused Paramount to be placed into liquidation. Mr Anthony Warner, from CRS Insolvency Services, was appointed liquidator.

52. On 12 May 2016, Mr Murphy appeared, by counsel, for the hearing of his District Court proceedings. Counsel previously briefed for Paramount appeared, amicus curiae, and informed the Court that Paramount was in liquidation. The proceedings had, of course, by then been stayed by reason of Paramount’s liquidation.

53. On the same day, Mr Firth spoke to Mr Warner who said something which made Mr Firth apprehend that Paramount “may have transferred all the work-in-progress out of Paramount to a new company”. Mr Warner told Mr Firth he would “look into” it.

54. Mr Firth then conducted a search at the Law Society of New South Wales and discovered the existence of PCL.

55. By notice of motion filed on 17 May 2016, the Clients sought an order that Mr Marocchi, or alternatively, PCL pay their costs of the proceedings and the freezing order to which I have referred.

56. Sackar J, as Duty Judge, made a freezing order ex parte on 17 May 2016 against both Mr Marocchi and PCL restraining both from disposing of, dealing with or diminishing the value of their assets in Australia up to the unencumbered value of $1.5 million. The transcript before Sackar J does not reveal any discussion as to why that figure was adopted. The figure appears to have been based on Mr Firth’s then assessment of the likely value of Paramount’s work in progress in the period 2011 to 2014 (although, in a later affidavit, Mr Firth nominated the same figure as being his estimate of the likely costs of the Clients in these proceedings and their recoveries in the District Court proceedings). On 20 May 2016, the freezing order was varied in a manner not presently relevant.

57. On 19 May 2016, Mr Warner circulated a “1st Report to Creditors” in which he said that, subject to obtaining “creditor funding”, he proposed to “pursue recovery of WIP outstanding” from PCL, liaise with Mr Marocchi “regarding certain transactions” and “investigate transfer of clients and business” of Paramount to PCL.

58. On 31 May 2016 Mr Marocchi signed a Report as to Affairs in which he stated that Paramount had:

1. sundry debtors in the order of $250,000, comprising amounts said to be due to Paramount from Mr Di Michiel’s practice, Premier Compensation Lawyers;

2. work in progress with a realisable value of $15,000 (presumably representing the balance owing to Paramount from PCL in respect of the files transferred to it from May to December 2015);

3. cash at bank of $46.56 (the balance shown in the company’s bank accounts); and

4. creditors in the order of $400,000 including, as contingent creditors, each of the Clients. In relation to the Clients, Mr Marocchi stated that the amount of their claim was “unknown”. That is, to say the least, a surprising statement for Mr Marocchi to make. He must have known, at the very least, the amount that each of the Clients was claiming. Each has served detailed expert reports directed to that very matter.

59. How, in light of his acknowledgment that Paramount had creditors in the order of $400,000, Mr Marocchi, a solicitor, felt free to place Paramount into liquidation without notifying those creditors has not been explained.

60. The Clients have foreshadowed augmenting their claims in the District Court proceedings by joining Mr Marocchi as a defendant and to claim from him the amounts hitherto claimed from Paramount. The basis of the proposed claim against Mr Marocchi will be his alleged involvement in Paramount’s alleged misleading or deceptive conduct of representing to the Clients that they would be and had been charged an appropriate amount for legal services, when in fact they were going to be and/or were over-charged.

Mr Marocchi did not give evidence

61. In written submissions circulated before commencement of the hearing before me, Mr McLure made submissions which were highly critical of Mr Marocchi.

62. Nonetheless, although Mr Marocchi swore an affidavit for the purposes of the hearing before Rein J, and on an application to vary the freezing order, he did not swear an affidavit in response to the Clients’ 17 May 2016 notice of motion.

63. In Kuhl v Zurich Financial Services Australia Limited [2011] HCA 11, 243 CLR 361 Heydon, Crennan and Bell JJ said, at [63]:

“The rule in Jones v Dunkel [[1959] HCA 8; 101 CLR 298] is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party's case. That is particularly so where it is the party which is the uncalled witness. The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn.” [Some citations omitted]

64. Mr Marocchi’s failure to give evidence on this application is unexplained. He is one of the parties against whom the Clients seek a costs order, and an extension of the freezing order. Mr Marocchi is the sole director and shareholder of Paramount. He is, with his de facto spouse, one of the two directors of PCL. He is, obviously, a person “in a position to cast light” on a number of the questions which arise on this application.

The jurisdiction to award costs against a third party

65. By reason of s 98(1) of the Civil Procedure Act 2005 (NSW) costs are in the discretion of the Court and the Court has full power to determine by whom costs are to be paid.

66. The Court has jurisdiction to order that costs be paid by a third party to the litigation.

67. In Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178, Mason CJ and Deane J (with whom Gaudron J agreed) said (at 192):

“Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognised that it may be appropriate for such an order to be made.

For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party... That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party...”. [Citations omitted]

68. The authorities referred to by Mason CJ and Deane J in Knight contain many references to awards being made against the “real party”.

69. In that context, the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39; 1 WLR 2807 said (at [25]):

“Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is ‘the real party’ to the litigation, a concept repeatedly invoked throughout the jurisprudence – see, for example, the judgments of the High Court of Australia in Knight.”

70. A non-exhaustive list of the factors found to be relevant to the exercise of the Court’s discretion in these matters is set out in the judgment of Basten JA in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]:

“It is clear that the categories of case which may attract the exercise of the power are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria:

(a) the unsuccessful party to the proceedings was the moving party and not the defendant;

(b) the source of funds for the litigation was the non-party or its principal;

(c) the conduct of the litigation was unreasonable or improper;

(d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and

(e) the unsuccessful party was insolvent or could otherwise be described as a person of straw.”

71. The Court of Appeal has emphasised that the jurisdiction is exceptional and only to be exercised where the interests of justice require such an order to be made (eg Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34).

72. However, “exceptional” in this context means “no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense" (see Yu v Cao [2015] NSWCA 276 at [139]; and Dymocks Franchise Systems at [25]).

73. The Privy Council has emphasised that the jurisdiction is “in the strictest sense supplemental to the judgment already pronounced…and in no way varies it” (Dymocks Franchise Systems at [17]).

Should a third party costs order be made?

74. I find this a clear case in which to make a third party costs order against Mr Marocchi. I shall give my reasons by reference to the factors listed by Basten JA in FPM Constructions.

Paramount was the unsuccessful moving party

75. First, Paramount was the moving party in these proceedings and has failed.

Mr Marocchi was the source of funds

76. Second, the substance of the matter is that Mr Marocchi funded this litigation.

77. On 4, 9 and 10 May 2016, Mr Marocchi deposited funds into Paramount’s bank account which were immediately used by Paramount to pay its legal expenses of the proceedings before Rein J.

78. There were no other funds in Paramount’s account to enable it to pay its legal fees. There is no evidence of any other means by which Paramount could have paid those expenses.

79. Mr Parker submitted that Paramount’s bank statements showed that there was a “running account” between Paramount and Mr Marocchi, that a figure will have to be “struck” (presumably by the liquidator) between Mr Marocchi and Paramount and that it was likely that the result of that exercise would be that Mr Marocchi will be shown to owe Paramount a large sum (Mr Parker mentioned $750,000 as being a possible figure).

80. However, whether in making these deposits Mr Marocchi was repaying money he owed Paramount, or was himself lending funds afresh to Paramount, the fact is that on the day Paramount commenced these proceedings (6 April 2016) and on the day Rein J delivered judgment (4 May 2016) Paramount had negligible funds in its account and, but for the deposits, did not have funds to pay for the costs it incurred in these proceedings. It could only pay its costs of the proceedings if Mr Marocchi chose to put it in funds to do so.

81. In substance, it was Mr Marocchi who was the source of the funds used to pay the costs incurred by Paramount in the proceedings.

The conduct of the litigation in this Court was unreasonable

82. Third, a reasonable person in Mr Marocchi’s position would have realised that his prospects of persuading this Court to transfer the District Court proceedings were low.

83. The prejudice to the Clients in having their proceedings transferred to this Court, to be heard concurrently with Paramount’s proposed cross-claim against Mr Di Michiel was obvious. The outcome of that cross-claim was of no interest or value to the Clients. The prejudice to Mr Murphy, whose case was fixed for hearing nine days after the hearing before Rein J, was particularly stark.

84. One basis upon which Mr Parker, with propriety, could submit to Rein J that all matters should be heard together were considerations of case management and efficient use of court time.

85. But a reasonable person in Mr Marocchi’s position must have realised that it was unlikely that submission would be accepted. In the absence of evidence from Mr Marocchi, I infer that this was in fact Mr Marocchi’s state of mind.

Mr Marocchi had an interest in the proceedings equal to that of Paramount

86. Fourth, Mr Marocchi had a vital interest in these proceedings and was in that sense the “real party” (see [68] and [69] above) behind them.

87. A reasonable person in Mr Marocchi’s position would have understood, and in the absence of any evidence from Mr Marocchi I infer he did understand, that Paramount’s prospects of successfully defending the Clients’ claims in the District Court proceedings were low. In each of those proceedings, expert evidence was served on behalf of the Clients that, if admitted and accepted, showed that Paramount had grossly overcharged each of the Clients. Paramount adduced no evidence to contradict that expert evidence. It may be, as Mr Parker (who was not retained by Paramount in the District Court proceedings) speculated, that it was proposed to object to the admissibility of the expert evidence adduced on behalf of the Clients. However, even if that were so, and even if that resulted in the expert evidence in Mr Murphy’s case being rejected, and those proceedings failing, a reasonable person in Mr Marocchi’s position would have understood that any short comings in the form of the expert evidence would be cured by the time the remaining Clients’ proceedings came on for hearing.

88. Mr Marocchi must also have known how “poisonous” (to adopt Mr McLure’s expression) it would be to his reputation as a plaintiffs personal injury specialist if the Clients’ claims that they have been grossly overcharged were to be upheld.

89. In these circumstances, Mr Marocchi must have thought that it was in Paramount’s interests, and thus his own as Paramount’s sole shareholder, to avoid for as long as possible “the dark day” (also Mr McLure’s expression) when the Clients’ cases came on for hearing.

90. In the absence of any evidence from Mr Marocchi, I infer that Mr Marocchi in fact held these views.

Paramount was “a person of straw”

91. Fifth, throughout the course of these proceedings, Paramount was in a precarious financial position. And that is because of the manner in which Mr Marocchi managed its financial affairs.

92. On the day these proceedings were commenced, 6 April 2016, the opening balance in Paramount’s account was $30.42.

93. As I have said, between that date, and the hearing before Rein J on 3 May 2016, significant sums were transferred by PCL to Paramount’s account (evidently on account of work in progress for the transferred files) but were immediately “swept” (Mr Parker’s word) out of the account and paid to, I would infer, Mr Marocchi.

94. The opening balance in Paramount’s account on 3 May 2016 (the day of the hearing before Rein J) was $3,585.16, $3,000 of which was paid out that day to, I would infer, Mr Marocchi, leaving a balance at the end of that day of $78.63.

95. Thereafter, as I have said, Mr Marocchi made deposits to the account to enable payment of Paramount’s fees in these proceedings, an income tax liability of (I infer) Paramount, a payment to the proposed liquidator, and the payment on account of the claim made against Paramount by Mr Mathers.

96. The substance of the matter is that Mr Marocchi placed Paramount in a position where the question of whether or not Paramount could meet any liability it had for the costs of these proceedings was a matter entirely within his discretion. If he deposited funds to Paramount’s account, it would be able to meet those costs; if he did not, then Paramount would not be able to meet those costs.

97. Paramount was the moving party in these proceedings and yet, because of the decisions that must have been made by Mr Marocchi, it was, on the date of Rein J’s order of 4 May 2016, without funds to meet any liability for the costs of the proceedings and without any assets.

98. Leaving aside funds in its bank account, Paramount had no other assets because it transferred its files to PCL in the circumstances that I have set out above.

99. In that regard, the temporal coincidence between the incorporation of PCL and the commencement of the District Court proceedings by the Clients is striking.

100. PCL was incorporated on 1 May 2015. By then, four of the seven District Court proceedings had commenced; those of Mr Adams on 18 February 2015, those of Ms McCarthy on 4 March 2015, those of Mr Murphy on 9 March 2015, and those of Mr Moran on 23 March 2015.

101. The transfer of files started as soon as PCL was incorporated.

102. Absent any explanation from Mr Marocchi, the inference I would draw is that Mr Marocchi caused the incorporation of PCL for the purpose of causing Paramount to transfer its clients to PCL, so that the asset represented by profit costs accruing for work done from 1 May 2015 would belong to PCL, a company beneficially owned by Mr Marocchi’s de facto wife, and thus beyond the reach of the Clients, should they be successful in the District Court proceedings.

103. There is no other obvious reason why these events would have occurred.

104. Mr Marocchi has chosen to give no explanation about it.

105. I find those factors a powerful basis to make a third party costs order against Mr Marocchi.

106. In those circumstances, I do not need to deal with Mr McLure’s further submissions that I should also conclude that:

1. when these proceedings were commenced, Mr Marocchi did not intend that Paramount would defend the Clients’ claims to trial irrespective of whether they stayed in the District Court, or were transferred to this Court;

2. Mr Marocchi’s strategy all along was that if these proceedings were unsuccessful, “the fall back position would be to resolve to wind up Paramount and thereby automatically stay all proceedings against it”; and

3. prior to the hearing before Rein J, Mr Marocchi had already decided, or at least had a tentative plan, to put Paramount into liquidation if the application to transfer the District Court proceedings to this Court was unsuccessful, and that in failing to disclose that decision or plan, in response to the question asked by Rein J to Mr Parker (referred to at [46] above) Mr Marocchi failed to act with the degree of candour to be expected of a litigant answering a direct question from the Court.

107. In any event, I would have hesitated to come to these conclusions.

108. It is clear that Mr Marocchi wished to have the Clients’ claims against Paramount heard concurrently with Paramount’s claim against Mr Di Michiel. It is also true that, as soon as Paramount’s application to achieve that result failed, Mr Marocchi caused Paramount to be placed into liquidation. It is by no means clear to me, however, when Mr Marocchi decided to place Paramount into liquidation. The letter sent by Paramount to Mr Firth on 6 May 2016 (see [49] above) suggests that, at least as at that date, Paramount was intending to defend the Murphy proceedings.

Order against PCL?

109. I do not consider it necessary or appropriate to make a third party costs order against PCL. PCL played no part in these proceedings. In their notice of motion, the Clients only sought a third party costs order against PCL in the alternative to an order against Mr Marocchi. In my opinion, a third party costs order against Mr Marocchi suffices to achieve justice for the Clients.

Indemnity costs?

110. A third party costs order is supplemental in nature (see Dymocks Franchise Systems at [17]). Thus, normally a third party costs order would be made on the same basis as the costs order made against the primarily liable party.

111. Rein J’s order of 4 May 2016 was that Paramount pay the Clients’ costs on a party-party basis. Thus, on the face of it, the third party costs order against Mr Marocchi should be made on the same basis.

112. However, Mr McLure submitted that, but for the winding up of Paramount, it would have been open to the Clients (once they became aware of the matters that I have set out above) to apply to Rein J to revisit the costs order and seek an order that the costs of these proceedings be paid by Paramount on an indemnity basis.

113. That may be right (although Mr Parker submitted it was “contestable”), but I doubt that Rein J would have been persuaded to order indemnity costs in that hypothetical circumstance.

114. I am not prepared to order indemnity costs.

Should the freezing order be continued?

115. The freezing order was made ex parte by Sackar J on 17 May 2016.

116. For various reasons associated with the state of the Court’s lists, Mr Marocchi and PCL did not have an opportunity to make submissions as to whether the freezing order should be continued until the commencement of the hearing before me.

No basis to continue the freezing order against PCL

117. For the reasons I have set out above, I do not propose to make a third party costs order against PCL. There is no proposal to join PCL in the District Court proceedings. In those circumstances, I see no basis to continue the freezing order against PCL.

Should the freezing order be set aside in any event?

118. Mr Parker submitted that the freezing order should, in any event, be set aside because:

1. although Mr Firth disclosed in his affidavit that he had asked the liquidator of Paramount to look into what he described as the transfer of “the work-in-progress…to the new company…with a view to clawing the work-in-progress back as a matter of urgency” he did not disclose that the liquidator said, in response, that he would “look into it”;

2. Mr Firth did not disclose the payment to Mr Mathers (see [47] above);

3. although Mr McLure drew Sackar J’s attention to the decision of the High Court in Knight, he did not draw Sackar J’s attention to the decision of the Court of Appeal in FPM Constructions; and

4. the account that Mr McLure gave to Sackar J of the undertaking given by Mr Parker, on account of Paramount, to Rein J (see [46] above) was not given in the “proper context” as Mr McLure did not tell Sackar J that Mr Parker would not necessarily be appearing for Paramount in Mr Murphy’s proceedings.

119. A failure to make full disclosure on an application for an ex parte injunction may result in the injunction being dissolved (for example, Thomas A Edison Ltd v Bullock (1912) 15 CLR 679 at 681-2; Aristocrat Technologies Australia Pty Ltd v Allam [2016] HCA 3; 90 ALJR 370 at [15]; Garrard (t/as Arthur Anderson & Co) v Email Furniture Ltd (1993) 32 NSWLR 662 at 676-677).

120. However, I do not see the matters relied upon by Mr Parker, whether taken individually or collectively, to provide a basis to set aside the freezing order.

121. There is no suggestion here that any non-disclosure was deliberate. Although Mr Firth did not, in his affidavit, disclose the terms of his conversation with the liquidator, he did disclose that he received a report from the liquidator which stated that the liquidator “intends to conduct an urgent investigation into the affairs” of Paramount. In my opinion it was sufficient for Mr McLure to draw Sackar J’s attention to the High Court’s decision in Knight. I do not accept that there was any mischaracterisation by Mr McLure of the undertaking given by Mr Parker to Rein J on behalf of Paramount. Mr McLure accepted that it would have been better had Sackar J’s attention been drawn to the payment to Mr Mathers. However, I do not see this factor, alone, as providing a basis to set aside the orders.

119. Mr Parker also submitted that, once the Clients, through their legal advisers, learned from the documents produced on subpoena by Paramount’s liquidator that the transfer of clients from Paramount to PCL had occurred in between May and December 2015 (rather than “recently” as Mr McLure told Sackar J), it was incumbent on them to re-approach the Court and reveal that change of circumstance. Mr Parker referred to observations of Dr Spry to this effect in his work The Principles of Equitable Remedies (9th ed, 2014, Lawbook Co) at 518 (referring to observations of Stein J (as his Lordship then was) in Commercial Bank of the Near East Ltd v A, B, C and D [1989] 2 Lloyd’s Rep 319.

120. However, as Sackar J had, in effect, fixed the further hearing of the freezing order before me on 9 June 2016, I do not see the Clients’ failure to re-visit the continued operation of the freezing order until then as providing a basis, of itself, to dissolve the freezing order. In any event, Mr Marocchi and PCL knew the true position as to when the files were transferred and could themselves have re-agitated the matter.

Should the freezing order be extended against Mr Marocchi?

124. Mr Marocchi has, through Mr Parker, given an undertaking to the Court that he would meet any third party costs order I made against him. Mr Marocchi is an officer of the Court. The consequences for him of not complying with an undertaking to the Court are obvious. I see no reason to apprehend that Mr Marocchi would not comply with that undertaking. Accordingly, I see no reason to extend the freezing order by reason of the third party costs order I propose to make, notwithstanding the fact that there will be a delay while those costs are assessed.

125. The remaining basis for extension of the freezing order is said to be an apprehension that Mr Marocchi might dispose of or encumber his personal assets to frustrate or defeat the Clients’ prospective claims against him in the District Court proceedings.

126. The Court’s jurisdiction to make a freezing order is, by reason of Uniform Civil Procedure Rules 2005 (NSW) r 25.11:

“…for the purpose of preventing the frustration or inhibition of the court’s process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied.”

127. Mr McLure drew attention to authorities which establish that:

1. a freezing order may be made “even though the risk of such dissipation may be assessed as being somewhat less probable than not” (Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 325 per Gleeson CJ);

2. a freezing order may be granted even if there is no evidence of the respondent’s positive intention to frustrate a judgment (National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277 per Mason CJ, Brennan and Deane JJ);

3. evidence that the respondent has been shown to be “secretive” or to show a “lack of candour” (Victoria University of Technology v Wilson [2003] VSC 299 at [34] per Redlich J) or to have “previously acted in a way which shows that his probity is not to be relied on” (Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG; The Nidersachsen [1984] 1 All ER 398 per Mustill J; cited with approval in Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014 at [11] per Kenny J) are relevant to the exercise of discretion to grant an order.

128. In substance, Mr McLure’s submission was that Mr Marocchi’s conduct in:

1. causing Paramount (a company in which he had a 100 per cent interest) to transfer its clients, and thus in effect its business (but not its trade liabilities or its contingent, but probable, liability to the Clients), to PCL (a company in which he has no interest and which is beneficially owned by his de facto wife) without consideration for the goodwill associated with that business and doing so to thwart the Clients’ claims against Paramount;

2. managing Paramount’s affairs so as to ensure it had no funds to meet any liability Paramount might have to pay the costs of these proceedings or any damages awarded against it in the District Court proceedings;

3. causing Paramount to be placed into liquidation seven days after delivery by Rein J of his judgment of 4 May 2016;

pointed to the relevant degree of risk that Mr Marocchi would, absent restraint, dispose of, or encumber his assets so as to ensure that such judgments as the Clients obtained against him in the District Court proceedings will not be satisfied.

129. In my opinion, there is substance in that submission.

130. In those circumstances, after the conclusion of oral argument, through my Associate, I enquired of Mr Parker as to whether Mr Marocchi was prepared to give the Court any undertaking concerning the disposition or encumbrance of his assets pending resolution of the Clients’ proposed claims against him.

131. Mr Marocchi owns two properties in Balmain jointly with Ms Merlo. One was purchased by Mr Marocchi and Ms Merlo as joint tenants in January 2004 for a little under $1 million and the other (which appears to be the family home) in November 2013 for some $3.7 million. Mr Marocchi swore an affidavit of 20 May 2016 in support of his application made that day to vary the freezing order (see [56] above). In that affidavit, he estimated the total value of the two properties to be $5.5 million and stated that they were encumbered in a total amount of $3.6 million. If those figures are right (and the estimates of value appear reasonable, bearing in mind the purchase price of the properties and the time that has elapsed since their purchase), Mr Marocchi’s equity in the properties is in the order of $950,000.00.

132. Mr Parker informed my Associate that Mr Marocchi had instructed him that he would undertake to the Court not to dispose of, or further encumber, his interest in the two Balmain properties, without giving fourteen days’ prior notice to the Clients.

133. In my opinion that undertaking provides sufficient protection for the Clients’ position.

134. The freezing order restrains Mr Marocchi (and PCL) from dealing with their assets up to $1.5 million.

135. But I would not, in any event, have been prepared to continue the freezing order in that form.

136. Continuation of the freezing order could not be justified at a level any higher than the amount the Clients might recover from Mr Marocchi, assuming they were successful. The total amount of the Clients’ claims (including interest) is in the order of $660,000.

137. Mr Firth has estimated the costs of the Clients’ claims in the District Court proceedings at something in the order of $400,000. But that figure is based on the figures in the conditional lump sum costs agreements Mr Firth has with each of the Clients. Mr Firth agreed that the figures do not represent a considered assessment by him of the amount likely to be recoverable by the Clients, should they be successful.

138. In those circumstances, I consider a more reasonable limit for the freezing order to be $850,000.

139. The undertaking offered by Mr Marocchi appears at least as valuable as a freezing order so varied.

140. It is true that, if Mr Marocchi gives notice of his intention to dispose of, or further encumber his interest in one or both of the Balmain properties, the Clients will have to consider whether, in the circumstances that then obtain, they should move for further relief. But that is a question best considered in light of the progress then made in the Clients’ litigation against Mr Marocchi. Mr Marocchi would be well advised to assume that, if that circumstance arose, it would likely be considered in light of Mr Marocchi’s conduct as revealed in these reasons.

141. In those circumstances, I propose to:

1. Order that Mr David Marocchi be jointly and severally liable with Paramount Lawyers Pty Ltd (in liquidation) for the costs ordered by Rein J on 4 May 2016.

2. Note the undertakings given to the Court by Mr Marocchi that he will:

1. pay the amount of costs agreed or assessed pursuant to order (1);

2. not dispose of, or further encumber his interest in the two properties located in Balmain and contained in certificates of title 3/2821 and 8 & 9/3157 being Auto Consol 1208-49 without giving the defendants 14 days’ notice.

3. Order that any notice of the kind referred to in (2)(b) be in writing and directed to the defendant’s solicitor, Mr Stephen Firth at Level 6, 370 Pitt Street Sydney, and at fax [phone] and at [email protected].

4. On the basis of those undertakings, decline to extend the freezing orders of 17 May 2016 beyond today.

5. Otherwise dismiss the defendant’s notice of motion of 17 May 2016.

6. Order that Mr Marocchi pay the defendants’ costs of that notice of motion.

7. Make no order as to the costs of Paramount Compensation Lawyers Pty Ltd of that notice of motion.

142. I will invite submissions as to the final form of orders that should be made.

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Amendments

30 June 2016 - Typographical error in [72] corrected

30 June 2016 - Typographical error in [34] corrected

Decision last updated: 30 June 2016