FEDERAL COURT OF AUSTRALIA
Polis v Zombor (No 5) [2022] FCA 122
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- Polis v Zombor (No 5) [2022] FCA 122
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- [2022] FCA 122
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CaseChat Overview and Summary
In Polis v Zombor (No 5), the court was called upon to consider an application to set aside orders for preliminary discovery that had been made in the absence of the prospective respondent, Mr Zombor. The case arose from an originating process filed by Mr Henry Polis, who sought discovery from Mr Zombor under r 7.23 of the Federal Court Rules 2011 (Cth). Mr Polis sought information to assist in determining whether to commence proceedings against Mr Zombor for deceit, misleading or deceptive conduct and/or unconscionable conduct. After Mr Polis' death, his widow, Mrs Gaye Scott Polis, sought to pursue the proceeding in her capacity as executor of Mr Polis’ estate. The primary issue before the court was whether there were sufficient grounds to grant the application to set aside the preliminary discovery orders.
The court considered several factors in its reasoning, including the maximum value of the claim, which was estimated to be $14,000. Given that the costs of the proceeding were likely to exceed the value of the claim, the court held that it was inconsistent with the overarching purpose of the Federal Court Rules to order preliminary discovery for a potential claim of such a low monetary amount. Additionally, the court found considerable defects in Mrs Polis' proposed causes of action, including the lack of a basis for an allegation of deceit, the remote prospect of establishing a claim for misleading or deceptive conduct, and the absence of a basis for an allegation of unconscionable conduct.
Consequently, the court set aside the preliminary discovery orders and dismissed the originating application. No costs were awarded for the interlocutory application or the originating application. This decision underscores the importance of the overarching purpose of the Federal Court Rules and the need to balance the cost of litigation against the value of the claims being pursued.
The court considered several factors in its reasoning, including the maximum value of the claim, which was estimated to be $14,000. Given that the costs of the proceeding were likely to exceed the value of the claim, the court held that it was inconsistent with the overarching purpose of the Federal Court Rules to order preliminary discovery for a potential claim of such a low monetary amount. Additionally, the court found considerable defects in Mrs Polis' proposed causes of action, including the lack of a basis for an allegation of deceit, the remote prospect of establishing a claim for misleading or deceptive conduct, and the absence of a basis for an allegation of unconscionable conduct.
Consequently, the court set aside the preliminary discovery orders and dismissed the originating application. No costs were awarded for the interlocutory application or the originating application. This decision underscores the importance of the overarching purpose of the Federal Court Rules and the need to balance the cost of litigation against the value of the claims being pursued.
Orders
Orders of the court
1. Pursuant to r 39.05 of the Federal Court Rules 2011, order 2 of the orders of the Honourable Justice Murphy made on 5 February 2019 be set aside.
2. The originating application be dismissed.
3. There be no order as to costs of the interlocutory application dated 17 November 2021 or the originating application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
For the reasons that follow, I make orders that the preliminary discovery orders be set aside and the originating application be dismissed, but that no costs of the interlocutory application or the originating application be awarded.Background The proceeding has a lengthy background brought about, in large part, by Mr Zombor’s failure to take any step in the proceeding until the present application. The proceeding was commenced on 27 February 2018 by the filing of an originating process in which the prospective applicant, Mr Henry Polis, sought orders for discovery from the prospective respondent, Mr Luke Zombor, under r 7.23 of the Federal Court Rules 2011 (Cth) (Federal Court Rules). Mr Polis considered that he may have causes of action against Mr Zombor based in deceit, misleading or deceptive conduct and/or unconscionable conduct, but required further information to assist in deciding whether to commence such a proceeding. Mr Polis has since died. His widow, Mrs Gaye Scott Polis, seeks to pursue the proceeding in her capacity as executor of Mr Polis’ estate. On 3 November 2021, orders were made by consent joining Mrs Polis to the proceeding in her capacity as executor of the estate of the late prospective applicant, pursuant to r 9.09(2). The events giving rise to the potential causes of action were stated by Mr Polis in an affidavit sworn 21 February 2018 (the 2018 Polis Affidavit). The following is a summary of those events:(a)In about November 2007, Mr Polis says that he provided a $70,000 loan to Mr Zombor and his son, Mr Benjamin Polis, to assist them in starting a new business (which Mr Polis refers to as the “Start-up Loan”). The Start-up Loan was interest-free, repayable at call and Mr Zombor and Benjamin Polis were jointly and severally liable to repay the Start-up Loan. Mr Polis transferred $70,000 to a bank account set up in the name of Polis Australia Pty Ltd (now deregistered) (Polis Australia).(b)In February 2009, Mr Zombor and Benjamin Polis incorporated Energy Watch Pty Ltd (Energy Watch), and the new business was operated through that entity.(c)On or about 19 August 2009, Polis Australia entered into liquidation. Mr Polis deposed that he did not lodge a proof of debt as the Start-up Loan agreement was with Mr Zombor and Benjamin Polis personally. (d)In about June 2012, Energy Watch went into liquidation. Mr Polis again deposed that he did not lodge a proof of debt for the same reason - the Start-up Loan agreement was with Mr Zombor and Benjamin Polis personally.(e)Mr Polis deposed that he had received some payments towards the repayment of the Start-up Loan, however the repayments were incorrectly recorded as a loan to Mr Polis in the books and records of Energy Watch. He deposed that he asked Benjamin “to plead with Luke” to change the accounts ledgers to accurately reflect the Start-up Loan repayments, however, this was not done. When Energy Watch went into liquidation, the liquidators sought recovery from Mr Polis of the amount recorded in the books as a loan. The statement of claim in that proceeding was annexed to Mr Polis’ affidavit. It claimed an amount from Mr Polis of $75,412.30. Mr Polis deposed that he settled the proceeding on terms that were not favourable to him. An aspect of this evidence was not explained by Mr Polis in his affidavit. If it were correct that the amount paid by Energy Watch to Mr Polis was by way of repayment of the Start-up Loan, the amount repaid (as recorded in the books of Energy Watch) exceeded the amount of the Start-up Loan, suggesting that the Start-up Loan was repaid in full. However, the current application does not turn on that discrepancy. (f)In his affidavit, Mr Polis does not depose to taking any steps to call in or recover the amount of the Start-Up Loan from Mr Zombor or Benjamin Polis, including after the liquidation of Energy Watch.(g)Mr Polis annexed to his affidavit a statement of the Australian Financial Security Authority which recorded that, in February 2013, Mr Zombor began steps to have his affairs dealt with under Part X of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). Mr Zombor authorised James Patrick Downey of J P Downey & Co, Chartered Accountants to be his controlling trustee. Mr Polis also annexed a “Report by Controlling Trustee” made by Mr Downey under s 189A of the Bankruptcy Act which states that:(i)on 26 February 2013, Mr Zombor executed an Authority pursuant to the provisions of s 188 of the Bankruptcy Act;(ii)Mr Zombor had submitted a proposal for consideration by his creditors by which Mr Zombor agreed to pay a total of $95,000 to his creditors in two instalments – the first being $10,000 to be paid on or before 31 May 2013 and the second being $85,000 to be paid on or before 1 December 2013 – and upon compliance Mr Zombor would be released from all of his provable debts within the meaning of the Bankruptcy Act;(iii)Mr Zombor had provided the Controlling Trustee with a Statement of Affairs which showed that he had liabilities (to 15 unsecured creditors) totalling $9,694,182 and assets (being cash and superannuation) of only $13,000;(iv)if Mr Zombor’s proposal was accepted by creditors, they would receive an estimated return of “0.005 cents” in the dollar. It should be noted that the expression of that figure in the Report is inaccurate. The true figure is $0.005 in the dollar (which equates to 0.5 cents in the dollar).(h)The proposal was approved by Mr Zombor’s creditors and, on or about 12 April 2013, Mr Zombor executed a personal insolvency agreement under Part X of the Bankruptcy Act in accordance with the proposal. Mr Zombor complied with the obligations in the agreement.(i)Mr Polis was not identified as a creditor and did not participate in the approval of the proposal.(j)Mr Polis deposed to his belief that creditors who voted in favour of the personal insolvency agreement may have been misled by Mr Zombor as to his true financial capacity. That belief arises from the following matters:(i)Mr Polis believes that, at some time in around April 2012, the assets of Energy Watch were sold to a company called General Brokerage Services Pty Ltd (GBS) and that, in connection with that sale, GBS promised to pay Mr Zombor 20% of the proceeds of the future on-sale of that business.(ii)Mr Zombor’s interest in the future on-sale of that business was concealed through a number of corporate entities (the details of which are unnecessary to set out).(iii)On 30 May 2014, it was announced that iSelect Ltd had agreed to purchase GBS for $10 million.(iv)Mr Polis believes that Mr Zombor received an amount of approximately $2 million from the sale of GBS (being 20% of the proceeds).
Evidence
Evidence Before The Court
Justice Murphy went on to consider Mr Polis’ submission that his proposed claims were for unliquidated damages and therefore not a provable debt for the purpose of s 229, concluding that (a) the proposed claims for deceit, misleading or deceptive conduct and/or unconscionable conduct are claims for unliquidated damages and (b) the proposed claims do not arise by reason of a contract, promise or breach of trust. Accordingly, Justice Murphy concluded that the claims to be made in the prospective proceeding fall within the carve-out in s 82(2), and are not provable debts in the bankruptcy (at [44]). His Honour went on to state: I will make the interlocutory orders which Mr Polis seeks, but I will hear Mr Zombor in relation to these questions if he applies to vary or set aside those orders. If the prospective proceeding is commenced, it will also be open to Mr Zombor to rely on s 229(2)(c) to plead that Mr Polis is barred from commencing it and/or to apply to dismiss the proceeding.Mr Zombor’s application and evidence By his interlocutory application, Mr Zombor seeks the following orders:1.Pursuant to r 39.05, alternatively r 17.04 or alternatively r 30.21(2) of the Federal Court Rules 2011, order 2 of the orders of the Honourable Justice Murphy made 5 February 2019 be set aside.2. The originating application be dismissed.3. The Prospective Applicant pay the First Prospective Respondent’s costs of and incidental to this application.4. The Prospective Applicant pay the First Prospective Respondent’s costs of and incidental to this proceeding.5. Such further orders as this Honourable Court sees fit. In support of his application, counsel for Mr Zombor read an affidavit affirmed by Mr Zombor on 17 November 2021. Limited objections were sustained. Mr Zombor was not cross-examined. In his affidavit, Mr Zombor responds to the evidence given by Mr Polis in the 2018 Polis Affidavit and states that he denies “most of [Mr Polis’] allegations”. The specific allegations that Mr Zombor denies are as follows:(a)Mr Zombor denies that on or about 19 November 2007, he and Benjamin Polis (Mr Polis’ son) incorporated the entity Polis Australia as a vehicle to launch their business concept, which would later be known as Energy Watch. Mr Zombor says he did not speak with Benjamin Polis regarding the incorporation of Polis Australia nor did he have anything to do with the incorporation of Polis Australia. He was not at any time a director, secretary or shareholder of Polis Australia. Mr Zombor says he did not have anything to do with Polis Australia until around March 2008 when Benjamin approached him and asked him to work for Polis Australia. At the time he was working for Neighbourhood Energy. At Benjamin’s request he resigned from Neighbourhood Energy and commenced working at Polis Australia in around late April 2008.(b)Mr Zombor denies that in or about November 2007 he and Benjamin Polis approached Mr Polis and asked to borrow $70,000 for a start-up loan and that Mr Polis transferred that amount into a bank account that had been set up in the name of Polis Australia. Mr Zombor says he did not have any discussions with either Mr Polis or Benjamin Polis regarding a loan from Mr Polis, nor was he a party to any agreement in this regard.(c)Mr Zombor denied Mr Polis’ evidence that “I spoke with Luke on a regular basis, as he would often borrow funds from me (personally) at short notice. I previously had no reason not to trust Luke as he was Benjamin's best friend, and had typically paid me back when he was able to”. Mr Zombor says that he rarely spoke with Mr Polis and has not borrowed money personally from him at any time. (d)Mr Zombor also denies Mr Polis’ claim that Benjamin Polis asked Mr Zombor to change the loan ledgers of Energy Watch. In this regard Mr Zombor states:I am aware that Benjamin borrowed money from his parents from time to time both personally and on behalf of Energy Watch and that payments were made from Energy Watch to Benjamin’s parents to repay the loans. I am also aware that Energy Watch provided other benefits to Benjamin’s family such as use of a vehicle, petrol, insurance, and registration. Energy Watch also hired Henry’s daughter to manage the admin team at a pay level in excess of the prevailing market rate.(e)In respect of Mr Zombor’s personal insolvency agreement, Mr Zombor says that he did not include Mr Polis in his list of creditors as he had not borrowed money from Mr Polis and did not owe him money. (f)As to Mr Polis’ belief that Mr Zombor concealed from creditors his interest in the sale of GBS (and his ultimate receipt of $1,930,000 from that sale), Mr Zombor says:14I deny that I had any arrangement to benefit, or did benefit, either directly or indirectly from any sale of the assets or business of Energy Watch to GBS, or the sale of GBS to iSelect Limited. There was a sale of some assets of Energy Watch to GBH. I cannot recall the precise details such as exactly what was sold, when or for how much. The sale was an arm’s length transaction and I did not receive any benefit from it.15 In relation to paragraph 53, I specifically say as follows:(a) I did not receive any funds or other benefit as a result of the sale of GBS to iSelect either through the transactions described in paragraph 53 or otherwise;(b) LMZ Project Pty Ltd and Latrme Pty Ltd did not receive any funds or other benefit as a result of the sale of GBS to iSelect either through the transactions described in paragraph 53 or otherwise.16I deny that I dealt with or obtained assets which were not disclosed in my Part X application.
Decision
Reasons for decision
As to Mr Zombor’s arguments on the exercise of the Court’s discretion to order preliminary discovery, I accept that the quantum of the claim is a relevant consideration having regard to the overarching purpose in s 37M of the Federal Court Act, particularly the objective of resolving disputes at a cost that is proportionate to the importance and complexity of the matters in dispute. Mrs Polis did not contest Mr Zombor’s submission that the maximum value of the claim is $14,000. Indeed, when various contingencies relating to causation are taken into account, particularly the value that might have been ascribed to Mr Zombor’s alleged interest in GBS at the time of the Part X proposal, the value of the claim is likely to be less. While interest may be added to the claim, Mr Zombor’s submission that the costs of this proceeding alone, let alone any subsequent proceeding, are likely to exceed the amount of the claim should be accepted. In my view, that factor is relevant to the exercise of the Court’s discretion. It is inconsistent with the overarching purpose of the Federal Court Rules to order preliminary discovery in respect of a potential claim for recovery of a monetary amount that is less than the costs that will be incurred in the application for preliminary discovery, let alone any subsequent proceeding.Conclusion In conclusion, while I do not consider that Mr Zombor has provided a satisfactory explanation for his failure to appear at the hearing of the preliminary discovery application before Justice Murphy, I consider that on the material and submissions now before me there are powerful reasons for refusing an order for preliminary discovery. Most importantly, it is apparent that there are considerable defects in Mrs Polis’ proposed causes of action including:(a)in respect of the claim of deceit, there can be no basis for an allegation that Mr Zombor made the alleged false representation (being the misstatement of his true financial capacity in his statement of affairs provided to his creditors) with the intention that it be relied upon by Mr Polis, nor for an allegation that Mr Polis acted in reliance on that false representation or suffered damage caused by that reliance;(b)in respect of the claim of misleading or deceptive conduct, the prospect of Mrs Polis establishing that Mr Zombor’s alleged false representation caused Mr Polis loss is remote and, in any event, the claim for relief would be statute-barred; and(c)in respect of the claim of unconscionable conduct based on equitable principles, there can be no basis for an allegation that Mr Zombor took unconscientious advantage of some disabling condition or circumstance that seriously affected the ability of Mr Polis to make a rational judgment as to his own best interests in circumstances where Mr Polis was not a participant in Mr Zombor’s arrangements under Part X of the Bankruptcy Act. Any such claim also suffers the same problems of causation of loss and being statute-barred.
Ratio Decidendi
Legal Principle Established
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