Spalla v St George Motor Finance Ltd (No 7)
[2006] FCA 1177
•12 SEPTEMBER 2006
FEDERAL COURT OF AUSTRALIA
Spalla v St George Motor Finance Ltd (No 7) [2006] FCA 1177
PRACTICE AND PROCEDURE – motion to set aside deed in relation to settlement of proceedings – lack of good faith asserted
INSOLVENCY – liquidator’s duty to act independently in the best interests of the company
Corporations Act 2001 (Cth), ss 181(1), 477(2A), 545(1), 1321
Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 513 referred to
Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 1566 referred to
St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094 referred to
Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466 referred to
Spalla v St George Motor Finance Ltd (No 5) [2004] FCA 1262 referred to
Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 referred to
Beck v Spalla [2005] FCAFC 82 referred to
Rambaldi v Spalla [2005] VSC 162 referred to
Westpac Banking Corporation v Totterdell (1998) 29 ACSR 448 referred to
Re Jay-O-Bees Pty Ltd (In Liquidation); Rosseau Pty Ltd (In Liquidation) v Jay-O-Bees Pty Ltd (In Liquidation) (2004) 50 ACSR 565 referred to
Re LuxtrendPty Ltd (In Liquidation) (1996) 135 FLR 170; [1997] 2 Qd R 86 referred to
Farrow Finance Co Ltd (In Liquidation) v ANZ Executors and Trustees Company Ltd (1996) 136 FLR 154; [1998] 1 VR 50 referred to
Re Tietyens Investments Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (1999) 31 ACSR 1 referred to
Watson v Foxman (2000) 49 NSWLR 315 referred to
Briginshaw v Briginshaw (1938) 60 CLR 336 referred to
Ex parte Sidebotham; In re Sidebotham (1880) 14 Ch D 458 referred to
Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 referred to
Bridgeport – Advisers & Asset Managers Pty Ltd (2005) 221 ALR 146 referred to
Koowarta v Bjelke-Petersen (1982) 153 CLR 168 referred to
Starmaker (No 51) Pty Ltd v Mawson KLM Holdings Pty Ltd [2005] SASC 313 referred to
Re Hedge (No 2) (2002) 196 ALR 557 referred to
Re Glowbind Pty Ltd (In Liquidation); Takchi v Parbery (2003) 181 FLR 208 referred to
Yeomans v Walker (1986) 5 NSWLR 378 referred to
SBBS v Minister for Immigration and Multicultural and Indigenous Affairs (2002) 194 ALR 749 referred to
Minister for Immigration and Multicultural and Indigenous Affairs v SBAN [2002] FCAFC 431 referred to
Secretary, Department of Education, Employment, Training and Youth Affairs v Prince (1997) 152 ALR 127 referred to
Pledger v Secretary, Department of Family and Community Services [2002] FCA 1576 referred to
Star v Silvia (No 1) (1994) 12 ACLC 600 referred to
Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114 referred to
Cook v Northoak Holdings Pty Ltd (1997) 25 ACSR 517 referred to
Jones v Dunkel (1959) 101 CLR 298 referred to
Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99 referred to
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 referred to
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 referred to
Re Club Superstores Australia Pty Ltd (In Liquidation) (1993) 10 ACSR 730 referred to
Re Allebart Pty Ltd (In Liquidation) and the Companies Act [1971] 1 NSWLR 25 referred to
Dew v Richardson [1999] QSC 192 referred to
Kelley v Corston [1998] 3 WLR 246 referred toANTHONY PATRICK SPALLA v ST GEORGE MOTOR FINANCE LTD (ACN 007 656 555), ST GEORGE WHOLESALE FINANCE PTY LTD (ACN 001 834 886), ANDREW WILLIAM BECK, ANDREW STEWART HOME, DELOITTE TOUCHE TOHMATSU, SIMON ALEXANDER WALLACE SMITH, ST GEORGE MOTOR WHOLESALE PTY LTD (ACN 007 664 217), GUISEPPE MICHELE RAMBALDI AND IRLMOND PTY LTD (RECEIVER & MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 066 314 870)
VID 631 OF 2005KENNY J
12 SEPTEMBER 2006
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 631 OF 2005
BETWEEN:
ANTHONY PATRICK SPALLA
ApplicantAND:
ST GEORGE MOTOR FINANCE PTY LTD (ACN 007 656 555)
First RespondentST GEORGE WHOLESALE FINANCE LTD (ACN 001 834 886)
Second RespondentANDREW WILLIAM BECK
Third RespondentANDREW STEWART HOME
Fourth RespondentDELOITTE TOUCHE TOHMATSU
Fifth RespondentSIMON ALEXANDER WALLACE SMITH
Sixth RespondentST GEORGE MOTOR WHOLESALE PTY LTD (ACN 007 664 217)
Seventh RespondentGUISEPPE MICHELE RAMBALDI
Eighth RespondentIRLMOND PTY LTD (RECEIVER & MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 066 314 870)
Ninth RespondentJUDGE:
KENNY J
DATE OF ORDER:
12 SEPTEMBER 2006
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The third further amended notice of motion filed on 18 April 2006 be refused and the proceeding be otherwise dismissed.
2.On or before 4 pm on 26 September 2006, the parties file and serve submissions as to the disposition of costs.
3.On or before 4 pm on 3 October 2006, the parties file and serve any submissions in reply to submissions filed in accordance with [2] above.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 631 OF 2005
BETWEEN:
ANTHONY PATRICK SPALLA
ApplicantAND:
ST GEORGE MOTOR FINANCE PTY LTD (ACN 007 656 555)
First RespondentST GEORGE WHOLESALE FINANCE LTD (ACN 001 834 886)
Second RespondentANDREW WILLIAM BECK
Third RespondentANDREW STEWART HOME
Fourth RespondentDELOITTE TOUCHE TOHMATSU
Fifth RespondentSIMON ALEXANDER WALLACE SMITH
Sixth RespondentST GEORGE MOTOR WHOLESALE PTY LTD (ACN 007 664 217)
Seventh RespondentGUISEPPE MICHELE RAMBALDI
Eighth RespondentIRLMOND PTY LTD (RECEIVER & MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 066 314 870)
Ninth Respondent
JUDGE:
KENNY J
DATE:
12 SEPTEMBER 2006
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
1In this proceeding, the applicant, Mr Anthony Patrick Spalla, seeks to set aside a settlement (“the settlement”) entered into by the respondents. The settlement relates to an earlier proceeding, VID 3203 of 2002 (“the primary proceeding”), and a related appeal, VID 83 of 2005 (“the appeal”), involving essentially the same persons. In order to set aside the settlement, he seeks to have a Deed (“the Deed”) also entered into by these persons set aside. He seeks to do so on the basis that Mr Rambaldi, the liquidator of a company formerly controlled by him, executed the Deed in bad faith.
2For the reasons I am about to give, I would dismiss Mr Spalla’s application. He has failed to show that Mr Rambaldi acted in bad faith in executing the Deed. On the contrary, the evidence shows that Mr Rambaldi acted in good faith in his dealings with Mr Spalla and as Irlmond’s liquidator.
PARTIES
3The applicant, Mr Spalla, controlled Irlmond Pty Ltd (“Irlmond”), prior to the appointment of receivers and managers and, ultimately, a liquidator. Irlmond traded in motor cars under the name “Essendon Mitsubishi and North City Daewoo” (“Essendon Mitsubishi”). Mr Spalla also controlled a related company, APS Wholesale Pty Ltd (“APS”), which purchased new cars and acted as the wholesale company for the dealership.
4St George Motor Finance Limited (“St George Motor Finance”) and St George Wholesale Finance Pty Ltd (“St George Wholesale Finance”) (collectively, with St George Motor Wholesale Pty Ltd, referred to as the “St George parties”) provided finance for Irlmond and APS by way of a floor plan.
5On 12 February 1999, the St George parties appointed Mr Andrew William Beck and Mr Andrew Stewart Home, both from Deloitte Touche Tohmatsu (“Deloittes”), to be the receivers and managers of the property of Irlmond and APS. Messrs Beck and Home retired on 8 August 2003. On 23 September 2003, Mr Simon Wallace-Smith, a partner at Deloittes, was appointed receiver and manager of Irlmond and APS in their place. Deloittes and Messrs Beck, Home and Wallace-Smith will be referred to collectively as the “Deloitte parties”.
6Mr Guiseppe Michele Rambaldi, a partner at Pitcher Partners, was appointed liquidator of Irlmond on 7 February 2001. He is sometimes referred to below as “the liquidator”.
HISTORICAL COURT PROCEEDINGS
7In proceeding V 74 of 1999, Mr Spalla contested the appointment of Messrs Beck and Home as receivers and managers of the property of Irlmond and APS. Finkelstein J held that their appointment was lawful: see Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 513 (“Spalla (No 1)”). In his reasons, his Honour addressed the question of whether Irlmond and APS were insolvent at the time receivers were appointed. Mr Spalla contended that the companies were not insolvent at that time. His Honour held, however, that “the fact that the companies were insolvent is an inescapable conclusion from the evidence”: see Spalla (No 1) at [140].
8Mr Spalla appealed against the decision of Finkelstein J to the Full Court. The Full Court, which was constituted by Heerey, Sundberg and Weinberg JJ, upheld his Honour’s decision: see Spalla v St George Wholesale Finance Pty Ltd [1999] FCA 1566 (“Spalla (No 2)”). The Full Court held, amongst other things, that the primary judge was correct to find that Irlmond and APS were insolvent at the time receivers were appointed: see Spalla (No 2) at [61]-[70].
9In proceeding V 7877 of 1999, St George Wholesale Finance unsuccessfully petitioned for a sequestration order against Mr Spalla based on an alleged failure to comply with a bankruptcy notice. The notice claimed that Mr Spalla owed a debt pursuant to the judgment obtained in proceeding V 74 of 1999 before Finkelstein J. Mr Spalla contested the sum specified. In St George Wholesale Finance Pty Ltd v Spalla [2000] FCA 1094 at [40]-[41], Heerey J concluded that “St George is not sure itself what is really owing under the judgment” and that “this proceeding amounts to an abuse of the procedures provided by the Act”.
10On 14 April 2000, Mr Spalla and Mr Andrew David Bentley Still (an accountant and company secretary of Irlmond and APS until 12 February 1999) were charged with 22 counts of dishonest false accounting in respect of their conduct at Irlmond. There was a trial in the County Court of Victoria. On 10 September 2002, the number of charges was reduced to four. On 19 September 2002 a jury, by direction of Judge Hart, acquitted Mr Spalla and Mr Still. In his ruling, his Honour said “[t]he evidence in support of the proposition that the accused acted only for the purpose of benefiting the company is overwhelming [and there] is no evidence which the Crown can point to which is inconsistent with this proposition”.
11A new proceeding, referred to above as the “primary proceeding”, was filed in the Federal Court on 17 October 2002, shortly after Mr Spalla and Mr Still were acquitted of the criminal charges. Irlmond joined the primary proceeding as an applicant. On 6 May 2005, pursuant to the Deed that is the subject of this proceeding, Irlmond settled all of its claims in the primary proceeding and the appeal. The procedural details and history of the primary proceeding are discussed in more detail in the Court’s factual findings below.
THIS PROCEEDING
12On 18 May 2005, Mr Spalla filed a notice of motion in the primary proceeding seeking to set aside the Deed. He filed an amended notice of motion on 30 May 2005. On 22 June 2005, French J ordered that the notice of motion be treated as an application by way of originating process in a new proceeding. Accordingly, this proceeding was allocated a separate file number (VID 631 of 2005). On 18 April 2006, Mr Spalla filed a third further amended notice of motion with the leave of the Court.
13In his third further amended notice of motion, Mr Spalla seeks the following relief:
“1. An Order that the Deed … is unenforceable against Irlmond …
1.A.An Order that the Deed … was entered into in bad faith and breach of the Litigation Funding Agreement dated 15th March 2002.
1.B.An Order that the Deed … was entered into in bad faith, in breach of [the liquidator’s] duties pursuant to sections 180 (2) (a) & (d) 181 (a) & (b), 182 (a) & (b) and 184 (c) & (d) of the Corporations Act.
2.An Order that the Deed … be set aside on the grounds of it being void ab initio.
2.A.An Order pursuant to section 1324 of the Corporations Act, restraining the [liquidator] from taking any steps to give effect to the Deed …
2.B.An Order on appeal from the decision of the [liquidator] executing the Deed … pursuant to section 1321 and 1321(d) of the Corporations Act, and pursuant to that appeal, orders reversing or modifying such decision.
3.An Order that [the liquidator] is liable for all the costs on an indemnity basis incurred by the Applicant as a result of the execution by [the liquidator] of the Deed …
4.A.An Order permanently restraining the Respondents from acting upon or enforcing the Deed …
5.A.An Order pursuant to section 236 (1) (a) (i) and 236 (2) of the Corporations Act 2001 that the Applicant be granted leave to intervene in proceedings No. 3203 of 2002 and Appeal No. VID 83/05 for the purpose of taking responsibility on behalf of the company for those proceedings and in the company’s name.
5.B.An Order pursuant to section 237 that an application for and granting leave for reasons purpose as defined in section 237 (a), (b), (c) and (d) be granted.
…
8. An Order for costs on an indemnity basis against [the liquidator] in respect [of] the mediation, preparation and lodgement of all Appeal documents.
9. Such other relief as the Court may Order.”
14The motion was heard on various dates in March, April, May and July 2006.
EVIDENCE
15Mr Spalla relied on affidavits (and exhibits) sworn on 18 May 2005, 20 June 2005, 5 July 2005, 22 July 2005 and 10 March 2006. Mr Spalla also sought to rely on an affidavit sworn by him on 1 June 2005. For reasons given during the hearing, I excluded that affidavit. Mr Spalla also called Mr Phillip Frank Borden of Home Wilkinson and Lowry (“HWL”) as a witness.
16Both Mr Spalla and Mr Rambaldi gave oral evidence in chief and were cross-examined.
17Mr Rambaldi and Irlmond also relied on an affidavit (and exhibits) sworn by Mr Rambaldi on 27 May 2005 and three affidavits sworn by him on 9 September 2005. They also relied on an affidavit sworn by Mr David Raj Vasudevan of Pitcher Partners on 9 September 2005.
18By consent, two unsworn statements of Ms April Arslan of HWL together with exhibits were admitted into evidence. Further, an affidavit sworn by Mr Andrew Jonathan Fisher on 24 September 2003 and an exhibit thereto (both of which were filed in the primary proceeding) were tendered by Mr Spalla without objection. There were a relatively small number of other documents admitted into evidence in the course of the trial.
19The St George parties and the Deloitte parties did not present any evidence.
20Unsurprisingly, given the subject matter of the present dispute, claims for legal professional privilege were raised from time to time. For the most part, they were not pursued or they were waived. Privilege was, however, claimed and pursued with respect to a relatively small group of documents, largely consisting of the written advices of counsel. In relation to these documentary communications, the St George parties and the Deloitte parties voluntarily undertook not to seek access without leave of the Court and not to plead waiver of privilege by reason of events occurring at trial.
21There was also an issue, particularly at the commencement of the trial, as to whether or in what circumstances evidence could be given of what happened at mediation on 29 April 2005. This mediation was central to Mr Spalla’s present application. Ultimately, counsel for Irlmond and Mr Rambaldi specifically stated that they did not wish to take the point that evidence could or could not be adduced of statements at mediation. Mr Spalla presented his case on the basis that any such evidence should be given. The Deloitte parties and the St George parties did not argue for a different approach.
22Section 53B of the Federal Court of Australia Act 1976 (Cth) does not prevent the parties from adopting such a stance in this case, because there was no order made under this provision. Section 53B(a) provides that “[e]vidence of anything said, or of any admission made, at a conference conducted by a mediator in the course of mediating anything referred under section 53A is not admissible … in any court”. Section 53A(1) provides that the Court “may by order refer the proceedings … to a mediator.” At the commencement of the trial, the parties expressed uncertainty as to whether mediation in this case was pursuant to Court order or simply pursuant to agreement between them. A thorough review of the files and relevant transcripts from the primary proceeding and the appeals (VID 3203 of 2002, VID 54 of 2005 and VID 83 of 2005) establishes that the Court in fact made no order referring the proceeding to mediation, although it gave encouragement to the parties to do so.
23On 14 February 2005, Black CJ ordered (in both appeals) that the matters be referred to a judge of the Court for directions concerning possible mediation. The matters subsequently came before North J for directions on 16 March 2005 and 21 March 2005. At the directions hearing on 16 March 2005, his Honour discussed the utility of mediation with the parties, without ordering a referral to mediation. His Honour simply ordered that the matter be stood over for mention, if necessary, on 21 March 2005 and reserved costs. On 21 March 2005, his Honour inquired of the parties whether they had agreed upon the identity of a mediator and, when informed they had not, ordered that the matter be stood down to a date to be fixed and reserved costs. As it happened, the parties ultimately agreed upon the identity of a mediator and proceeded to mediation pursuant to a mediation agreement.None of the parties to this agreement relied on its terms in connection with the evidence given or sought to be given about the mediation or any related matter.
24Further, s 131 of the Evidence Act 1995 (Cth) does not prevent the parties to the present proceeding from giving evidence about the mediation. Subject to s 131(2), s 131(1) prevents parties to litigation from adducing evidence of “a communication … between persons in dispute … in connection with an attempt to negotiate a settlement of the dispute”. Counsel for Mr Rambaldi submitted that s 131 did not in fact apply to communications between Mr Spalla and Mr Rambaldi, because they were not “persons in dispute” for the purposes of s 131(1). I accept this submission. No-one submitted to the contrary. At the time of the mediation, Mr Spalla and Mr Rambaldi were not in dispute. Furthermore, neither of them was in dispute with Mr Borden, Ms Arslan or Mr Bowman.
25Further, neither the Deloitte parties nor the St George parties submit that evidence of communications at the mediation between them and the applicants in the primary proceeding should not be given. Section 131(1) does not prevent evidence being given in this case of communications with the Deloitte parties and the St George parties and Mr Rambaldi, Mr Spalla, Mr Borden, Ms Arslan or Mr Bowman, even if they were parties in dispute for relevant purposes. This is because s 131(2) provides that s 131(1) does not apply if, amongst other things, “the persons in dispute consent to the evidence being adduced in the proceeding concerned”; “the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute”; “the proceeding in which it is sought to adduce the evidence is … a proceeding in which the making of such an agreement is in issue”; or “making the communication … affects a right of a person”: see s 131(2)(a), (e), (f) and (i). In the circumstances of this case, these provisions operate to take out of the reach of s 131(1), evidence of any communication that might otherwise fall within this provision.
26Finally, whatever confidentiality once pertained to the Litigation Funding Agreement, discussed below, was lost by the time of the trial.
FACTUAL FINDINGS
The commencement of the primary proceeding and joinder of Irlmond
27The primary proceeding began on 17 October 2002, when Still & Co filed the original application and statement of claim on behalf of the then applicants. Those applicants were Mr Spalla and his wife, Stella, Mr Still, and Anstella Nominees Pty Ltd (“Anstella”) as the holder of all shares in Irlmond and APS. Irlmond was not one of the original parties to the primary proceeding. The original respondents included St George Motor Finance, St George Wholesale Finance, Messrs Beck and Home, and Deloittes. By their original statement of claim, the applicants alleged that the respondents had given false evidence in the proceeding before Finkelstein J and raised various claims relating to the receivership of Irlmond and APS. The applicants also claimed that the respondents had conspired wrongly to subject Mr Spalla and Mr Still to criminal conspiracy charges.
28Prior to May 2003, Mr Rambaldi retained the firm of Darrer Muir Fleiter to advise him with respect to the primary proceeding and, in particular, as to Irlmond’s prospects if it were to join in the proceeding. On 22 November 2002, Mr Rambaldi sought quotations for insurance litigation funding. In a facsimile dated 3 February 2003, Mr Rambaldi’s solicitors subsequently wrote to Mr Spalla’s solicitors stating that, as liquidator of Irlmond, Mr Rambaldi was not in a position to join in the primary proceeding, or institute his own proceeding, until he had entered into an acceptable funding arrangement, although Mr Rambaldi had “his own legal advice that various claims against the Respondents, or a combination of them are likely to be successful”.
29Throughout February and March 2003, Mr Rambaldi, assisted by Mr Vasudevan negotiated with IMF (Australia) Ltd (“IMF”), represented by Mr Clive Bowman, to secure litigation funding and, in particular, concerning the terms of a litigation funding agreement, which Mr Rambaldi required before agreeing to Irlmond becoming an applicant in the primary proceeding. The contemporaneous correspondence shows that control of the litigation was an important issue. By a letter dated 6 March 2003, IMF specifically noted that it wanted to avoid “Spalla attempting to block, or interfere with, a settlement which Irlmond wishes to pursue”. It reiterated this concern in an email of 29 April 2003. Ultimately, a funding agreement was reached with Insolvency Litigation Fund Pty Ltd (“ILF”), a wholly owned subsidiary of IMF. Before concluding the funding agreement, Mr Spalla retained the services of Mr Borden to act on his behalf in place of Still & Co.
30By motion, notice of which was dated 2 May 2003, Mr Rambaldi applied for leave from the Court to enter into the proposed funding agreement (“proposed funding agreement”), to which the applicants to the primary proceeding and ILF were to be parties. He also sought leave for Irlmond to join the primary proceeding. In his supporting affidavit, he deposed that, in the absence of the funding agreement, Irlmond could not join the proceeding since it would not have the funds to do so.
31The draft funding agreement included the following provisions:
“1.1 Definitions
…
“Irlmond claim” means the claim(s) prosecuted in the Proceeding by Irlmond as referred to in Clause B of this Agreement.
…
“Settlement Offer” means an offer by the Respondents or any one or more of them to settle the Liquidator and/or Irlmond’s claims in the Proceeding or to settle the Liquidator and/or Irlmond’s claims and/or the Spalla Interests claims in the Proceeding;
“Solicitors” means Home Wilkinson Lowry or such other firm of solicitors retained to act for the Liquidator and Irlmond from time to time; and
“Spalla Interests” means Anstella, Anthony Patrick Spalla, Stella Marie Spalla and Andrew David Bentley Still.
“Spalla Interests claim” means the claim(s) prosecuted in the Proceeding by the Spalla Interests as referred to in Clause B of this Agreement.”
…
9.CONTROL OF THE PROCEEDINGS
9.1.The Spalla Interests and the Liquidator agree that the Solicitors shall, after Court approval, conduct the Proceeding on behalf of the Liquidator and the Spalla Interests.
9.2The Solicitors shall at all times be instructed by the Liquidator in respect of the Irlmond claim and subject to clause 9.3, the Spalla Interests will not interfere with the conduct of the Proceeding by the Liquidator in respect of the Irlmond claim.
9.3Notwithstanding clauses 9.1 and 9.2, the Liquidator shall not instruct the Solicitors to:-
(a)settle or discontinue the Proceeding as a whole; or
(b)settle, amend, vary, abandon or discontinue any claim made or the relief sought by the Spalla Interests, or any one or more of them;
unless the instruction to the Solicitors is agreed to by both the Spalla Interests and the Liquidator. The provisions of clause 13 shall apply to this clause if the liquidator and the Spalla Interests do not agree to so instruct the solicitors.
9.4ILF shall not at any time interfere with the conduct of the Proceeding by the Liquidator or the Spalla Interests.
…
13.ARBITRATION
13.1On written notice to the other parties, any party hereto may request that an independent third party arbitrator be appointed to adjudicate any matter in dispute and may nominate an Arbitrator …
13.5The Arbitrator’s written determination shall be binding on the parties …
14.SETTLEMENTS
14.1If a Settlement Offer is received from the Respondents or any one or more of them or if the Applicants or any one or more of them wish to make an offer to settle and either:
(a)the Spalla Interests and the Liquidator cannot agree on accepting the terms of the Settlement Offer; or
(b)the Settlement Offer relates only to the Liquidator and/or Irlmond’s claims in the Proceedings and the Spalla Interests disagree with the Liquidator and/or Irlmond’s intention to accept the Settlement Offer and the Liquidator’s/Irlmond’s intention has been communicated to the Spalla Interests in a written document referring to this clause; or
(c)the Spalla Interests or the Liquidator cannot agree to the terms of an offer to be put to the Respondents to settle the Proceedings.
then any party may:
(i)on written notice to the other parties, request that an independent third party arbitrator be appointed to adjudicate on the Settlement Offer or offer to settle and may nominate an Arbitrator …
(iv)the Arbitrator shall make a written determination on whether the Settlement Offer or offer for settlement is reasonable having regard only to the legal issues involved in the Proceeding; …
(v)the Arbitrator’s written determination shall be binding on the parties; …
14.2 Upon receipt of the Arbitrator’s written determination, the parties shall be authorised to accept or reject the Settlement Offer or to put the offer of settlement and shall instruct the Solicitors, Senior Counsel and Junior Counsel accordingly.”
(Hereafter the expression “Spalla Interests” refers to Anstella, Mr and Mrs Spalla, and Mr Still.)
32At the hearing of the motion on 8 May 2003, Finkelstein J allowed Mr Iain Jones, as counsel for two of the St George parties in their capacity as creditors of Irlmond, to appear and make submissions. Mr Jones argued that the agreement, as then drafted, improperly limited the liquidator’s discretion to settle claims on behalf of Irlmond. Mr Jones noted that clauses 13 and 14 of the proposed funding agreement allowed the Spalla Interests to object to the liquidator accepting a settlement offer made only to Irlmond and, in the event of such an objection, delegated to an arbitrator the decision whether to accept such an offer. Mr Jones claimed that this arrangement was an unlawful restraint on the liquidator’s discretion. His Honour said that it appeared that Mr Jones was correct on this point. Mr Jones also argued that the proposed funding agreement – which allowed ILF to withdraw at any time on seven days’ notice but still take part in a distribution of any recovery – gave ILF a potential windfall if it withdrew shortly after executing the agreement.
33After the hearing of 8 May 2006, the parties to the proposed funding agreement negotiated further, in order to amend it so as to meet the concerns expressed by Finkelstein J. In particular, as part of these further negotiations, the parties considered the issue of control over any settlement offer to Irlmond and the issue of ILF getting a ‘windfall’ if it withdrew its indemnity shortly after executing the agreement. They prepared a new draft funding agreement. On 12 May 2003, Mr Rambaldi filed this new draft in the Court, together with counsel’s supplementary submission in support of the new agreement.
34This supplementary submission stated that the amendments to the proposed funding agreement “address the criticisms made by Mr Jones”. It continued:
“The effect of the amendments is to:
(a)remove any restriction on the power of the liquidator to accept a settlement offer made to the company. No limitations are imposed upon the liquidator at all in this regard;
(b)in the event that ILF terminates its indemnity pursuant to clause 6.2, to restrict the entitlement of ILF to the “Recovery” to simply a reimbursement of monies it has paid pursuant to clause 6.2.”
35The new agreement deleted the former clauses 13 and 14 from the earlier draft. Clause 9, relating to control of the proceedings, was unchanged except “clause 14” was substituted for the words “clause 13” in clause 9.3. A new clause 13 dealt with “Recoveries”. A new clause 14 relevantly read:
“14. DISPUTE RESOLUTION PROCEDURE
14.1If at any time, a dispute or difference arises in connection with this Agreement and that dispute or difference has not been able to be resolved by negotiations between the parties then a party may provide the other parties with a written notice addressed to the other parties outlining the dispute or difference, and if capable of remedy, requiring remedy on the expiry of 3 Business Days from receipt of the written notice.
14.2If the dispute or difference communicated to the other parties by written notice is not remedied or is not capable of remedy, then the parties agree to submit to mediation prior to the institution of Court proceedings utilising the following procedure:-
(a)The parties shall jointly appoint a mediator. If the parties cannot agree on a mediator within 2 Business Days of receipt of the written notice by the other parties, the parties agree that any one or more of the parties may request the President for the time being of the Law Institute of Victoria to nominate a mediator.
(b)The costs and expenses plus any GST payable to the mediator and the costs and expenses of the mediation shall be paid by Anstella.
(c)If a settlement is reached at the mediation, written terms of settlement shall be entered into immediately upon conclusion of the mediation and shall, unless Court approval of the terms of settlement is required, override the terms and conditions of this Agreement. …”
36On 14 May 2003, Finkelstein J delivered reasons for judgment giving approval to Mr Rambaldi as liquidator of Irlmond to enter into the funding agreement in the form attached to his counsel’s supplementary submission of 12 May 2003: see Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466 (“Anstella”). His Honour wrote (at [5]-[8]):
“The initial version of the draft agreement required the liquidator to surrender his power to control the destiny of the action in the event of disagreement between the liquidator and the other applicants concerning the settlement or discontinuance of the action. The draft agreement provided that the liquidator could not instruct his solicitors to settle or discontinue the proceeding without obtaining the consent of the other applicants. If there was a dispute, the matter had to go to arbitration. …
It seemed to me … that the proposal gave rise to a … difficulty, namely whether there are any circumstances under which a liquidator can lawfully give up his statutory powers or duties. There is a view that, while a liquidator may listen to the opinion of others on what steps he should take in a particular situation, in the end he must exercise his own judgment on what is or is not in the best interests of the creditors or contributories. For this reason he cannot give up control of litigation in which his company is a party. This is the view taken by Lightman J in Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80. …
Recognising the potential difficulty he was in, the liquidator sought time to see whether Insolvency Litigation Fund Pty Ltd (“ILF”) (the company providing the funding) could be persuaded to change the terms. This is in fact what occurred. The liquidator was able to negotiate the removal of the restriction on his ability to settle or discontinue the proceeding if Irlmond became a party to the action.”
37On 15 May 2003, the litigation funding agreement (hereafter referred to as “the LFA”) was executed by Mr and Mrs Spalla, Mr Still, Anstella, Mr Rambaldi, Irlmond, and ILF. Other significant provisions of the LFA include:
·Clause 4(a)(iv) provided that the “Spalla Interests shall pay and shall at all times remain liable to pay all Legal Costs charged by the Solicitors, Senior Counsel and Junior Counsel in respect to … Irlmond and the Liquidator’s participation in and conduct of the Proceeding.” Clause 4.2 required the Spalla Interests to provide the liquidator with a letter confirming that the Spalla Interests have sufficient funds to settle these costs.
·Pursuant to Clause 5.1, the Spalla Interests agreed to indemnify Irlmond and the liquidator in respect of legal costs claimed by their joint representatives in the proceeding.
·Clause 6.1 provided that ILF would indemnify the liquidator for any costs for which he becomes personally liable in relation to his and Irlmond’s participation in the primary proceeding. Pursuant to Clause 6.2, “[t]he indemnity provided by ILF to the Liquidator in respect of any Costs Order will not be a continuing indemnity, but may be terminated by ILF, in its absolute discretion by giving 7 days written notice to the Liquidator”. This right of termination was subject to a proviso that ILF would remain liable for any personal costs orders against the liquidator up to the time of termination.
·Clause 7 related to the appointment of solicitors and counsel and provided that solicitors and junior and senior counsel would be retained to act for the liquidator, Irlmond and the Spalla Interests. In accordance with clause 1.1, the solicitors were to be HWL “or such other firm of solicitors retained to act for the Liquidator and Irlmond from time to time” and senior counsel was to be Peter Hayes QC “or such other lead Counsel retained to act for the Liquidator and Irlmond from time to time”.
·Clause 15 contained certain warranties, including that the “Spalla Interests warrants [sic] that it [sic] has sufficient financial resources to carry out its [sic] obligations under this Agreement and shall continue to have such financial resources.”
38HWL and the Spalla Interests entered into a costs agreement with respect to the primary proceeding in May 2003. Mr Spalla’s original retainer with HWL required Mr Spalla to pay $80,000 upfront with the balance to be at HWL’s prevailing hourly rates, plus a 20% uplift fee to be paid on the successful outcome of the matter. Mr Spalla was to meet all HWL’s disbursements and counsel fees. Mr Spalla reached a similar “no win, no fee” arrangement with Mr Hayes QC. Mr Spalla paid the initial amount of $80,000 to HWL and funded the litigation in accordance with these agreements. He did not, however, have sufficient funds to meet the costs of the litigation had all of the lawyers’ costs been due at the time they were incurred.
39Mr Rambaldi was aware of Mr Spalla’s costs agreement with HWL and informed HWL that he had no objection to HWL’s costs being calculated and paid on the basis of that agreement. By a letter dated 20 May 2003, Mr Rambaldi confirmed with Mr Borden that Mr Rambaldi and Irlmond retained HWL to act for them with respect to the primary proceeding, although the Spalla Interests would meet HWL’s costs and disbursements. Mr Rambaldi emphasized that Mr Borden was to take instructions from him before making any commitment on his behalf to the Spalla Interests or the respondents. Mr Rambaldi also confirmed with counsel, including Mr Hayes QC, that, although retained by him and Irlmond to act on their behalf, he, Mr Rambaldi, would not be liable for counsels’ fees, which the Spalla Interests were to meet.
40On 25 June 2003, Still & Co, solicitors then acting for the Spalla Interests, wrote to Mr Rambaldi stating that the firm held “sufficient funds in trust to settle the costs as set out in Clause 4.1 of the Funding Agreement”. With the LFA executed, Irlmond began participating in the primary proceeding as an applicant, with the main issue being the terms of any new application and statement of claim. On 15 May 2003, the applicants filed a proposed amended statement of claim that named Irlmond as the fifth applicant. On 16 December 2003, the applicants filed a Further Amended Statement of Claim pursuant to leave granted by Goldberg J on 9 December 2003.
Difficulties in the conduct of the primary proceeding
41By mid 2004, Irlmond and Mr Rambaldi were encountering difficulties in conducting the litigation within the framework agreed with the Spalla Interests and ILF. First, there was an issue as to whether there was a potential conflict of interest between Mr Rambaldi as liquidator of Irlmond and Mr Spalla as a potential debtor of Irlmond. Mr Borden addressed this issue in a facsimile sent on 8 June 2004 to Mr Rambaldi. Minter Ellison, as solicitors for the Deloitte parties, had apparently initiated consideration of the issue by their letter of 27 May 2004. In his letter to Mr Rambaldi, Mr Borden wrote that:
“If Spalla was a debtor of Irlmond, you, as the Liquidator of Irlmond, should be pursuing him along with any other debtors of the company in the interests of the creditors. However the obligation to pursue him would only apply if there were a prospect of recovering some funds. As you know, Spalla is totally without funds and has no assets at all. In my view, the best course to adopt is to continue to co-operate with Spalla in the proceedings so that any assets that are recovered by Irlmond can be used for the benefit of the company’s creditors. Finally, it should be noted that Spalla claims to be a creditor of Irlmond, rather than a debtor.”
The issue of conflict of interest was to return at the mediation on 29 April 2005, which gave rise to the matters currently in dispute.
42It also proved difficult for the applicants to frame a viable statement of claim and the respondents foreshadowed applications for indemnity costs against Mr Rambaldi personally and ILF.
43On 21 May 2004, the Deloitte parties filed a notice of motion seeking to strike out the applicants’ further amended statement of claim. St George Motor Finance and St George Wholesale Finance filed a similar notice of motion on 24 August 2004.
44On 16 July 2004, Minter Ellison sent a letter to HWL regarding the Deloitte parties’ strike out motion. In this letter, Minter Ellison outlined the arguments they would present in support of their motion and said:
“[W]e expect that the liquidator of Irlmond acting reasonably and objectively would or should have grave grounds for concern regarding the viability of Irlmond’s claim. Those concerns should in turn inform a serious concern regarding the consequences of continuing proceedings where it does not appear to us that he is receiving advice independent of Mr Spalla one of the applicants who happens to be maintaining the action and who will benefit from Irlmond’s preparation and prosecution of its claim.
If the liquidator chooses to ignore these warnings so be it, but these risks are a matter that he should bring to the attention of his partners and the litigation funder as he exposes them to a liability for indemnity costs, which could exceed $1 million due to the apparent impecuniosity of the other funders and the size and nature of the litigation in contemplation here and the number of parties involved.”
45On 28 September 2004, French J struck out the applicants’ further amended statement of claim but gave liberty to file and serve, by 21 October 2004, a substituted application and statement of claim: see Spalla v St George Motor Finance Ltd (No 5) [2004] FCA 1262 (“Spalla (No 5)”). His Honour also ordered that the applicants pay the respondents’ costs of their respective motions. Amongst other things, his Honour held that many of the allegations in the further amended statement of claim involved allegations of fact that contradicted the factual findings made by Finkelstein J in proceeding V 74 of 1999. In these respects, the further amended statement of claim could not stand “against the res judicata estoppel and the issue estoppels generated by the judgment in the first proceedings”: see Spalla (No 5) at [4]-[5] and [44].
46The primary proceeding was originally fixed for trial beginning on 19 July 2004. As a result of the various strike-out motions, that date was vacated and the matter was re-listed for hearing in February 2005. On 13 October 2004, HWL advised Mr Spalla (by a letter, which was also copied to Mr Rambaldi) that they would terminate their retainer with Mr Spalla if the February 2005 hearing date were vacated for any reason. Amongst other things, the letter said, “[w]hilst we regret having to take this position, we simply cannot afford the ongoing burden of the case and the impact it is having on the firm overall”.
47Some days later, on 19 October 2004, HWL wrote to Mr Spalla that:
“In line with our obligation to keep you apprised of the costs incurred thus far, we advise that as at 18 October 2004 the total time recorded on this matter is $620,519.50 of which $80,000.00 has been paid leaving an unpaid work in progress of $540,519.50. This does not include any uplifting fee which was outlined in our costs agreement.”
HWL copied this letter to Mr Rambaldi.
48Also on 19 October 2004, Mr Beck sent Mr Bowman a facsimile on Deloittes’ letterhead. In this facsimile, Mr Beck referred, amongst other things, to the order for costs that French J had made on 28 September 2004 against the applicants and in favour of the Deloitte parties. He stated that his solicitors had informed him that the Deloitte parties’ costs were about $50,000 on a party and party basis and that the Deloitte parties sought these costs from ILF “in its capacity as a non-party”. He also wrote that if “the matter proceeds and Irlmond is unsuccessful, we will look to ILF for its entire costs of the matter and we reserve all our rights to seek those costs from ILF, not only on a party and party basis but on an indemnity basis”.
49The next day, on 20 October 2004, Mr Beck sent a facsimile to Mr Rambaldi in similar terms to that sent to Mr Bowman. Mr Beck again referred to the order for costs that French J had made in favour of the Deloitte parties and to the Deloitte parties’ solicitors’ estimate of the amount of these costs. He wrote that the Deloitte parties sought these costs from Mr Rambaldi personally and added that, should the matter proceed and Irlmond fail, the Deloitte parties “will look to you personally for [their] entire costs of the matter … not only on a party and party basis but on an indemnity basis”.
50Pursuant to French J’s orders of 28 September 2004, a third further amended application and a third further amended statement of claim were filed in the primary proceeding on 19 October 2004. This statement of claim named Mr Spalla, Mr Still and Irlmond as the first, second and third applicants. No other applicants were named. The first to fifth and seventh and eighth respondents were the same as those in the present proceeding. The sixth respondent was the Australian Securities and Investments Commission (“ASIC”).
51By the third further amended statement of claim, Irlmond brought numerous claims against the St George parties and the Deloitte parties arising out of the receivership of Irlmond. Against the St George parties, Irlmond claimed breach of mortgagee’s duties, conversion and contravention of s 52 of the Trade Practices Act 1974 (Cth). Against the Deloitte parties, Irlmond claimed breach of receiver’s duties and conversion and sought restitution of the receiver’s fees. Irlmond claimed restitution of the sum of $1.3 million together with other payments against St George Motor Wholesale.
52Also by the third further amended statement of claim, Mr Spalla and Mr Still brought claims against Messrs Beck and Home for malicious prosecution and injurious falsehood. Mr Spalla and Mr Still also brought a claim for malicious prosecution against ASIC.
53On 20 December 2004, French J ordered that most of the statement of claim in the primary proceeding be struck out: see Spalla v St George Motor Finance Ltd (No 6) [2004] FCA 1699 (“Spalla (No 6)”). In essence, his Honour held that most of the statement of claim was an abuse of process because it sought to relitigate issues that had been determined by Finkelstein J in proceeding V 74 of 1999: see Spalla (No 6) at [2]-[3], [71]-[108]. His Honour struck out all of Irlmond’s claims for conversion and breach of duties against the St George and the Deloitte parties.
54The only claim of Irlmond that was not struck out was the claim for $1.3 million against St George Motor Wholesale. That claim related to the application of proceeds of the sale of Essendon Mitsubishi which was a discrete event that post-dated the judgment of Finkelstein J. For this reason, his Honour concluded (at [91]-[92]) that the claim should not be struck out as an attempt to relitigate a matter already determined by Finkelstein J. At [92], however, his Honour expressed doubt as to whether “the impugned payment of $1.3 million” would be shown “to be anything other than a continuation” of practices already approved by Finkelstein J. His Honour did not strike out Mr Spalla’s and Mr Still’s claims for malicious prosecution and injurious falsehood: see Spalla (No 6) at [110]-[116].
The institution of the appeals and reappraisal of the primary proceeding
55On 24 December 2004, Messrs Beck and Home filed a notice of motion seeking leave to appeal from the interlocutory orders of French J allowing Mr Spalla and Mr Still liberty to continue their claims for malicious prosecution and injurious falsehood. This application was given proceeding number VID 54 of 2005. On 31 January 2005, Irlmond also sought leave to appeal from the orders of French J that were unfavourable to it. This application was given proceeding number VID 83 of 2005. These two proceedings (hereafter “the appeals”) were to be heard together.
56With the judgment of French J in December 2004 and the institution of the appeals in January 2005, the primary proceeding entered a new stage and, so far as ILF, Irlmond, Mr Rambaldi and HWL were concerned, led to their reappraisal of the litigation.
57On 13 January 2005, prior to Irlmond filing its appeal, Mr Vasudevan, Mr Bowman and Mr Stephen Foale from ILF, and Mr Borden and Ms April Arslan met at the offices of Pitcher Partners, in order to discuss French J’s judgment. Mr Rambaldi did not attend although, as copies of Mr Vasudevan’s emails of 13 and 23 January 2005 attest, Mr Vasudevan kept him informed. In these emails, Mr Vasudevan reported to Mr Rambaldi that Mr Bowman was concerned about ILF’s exposure to any personal costs liability incurred by Mr Rambaldi or its own liability for costs as a “third party” beneficiary of the action. Mr Vasudevan also reported to Mr Rambaldi that HWL estimated that solicitor/client costs for the respondents would be between $1 million and $2 million. Significantly for present purposes, Mr Vasudevan notified Mr Rambaldi that:
“There may be a possibility that Delloites [sic] may entertain the possibility of settling the matter or ending the matter where each party bears [its] own costs, and in that regard, Borden was prepared to help with the appeal. Spalla will not be a factor in settlement negotiations as if he does not come to the party, then IMF, HWL and the liquidator will drop this matter.”
Mr Vasudevan advised Mr Rambaldi that, after HWL left, Mr Bowman told Mr Vasudevan, that ILF was considering withdrawing its indemnity, although it would not do so until after the appeal was lodged and “if settlement negotiations do not go well”.
58Around this time, a dispute arose between ILF and Pitcher Partners concerning the provision of a written opinion by junior counsel (Mr Ian Martindale) in mid November 2002. In a letter of 17 January 2005, Mr Bowman complained to Mr Rambaldi that ILF had not been provided with this opinion at the time it was given. Mr Bowman claimed that the opinion was significantly different from an opinion of Mr Hayes QC upon which ILF had based its decision to provide Mr Rambaldi with indemnity insurance. Mr Bowman intimated that this failure might be a breach of the LFA and stated that ILF reserved its rights in respect of the matter. Mr Rambaldi defended his position in a letter to Mr Bowman of 24 January 2005 (see below), denying that there had been any breach of the LFA.
59On 21 January 2005, Messrs Rambaldi and Vasudevan attended a further meeting with Messrs Bowman and Foale, during the course of which Mr Bowman and Mr Foale confirmed that ILF was only prepared to maintain ILF’s indemnity insurance for Mr Rambaldi in order that a settlement might be negotiated.
60Also in his letter to Mr Bowman of 24 January 2005, Mr Rambaldi referred to ILF’s advice of 21 January 2005 that it would “withdraw its litigation support … after the appeal” and stated:
“[I]t would not be commercially appropriate to prematurely advise the defendants of any threat or decision to withdraw from the funding agreement until such withdrawal is actually made because this will cause detriment to any settlement negotiations and may be a contributing factor in not achieving your desired outcome of all parties walking away and bearing their own costs.” (Emphasis original)
Mr Rambaldi added:
“Given your decision to withdraw litigation funding, I agree with your comments that we should work closely in an effort to resolve these proceedings in the most favourable manner possible and assure you of our cooperation in this matter.”
61At the trial, there was an issue as to whether HWL were kept abreast of this turn of events. Upon the evidence as outlined below, I am satisfied that, whether or not HWL actually received an emailed copy of Mr Rambaldi’s letter of 24 January 2005, Mr Vasudevan and Mr Rambaldi believed that they had. For present purposes, all that matters is that HWL became apprised of ILF’s attitude with respect to its involvement in the litigation by the end of January 2005. Mr Borden stated in evidence that, as at 21 January 2005, he was not aware that “the desired outcome … was … a walk away offer”, although, in cross-examination, he conceded that he was aware in January 2005 that ILF was actively considering withdrawing its support. What Mr Borden said in cross-examination is borne out in the evidence concerning a meeting on 28 January 2005: see below at [62] – [67].
62A meeting was scheduled for the afternoon of 28 January 2005 at the offices of HWL, for Mr Rambaldi and Mr Vasudevan and ILF’s representatives to meet with HWL’s solicitors. In the course of the morning prior to the meeting, at around 11.33 am, Mr Vasudevan sent an email to Ms Arslan and Mr Borden. The email read as follows:
“Morning all
Just confirming that we will meet at your office at 2.30 today with [ILF]. As dsicussed [sic] yesterday, I’ve attached a copy of our response to [ILF] in relation to the Martindale issue.”
The reference in this email to “our response to IMF in relation to the Martindale issue” was a reference to Mr Rambaldi’s letter to Mr Bowman of 24 January 2005. At around 11.35 am on the same morning, Ms Arslan replied to Mr Vasudevan’s email, saying:
“David I have been in undated [sic] with urgent applications and affidavits that I need to do. Unfortunately I will be absent. I think Phil [Borden] will be there. I have let him know.”
63Ms Arslan’s reply did not indicate that she had not received the attachment to which Mr Vasudevan’s email referred, although her reply does indicate that she was very busy at the time and, in consequence, may have overlooked Mr Vasudevan’s reference to an ‘attached’ ‘response’. Ms Arslan could not recall having received or read Mr Rambaldi’s letter of 24 January 2005 that was supposedly attached to Mr Vasudevan’s 28 January 2005 email. Mr Borden’s evidence was to the effect that he did not receive the letter. Searches at HWL failed to locate any copy of Mr Vasudevan’s email (whether electronic or kept as a print copy). On balance, having regard to the evidence, I accept that Mr Borden and Ms Arslan did not read the letter of 24 January 2005, although I accept that Mr Vasudevan and Mr Rambaldi believed that they had. This belief was reasonable in the circumstances. I also find that Mr Vasudevan sent the email, with its attachment (the letter of 24 January 2005) and received a reply from Ms Arslan. I make no finding as to whether the attachment was actually received by Ms Arslan or Mr Borden. Nothing ultimately turns upon this issue.
64In the afternoon of 28 January 2005, Messrs Rambaldi, Vasudevan, Bowman and Foale met at the offices of HWL with Mr Borden and, for a shorter period, Ms Arslan. For the benefit of Mr Borden and Ms Arslan, Mr Rambaldi explained that ILF intended to withdraw the indemnity insurance to him, although ILF had not determined whether to do so before or after the hearing of the appeals. Also at this meeting, Mr Rambaldi said that, if ILF withdrew, then he would not proceed with the litigation unless Mr Spalla set aside funds for future legal costs, including funds to meet adverse costs orders against the liquidator personally. He estimated that, in order to do so, Mr Spalla would need to set aside $1.5 million.
65There can be no doubt that, by the end of this meeting, Mr Rambaldi, Mr Vasudevan, Mr Borden and Ms Arslan understood ILF’s position and that, so far as ILF was concerned, the principal issue related to the timing of the withdrawal of its indemnity insurance. The very next day after the meeting, Mr Vasudevan sent an email to Mr Rambaldi, Mr Borden and Ms Arslan, which purported to summarise the substance of this meeting. Five days later, on 3 February 2005, Mr Borden emailed his diary notes of the 28 January 2005 meeting to Mr Rambaldi and Mr Vasudevan. Mr Borden’s notes specifically stated:
“Gess [Mr Rambaldi] reported that Clive [Bowman] had advised him that he intended withdrawing the indemnity provided to Gess under the litigation funding agreement. The only question was whether he would withdraw that support before the appeal was heard or after it was heard.”
66There can also be no doubt that Mr Borden knew what Mr Rambaldi’s position would be when ILF withdrew indemnity. Mr Borden’s diary notes clearly stated:
“Gess advised that if the indemnity provided by ILF was withdrawn, he would be unable to proceed in the absence of proper support by which he meant a litigation funder or insurer or other appropriate body who would provide adequate financial support to cover legal costs as they were incurred, to provide an indemnity to him in relation to any adverse costs orders and to provide security for any costs orders that might be made by way of cash or something equivalent. In its estimation about $1.5 million would be needed for this.”
67Further, at this meeting of 28 January 2005, Mr Bowman and Mr Rambaldi differed about when settlement negotiations should be pursued. Mr Bowman was keen to negotiate a settlement with the respondents before the appeal proceedings were heard, whilst Mr Rambaldi wanted to postpone these negotiations until after the hearing. Mr Borden’s diary note makes it clear that he also knew of this difference of opinion.
68On 3 February 2005, Mr Bowman replied to Mr Rambaldi’s letter of 24 January 2005. He reiterated that junior counsel’s opinion “would be relevant to a funder in determining whether or not to offer funding or an indemnity” in respect of the primary proceeding and that Mr Spalla had not, in ILF’s view, honoured his obligations under the LFA to fund the proceedings. Mr Bowman also said that “it [was] not correct that at our meeting on … Friday 21 January, we advised that [ILF] will withdraw its litigation support after the appeal is heard”. Rather, according to Mr Bowman, “[w]e said … that we reserve our rights, to withdraw the indemnity and to refuse indemnity in respect of costs up to the date of … withdrawal”. He added that ILF did “not intend to prematurely advise the defendants of any threat or decision in relation to the indemnity, until such decision is communicated to you” and he agreed that ILF and Mr Rambaldi “should work closely in an effort to resolve the proceedings in the most favourable manner possible”.
69On 11 February 2005, Mr Rambaldi wrote to Mr Spalla care of Mr Borden. He said (in part):
“[ILF] has advised me that it will withdraw from the [LFA] (subject to its rights in the agreement). It has not, however, decided when its withdrawal will take place and is considering whether to do so either before or after the appeal is heard.
When [ILF] withdraws its funding, Irlmond will not be able to proceed with any action to which it is a party … unless satisfactory funding arrangements are in place at the time. In the circumstances, cash held by me in trust is the only arrangement that would be considered satisfactory to me. I estimate … in that regard a minimum amount of no less than $2 million … will need to be paid into my trust account … to ensure that Irlmond does not withdraw from the action upon the withdrawal of [ILF] from the [LFA]. …
Unless I am satisfied that a satisfactory alternative funding arrangement will be in place prior to [ILF] withdrawing from the [LFA], I will be forced to negotiate a settlement with the defendants prior to [ILF] withdrawing its funding arrangement so as to maximise the chances of getting a better return, if any, from the defendants. As you will be aware, any attempts to negotiate with the defendants after [ILF] withdraws from the funding arrangement, would put me in a disadvantageous position as I will be notifying the Court of such withdrawal.
I would be grateful if you could provide me with your advice and evidence that you are able to provide a satisfactory alternative funding arrangement, including the funding amount, within seven days of the date of this letter.”
Mr Spalla did not reply to this letter.
70As already noted, the applications for leave to appeal and the appeals were listed for hearing on 10 and 11 May 2005. The mediation was scheduled for 29 April 2005. A Full Court, which was constituted by Hill, Finn and Kenny JJ, heard argument in proceeding VID 54 of 2005 on 10 May 2005 and, on 13 May 2005, granted leave to appeal and dismissed the appeal: see Beck v Spalla [2005] FCAFC 82. On account of what happened at the mediation on 29 April 2005, proceeding VID 83 of 2005 did not proceed before the Full Court on 10 May 2005.
Events shortly before the mediation
71On 27 April 2005, two days prior to the mediation, Mr Rambaldi and Mr Vasudevan, Mr Foale, Mr Borden and Ms Arslan, and Mr Spalla and Mr Ian Still attended a meeting, to discuss the forthcoming mediation. I accept that a file note of that meeting, which Mr Borden had prepared the following day, accurately records the discussions at that meeting.
72At the meeting of 27 April 2005, Mr Rambaldi repeated that ILF was considering withdrawing its litigation support and that he would be unable to continue with the litigation if it did so. He also said that, if ILF withdrew after the mediation, he would take whatever offer was made, including a walk-away offer. Mr Borden’s file note of the meeting specifically recorded that:
“Gess [Rambaldi] reported that he had been informed that ILF was considering withdrawing its support. He reported that if ILF withdrew its support, he would not be able to proceed any further with the litigation. He requested ILF to advise whether they would continue support past Friday, as he will need to know this when taking on board any offers that might be made. If the support is withdrawn after Friday, Gess advised that he would take whatever offer was made including a walk-away if that was available.”
Mr Rambaldi also asked the solicitors what they thought the Irlmond claim was worth. Mr Borden’s file note records that Ms Arslan “advised that the bottom line was somewhere between $2 [million] and $3 [million] plus interest and costs”.
73Mr Borden also sought to dissuade ILF from withdrawing their litigation support prior to the appeal. He pointed out to Mr Foale that “it made no sense for ILF to withdraw support until after the appeal if the matter did not settle” at the mediation. He argued that the prospect of an order for costs against the liquidator personally was remote because the appeal was brought on reasonable grounds.
74In cross-examination at the trial, Mr Spalla agreed that neither he nor Mr Borden objected to Mr Rambaldi’s statement that he would not be able to proceed any further with the litigation if ILF withdrew its support. Further, he conceded that neither he nor Mr Borden objected to Mr Rambaldi’s statement that he would, in circumstances to which Mr Rambaldi referred, take whatever offer was made, including a walk-away offer.
75After the meeting on 27 April 2005, Mr Borden had at least two telephone conversations with Mr Spalla by telephone. A file note made by Mr Borden of a conversation with Mr Spalla later on 27 April (which I accept as accurate), reads (in part) as follows:
“In so far as the meeting that was held today is concerned, I reiterated to Tony [Spalla] what I had been telling him for some time now – namely that the risk he faces is that ILF will withdraw litigation support for Gess [Rambaldi] – we will then be forced to accept whatever is put, including an offer that each party walk away and bears their own costs. In my view, Gess would be entitled to adopt this course if ILF withdrew its support and Tony would be unable to complain about it. This would bring the Irlmond claim to an end.
…
I pointed out that it was a real possibility that the Irlmond claim would be resolved in this manner although, in my view, ILF should continue its litigation support at least until the appeal stage given the minimal exposure that they had in relation to costs and the maximum benefit that could be obtained if the appeal is successful.”
In a conversation the next day, 28 April 2005, Mr Borden also reminded Mr Spalla that HWL “were withdrawing from the litigation after the hearing of the appeal”.
76By the time of the mediation on 29 April 2005, HWL had about $800,000 of billed time recorded (plus a 20% uplift) on its files for the primary proceeding and the appeals. Thus, under its retainer with Mr Spalla, HWL would have sought to recoup approximately $1 million from any recovery. Mr Hayes QC had already billed over $600,000 of time on the matter. Mr Rambaldi’s firm had expended about $300,000 of fees on the matter. Unless the lawyers and Mr Rambaldi were to take what Mr Borden called a “haircut”, taken together (and including the apportionment due to ILF under the funding agreement), this meant that Irlmond needed to recover about $3 million or more before any money would have been available to unsecured creditors.
The mediation
77The mediation commenced as scheduled at 10:00 am on 29 April 2005 at the Victorian Bar Mediation Centre. Immediately prior to the mediation, Mr Rambaldi and Mr Spalla met outside the venue. Mr Spalla told Mr Rambaldi that he was endeavouring to find a new liquidator. He said that he had engaged a former liquidator to assist him in his search and that he was meeting a potential new liquidator on Monday, 2 May 2005. In cross-examination, Mr Spalla said that he had contacted this potential new liquidator “so that we would have some alternatives in the event of something happening”.
78Present for the applicants at the mediation were Mr Spalla, Mr Gary Spalla (Mr Anthony Spalla’s son), Mr Rambaldi, Mr Borden, Ms Arslan, Mr David Still (the second applicant in the primary proceedings), and Mr Ian Still (Mr David Still’s father and a solicitor with Still & Co). Mr Bowman also attended at the request of Mr Rambaldi. Mr Hayes QC did not attend the mediation. Also attending the mediation were representatives of the ASIC, the St George parties and the Deloitte parties. Messrs Beck and Wallace-Smith and their solicitor represented the Deloitte parties.
79The mediator invited the parties to state their cases, which they did. The parties then proceeded to separate rooms. The mediator met with the applicants and the issue of a walk-away offer was ventilated. As it happened, however, on the morning of the mediation, no-one made any offer.
80At the mediator’s suggestion, later in the morning, Mr Rambaldi met with Messrs Beck and Wallace-Smith without their solicitors being present. In this meeting, Mr Wallace-Smith told Mr Rambaldi that the Deloitte parties had received legal advice that Mr Rambaldi could be held personally liable for costs of approximately $1.3 million. Mr Wallace-Smith also said that the Deloitte parties would not pay any money toward a settlement but he would raise the matter with the St George parties. After this meeting (which lasted 15 to 30 minutes), Mr Rambaldi returned to the applicants’ room.
81I interpolate here that Mr Borden’s evidence was that he did not recall any morning meeting between Mr Rambaldi and the Deloittes representatives. Mr Borden was not involved in this meeting and little of significance transpired at the meeting concerning him. It is, therefore, unremarkable that he did not recall the meeting. Mr Rambaldi was a participant and the conversation with Mr Wallace-Smith touched him personally. He would be more likely than Mr Borden to recall it. I find that the meeting did take place and I accept Mr Rambaldi’s evidence concerning it.
82Mr Rambaldi left the mediation after noon to attend an unrelated creditors’ meeting. He left with Mr Bowman and they stopped briefly at a café. Mr Bowman told Mr Rambaldi that ILF’s board had decided to withdraw its litigation indemnity in his favour. Mr Bowman said that ILF would provide written notice, as required by the LFA, later that day.
83Mr Rambaldi returned to the mediation venue at approximately 1.15 pm. He did not inform those present on the applicants’ side (including Mr Spalla and Mr Borden) that ILF had decided to withdraw its indemnity for him. Shortly after returning, and to the knowledge of Mr Spalla, Mr Borden, Ms Arslan and Mr Bowman, Mr Rambaldi again met with Messrs Beck and Wallace-Smith.
84The evidence of Mr Borden and Mr Spalla was that Mr Bowman joined Mr Rambaldi for this meeting. Mr Rambaldi’s evidence was, however, that Mr Bowman was not present when he again met with Mr Beck and Mr Wallace-Smith. I accept Mr Rambaldi’s evidence on this issue. Although Mr Borden and Mr Spalla said that they saw Mr Bowman leave the applicants’ room at the same time as Mr Rambaldi, this does not establish that Mr Bowman attended the meeting with the Deloitte parties. Further, Mr Rambaldi, who attended the meeting, is more likely to have an accurate recollection of who was present. I reject the proposition advanced by Mr Spalla that Mr Rambaldi specifically asked for Mr Bowman to meet with Mr Beck in Mr Borden’s absence. The source of this proposition is a file note made by Mr Borden in the week after the mediation. However, Mr Borden said, in examination in chief, that Mr Rambaldi did not say that he did not want Mr Borden to come with him. Mr Rambaldi denied that he made any such request. I accept that Mr Rambaldi did not specifically seek to exclude Mr Borden from meetings with the respondents against Mr Borden’s wishes or judgment.
85At this second meeting, Messrs Beck and Wallace-Smith told Mr Rambaldi that neither the St George parties nor the Deloitte parties would offer money to settle the Irlmond claim. They also said that the St George parties’ representatives were already on their way to the airport to catch a flight to Sydney. Mr Rambaldi asked them if they (and the St George parties) would be prepared to make an offer to settle the Irlmond claim on a walk-away basis. The meeting adjourned to allow Mr Wallace-Smith to contact the St George parties regarding Mr Rambaldi’s suggestion.
86Mr Rambaldi subsequently had a discussion with Mr Bowman outside the applicants’ room, in the course of which he told Mr Bowman that he was attempting to get a walk-away offer from the respondents that would remain open for at least the period in which he was still indemnified by ILF. Mr Bowman said that his office would shortly deliver a typed termination notice. Mr Rambaldi briefly returned to the applicants’ room where Mr Spalla and Mr Borden were present. He was called out to meet again with Messrs Beck and Wallace-Smith. As Mr Rambaldi left, Mr Spalla said words to the effect that he should not come to any agreement with the respondents without talking to him first. According to one of his 9 September 2005 affidavits, Mr Rambaldi said words to the effect that he would do his best to try to get an offer from the respondents.
87In addition, according to Mr Borden’s file note of the mediation, which was typed the following week, Mr Rambaldi confirmed that before any offers were accepted, he would bring them back to Mr Spalla for discussion. Mr Rambaldi denied making a statement to this effect. I prefer Mr Rambaldi’s evidence on this point. His evidence was that after Mr Bowman informed him that ILF was going to withdraw his litigation indemnity, he said nothing about the matter to anyone because he wanted time to reflect on what had occurred and, upon this reflection, he formed the view that from this point onwards he had to proceed with the negotiations as liquidator, having primary regard to the interests of Irlmond and its creditors, and, in particular, without reference to Mr Spalla, or Mr Borden (whom he believed was in a position of conflict). For this reason, he did not inform the Spalla Interests or Mr Borden of the forthcoming withdrawal of his indemnity. In this circumstance, it is improbable that he would have given the alleged assurance. It must be borne in mind that this particular file note was not contemporaneous with the meeting and came into existence in the week immediately after the mediation on Friday, 29 April 2005. At best, this part of Mr Borden’s file note indicates what Mr Borden had understood, or wanted to understand, that Mr Rambaldi had said.
88At the subsequent meeting, Messrs Beck and Wallace-Smith told Mr Rambaldi that they had instructions to put a walk-away offer to Irlmond on behalf of both the St George parties and the Deloitte parties. Mr Rambaldi said that he required an offer that would be left open for at least seven days to enable him to consider various factors, including the need to discuss with his partners effectively writing-off approximately $300,000 of time invested in the Irlmond file.
89Mr Rambaldi gave evidence that, as a partner of Pitcher Partners, he had authority to write-off fees. Thus, he did not need to meet with his partners to write-off the $300,000 of time invested in the Irlmond claim. Also, he had been writing-off Irlmond-related fees throughout the litigation. Thus, it was not the case that $300,000 of fees needed to be written-off before the settlement could be executed. Rather, Mr Rambaldi had already written-off approximately $250,000 of fees and $50,000 remained to be written off. Mr Rambaldi gave evidence that he referred to the need to write-off fees mostly as a way of getting the respondents to agree to keep the offer open for the seven days remaining for the indemnity. He testified that he expected that his partners would ultimately adopt his recommendation concerning the Deed. I accept this evidence.
90After Mr Rambaldi left his meeting with Messrs Beck and Wallace-Smith, he met with Mr Bowman in the reception area and, subsequently, with Mr Bowman and the mediator in the mediator’s room, where Mr Rambaldi informed them both about what had happened.
91Some time later in the afternoon, Messrs Beck and Wallace-Smith gave Mr Rambaldi a handwritten draft offer and left him for a short period. Mr Rambaldi reviewed this document in the presence of Mr Bowman and the mediator, and made handwritten amendments. When Messrs Beck and Wallace-Smith returned to the mediator’s room, they discussed the draft offer with Mr Rambaldi. They said that they wished the offer to be open for no longer than three days because their solicitors had advised them that costs would have to be incurred in preparing for the appeal while the offer remained open. Mr Rambaldi said that the issue of the offer being open for seven days and being irrevocable was not negotiable. Messrs Beck and Wallace-Smith left to prepare a further draft of the offer.
92At this point, there is another discrepancy between the evidence of Mr Rambaldi and Mr Borden. Mr Rambaldi said that Mr Borden entered the mediator’s room while Messrs Beck and Wallace-Smith were absent preparing the second draft of the offer. According to Mr Rambaldi, while Mr Borden was in the mediator’s room, Mr Beck returned with a copy of the first draft of the offer; and, at this point, Mr Rambaldi told Mr Borden that he was negotiating a walk-away offer and handed him a copy of the first draft. He said that, upon hearing this information, Mr Borden expressed concern that he had a conflict of interest and indicated that he would prefer not to be involved. Mr Rambaldi maintained that he also told Mr Borden that ILF was withdrawing Mr Rambaldi’s indemnity under the LFA. According to Mr Rambaldi, Mr Borden inquired whether this was being done in writing. Mr Bowman then proceeded to write a notice of withdrawal by hand. Almost the moment this was done, however, the notice, in typed form, arrived from Mr Bowman’s office. This notice was signed by Mr Rambaldi and Mr Bowman, and Mr Rambaldi noted that he had received it at 4.43 pm.
93Mr Borden’s evidence was different. He agreed that he had entered the room where Mr Rambaldi and Mr Bowman were present. He also agreed that Mr Rambaldi told him that ILF was withdrawing Mr Rambaldi’s indemnity. He concurred that he had asked whether the withdrawal was in writing and that, in response, Mr Bowman had written a notice by hand. Mr Borden also said that, shortly thereafter, a typed notice arrived. Mr Borden agreed that Mr Rambaldi told him that he, Mr Rambaldi, was expecting an offer from the Deloitte parties and the St George parties. According to Mr Borden, however, he did not ask Mr Rambaldi about the terms of the offer and Mr Rambaldi did not tell him that he was negotiating a walk-away offer. He said that it did not occur to him to ask Mr Rambaldi about the offer. He did not recall any mention of a walk-away offer; and that, if he had been told about a proposed walk-away offer, he would have recalled it.His evidence was that he assumed that the offer would be an offer of money. Mr Borden conceded that it was his choice not to ask any questions about the nature of the offer. He also chose to leave Mr Rambaldi and Mr Bowman to themselves and return to the applicants’ room. He was not asked to leave.
94Both Mr Rambaldi and Mr Borden agreed that Mr Rambaldi told Mr Borden that ILF had given notice that Mr Rambaldi’s indemnity under the LFA had been withdrawn and that Mr Rambaldi was negotiating an offer of settlement with the Deloitte parties and the St George parties. Even if Mr Rambaldi did not use the expression ‘walk-away’ offer, I reject Mr Borden’s evidence that he did not turn his mind to the possibility that Mr Rambaldi had such an offer in mind. The possibility of a walk-away offer had been raised at the commencement of the mediation. Further, two days’ earlier, Mr Borden had specifically warned Mr Spalla that, if ILF withdrew Mr Rambaldi’s indemnity, Mr Rambaldi would be likely to seek to negotiate a walk-away offer. This was in the context of the meeting of 27 April when Mr Rambaldi had clearly stated to both Mr Borden and Mr Spalla that he would take this course if ILF withdrew his indemnity. Whether or not Mr Rambaldi actually used the words ‘walk-away’ offer, Mr Rambaldi would reasonably have assumed that, once Mr Borden knew that his indemnity had been withdrawn and that he was negotiating an offer from the respondents in respect of the Irlmond claim, that offer was, in all probability, a walk-away offer. If Mr Borden did not make any specific inquiries (as he said), then he did not do so because he knew that the offer being negotiated by Mr Rambaldi was likely to be a ‘walk-away’ offer and he believed that he was likely to be in a clear position of conflict if he asked for and received further details of the offer being negotiated. I reject Mr Borden’s evidence to the contrary.
95Ultimately, it is of limited importance whether Mr Rambaldi told Mr Borden about the walk-away offer at that particular time. Mr Rambaldi’s evidence was that, once Mr Bowman told him that the indemnity would be withdrawn that day, he decided to act independently of Mr Spalla and HWL. This is why, when he returned from the lunch-time creditors’ meeting, he did not inform Mr Borden, Ms Arslan or Mr Spalla that ILF had told him the indemnity was being withdrawn.
96A discrepancy also arose between the evidence of Mr Borden and Mr Spalla. Mr Borden said that, after he saw the written notice of withdrawal, he returned to the applicants’ room and informed Mr Spalla that ILF had withdrawn Mr Rambaldi’s indemnity and an offer was expected. Mr Spalla had no recollection of being told by Mr Borden that Mr Rambaldi’s indemnity had been withdrawn. For reasons explained below, I find that Mr Spalla’s recollection is to be preferred on this issue.
97After Mr Borden had left the mediator’s room, Messrs Beck and Wallace-Smith returned with a further handwritten offer titled “Deed of Settlement”. The parties to the Deed were the Deloitte parties and the St George parties, Irlmond and Mr Rambaldi. The Deed provided that Irlmond would withdraw or discontinue its appeal in VID 83 of 2005. Irlmond also agreed to release the Deloitte parties and the St George parties from all claims in the primary proceeding. The parties agreed to bear their own costs and not to enforce any costs orders in their favour. The Deloitte parties and the St George parties agreed to release Mr Rambaldi, Irlmond and ILF from all claims. The Deed contained the following condition precedent:
181Mr Spalla contended that clause 9.3 prohibited the Liquidator from settling “any claim” unilaterally. This argument takes the words “any claim” out of context. Clause 9.3(b) refers to “any claim made or the relief sought by the Spalla Interests” (emphasis mine). In context, the words undoubtedly refer to claims brought by the Spalla Interests. Overall, it is clear that clauses 9.2 and 9.3, when read together, create a regime whereby Mr Rambaldi had complete autonomy with respect to claims brought by Irlmond but was required to seek the consent of the Spalla Interests before settling the entire proceeding (including those claims brought by the Spalla Interests) or settling, amending or discontinuing any claims brought by the Spalla Interests.
182For these reasons, I conclude that Mr Rambaldi was not required to participate in mediation after he received the letter from Still & Co. of 4 May 2005 demanding that he do so. Clause 9.3 required mediation (pursuant to the procedure outlined in clause 14) where the parties could not agree with respect to settlement of the proceeding as a whole or claims brought by the Spalla Interests. However, mediation was not required with respect to the settlement of Irlmond’s claims.
183The circumstances surrounding the creation of the LFA strongly support this view. Of particular significance are the submissions made to Finkelstein J on 12 May 2003 that the new draft of the LFA “remove[d] any restriction on the power of the liquidator to accept a settlement offer made to the company” and that “[n]o limitations are imposed upon the liquidator at all in this regard” (emphasis mine). These submissions were made by counsel for the liquidator in circumstances where the Spalla Interests were also supporting the application and had an opportunity to be heard on these issues. Effectively, all the applicants in the primary proceeding represented to the Court that the LFA placed no restrictions whatsoever on the liquidator to settle Irlmond’s claim. This is a strong indication that this is how they understood the terms of the LFA.
184Mr Spalla now contradicts the representations made to Finkelstein J by arguing that the LFA required the liquidator both to consult with him prior to settling Irlmond’s claim and required the liquidator to participate in mediation if agreement could not be reached. Leaving aside issues of estoppel, I would not conclude that the parties to the LFA intended the terms of that agreement to mean something other than what was suggested to the Court without a very strong showing from Mr Spalla. No such showing has been made. In fact, there is no reason to interpret the LFA in a manner inconsistent with the 12 May 2003 submissions to Finkelstein J.
185Mr Spalla relied on the email exchange outlined at [131] above. This exchange does not support Mr Spalla’s interpretation of the contract. In that exchange, Mr Bowman and Mr Vasudevan agree that clause 14 will apply to disputes concerning settlement that arise under clause 9.3. As previously noted, however, clause 9.3(b) only relates to disputes that involve a claim brought by the Spalla Interests. Clause 9.3(a) relates to “the Proceedings as a whole”, which would, of course, include the Spalla Interests claim. Neither clause applies to the claim(s) brought by Irlmond alone.
186The final issue to consider with respect to the LFA is whether the LFA required Mr Rambaldi to consult with his solicitors before settling the Irlmond claim. Mr Spalla relied on clause 9.2 which provides that “[t]he Solicitors shall at all times be instructed by the Liquidator in respect of the Irlmond claim” for his contention that Mr Rambaldi was obligated to consult HWL before executing the Deed. Clause 9.2 does not support Mr Spalla’s submission. Rather, that clause (which appears in a section of the LFA entitled “Control of the Proceedings”) concerns who has control over the Irlmond claim. Its significance is that the liquidator, rather than the Spalla Interests, has the control over the Irlmond claim and has authority to instruct the solicitors concerning that claim. It is a general principle that parties are entitled to communicate with opposing parties and settle their cases without consulting their solicitors. There is nothing in the LFA that derogates from this general principle. I also note that Mr Borden did not form the view that Mr Rambaldi was required to consult with him prior to executing the Deed. Further, once Mr Bowman informed Mr Rambaldi that ILF was going to give notice that afternoon withdrawing his indemnity, Mr Rambaldi reasonably took the view that Mr Borden was in a position of conflict and unable to advise him properly.
187Overall, I conclude that there was no breach of the LFA. The LFA gave Mr Rambaldi autonomy over the settlement of the Irlmond claim and he was entitled to execute the Deed without first consulting with Mr Spalla or HWL. Also, he was not required to mediate a dispute concerning a settlement that covered only the Irlmond claim. As I have found no breach of the LFA, the issue of inducement to breach does not arise.
Was Undue Pressure Placed On The Liquidator?
188Mr Spalla argued that Mr Rambaldi executed the Deed under duress. The evidence does not support this conclusion. Although Mr Rambaldi did make occasional references to having a “gun to his head”, his evidence was that this was a reference to his indemnity being withdrawn and his having limited options with respect to the affairs of Irlmond. I accept this evidence. I have already found that ILF withdrew the indemnity under the LFA by giving notice in accordance with the LFA.
189Clearly, Mr Rambaldi’s conduct was heavily influenced by the prospect that his indemnity was being terminated in seven days time. It was not unreasonable for Mr Rambaldi to be influenced by this. I accept his submission that he could not be expected to continue his involvement in the litigation after his indemnity was terminated. Thus, on 29 April 2005, he knew that he would need to withdraw from the litigation by 6 May 2005. Faced with this prospect, he chose to procure an offer that protected Irlmond from adverse costs orders. Although he may have had other options, this was a reasonable decision in the circumstances: see below for further discussion of the reasonableness of the terms of the Deed at [203]-[208].
190I do not find that the St George parties or the Deloitte parties acted improperly at the mediation. It may be accepted that they stated their case very strongly. But, as Mr Rambaldi himself noted, this is hardly unusual behaviour at mediation. Whether or not they would ultimately have been successful in a claim for costs against Mr Rambaldi personally, they did not place improper pressure on Mr Rambaldi by suggesting that they might seek such costs. Although a lay person, Mr Rambaldi was a sophisticated actor with prior experience with litigation and access to legal advice. Mr Rambaldi could – and did – seek advice as to the likelihood of being liable personally for costs. He received advice that it was unlikely that he would have to pay such costs. He knew, nonetheless, that it was open to the respondents to seek such costs and that they had stated that they would do so. In this circumstance, he was entitled to bear this consideration in mind and not to rule it out of account as a possibility.
191I also address Mr Spalla’s suggestion that Mr Bowman placed undue influence on Mr Rambaldi by improperly “varying” the LFA. Mr Spalla noted that the LFA could not be varied except in writing by all the parties. He claims that, from about January 2005, Mr Bowman and Mr Rambaldi agreed that the ILF would only indemnify the liquidator for the purposes of allowing him to settle the action. I do not find that Mr Rambaldi and Mr Bowman “varied” the LFA, as Mr Spalla would have it. Although Mr Bowman frequently mentioned that ILF might withdraw from the LFA, this was not illegitimate as ILF was entitled unilaterally to withdraw from the agreement under clause 6.2. The evidence shows that ILF became increasingly dissatisfied with the manner in which the primary proceeding was being conducted and Mr Bowman, on its behalf, stated to Mr Rambaldi that it was considering withdrawing its indemnity at some stage. This evidence showed a change in circumstances and not a change, or variation, in the agreement.
192Further, I find that ILF’s conduct had no impact on Mr Rambaldi’s conduct of the Irlmond claim until 29 April 2005 when Mr Bowman told him that ILF would provide notice of the indemnity’s termination under clause 6.2 that afternoon. Until then, Mr Rambaldi had continued with the appeal and participated in the mediation pursuant to the advice of his and Mr Spalla’s solicitors. He repeatedly expressed his preference to ILF that it should at least wait until after the appeal was decided before it withdrew his indemnity. It was only after ILF provided the notice of termination pursuant to the LFA that Mr Rambaldi procured a walk-away offer from the respondents. In these circumstances, I find that Mr Rambaldi did not act under duress and was not influenced by any improper pressure.
Did The Liquidator Act Dishonestly?
193Mr Spalla contended that Mr Rambaldi acted in bad faith because he acted dishonestly. This is a serious accusation to make and I reject it.
194First, Mr Spalla argued that Mr Rambaldi “deceived” him and Mr Borden by not informing them, after lunch on 29 April 2005, that ILF was withdrawing the indemnity. I have already found that, under the LFA, Mr Rambaldi had control of the conduct of the Irlmond claim and that he was not required by the LFA to inform Mr Spalla or Mr Borden of what he had been told or that he intended to procure a walk-away offer. Further, it is important to recall that under clause 9.2 the Spalla Interests were not to interfere with Mr Rambaldi’s conduct of the Irlmond claim. Therefore, Mr Spalla can have no complaint that Mr Rambaldi decided to act independently of him when procuring an offer.
195Mr Spalla’s case was, in part, that Mr Rambaldi deliberately excluded Mr Borden from his meetings with Messrs Beck and Wallace-Smith and did not inform Mr Borden of the withdrawal of his indemnity and the forthcoming offer when he knew one was imminent. These propositions are, however, contrary to the facts as I have found them to be. Furthermore, in assessing Mr Rambaldi’s conduct on the afternoon of 29 April 2005, it must be recalled that Mr Rambaldi had already put Mr Spalla (and Mr Borden) on notice that he would accept a walk-away offer if ILF withdrew his indemnity and Mr Borden had acknowledged that this course was properly open to him. Further, as already noted, Mr Rambaldi believed (as was by then the case) that Mr Borden was in a position of conflict and could no longer advise him properly.
196Mr Spalla also said that Mr Rambaldi deceived him when, before meeting with the respondents on the afternoon of 29 April 2005, Mr Rambaldi told Mr Spalla that he would discuss any offer with Mr Spalla before accepting the offer on behalf of Irlmond. Although he was not required under the LFA to make such a promise, Mr Rambaldi acknowledged that he told Mr Spalla that he would confer with him before settling Irlmond’s claim. Mr Spalla alleges that Mr Rambaldi broke this promise because he settled the proceeding on the afternoon of 29 April 2005. I have already found that Mr Rambaldi did not settle Irlmond’s claim at the mediation. Rather, he procured an irrevocable offer from the respondents. Consistent with his earlier representation, he did discuss this offer with Mr Spalla prior to settling Irlmond’s claim.
197Mr Spalla also suggested that Mr Rambaldi was fabricating his claim that the condition precedent, which required the offer remain irrevocably open for seven days, was included for his, Mr Spalla’s, benefit. Mr Spalla said that Mr Rambaldi had said nothing of the sort and that this was just recent invention on Mr Rambaldi’s part. I reject this suggestion. I accept that Mr Rambaldi was prevented from explaining himself adequately in the evening of 29 April 2005, by reason of the general hubbub and confusion that prevailed. He plainly did explain himself in these terms on the first occasion that it was reasonably practicable for him to do so, in the coffee shop the following Monday morning.
198Finally, Mr Spalla referred to Mr Rambaldi’s discussions at the mediation with the respondents. Mr Rambaldi said that, to ensure that the offer stayed open for seven days, he told the respondents, inaccurately, that he required the consent of his partners to write-off fees. I find no fault in Mr Rambaldi’s conduct here. Mr Rambaldi was in a difficult situation. The period of grace he sought to negotiate did not benefit him personally but it was of potential benefit to Irlmond (and to Mr Spalla). He sought to protect the interests of Irlmond by negotiating an offer that stayed open while his indemnity remained. At the same time, he did not want the respondents to know that his indemnity was being withdrawn. He reasonably considered that that would have been a disaster for Irlmond and that no offer of any kind would have been forthcoming had the respondents known this fact. Accordingly, he gave an excuse for why he wished the offer to stay open for seven days. He reasonably believed that it would not have assisted Irlmond had he applied to Court at this stage because in so doing Irlmond’s and its liquidator’s position would have been disclosed. In his letter to Mr Spalla of 11 February 2005, he had already expressed a similar view. Seen in context, Mr Rambaldi’s conduct in this regard was not out of the ordinary.
Events After The Mediation
199Mr Spalla did not complain that the seven days’ period of grace was too short for his purposes. Rather, Mr Spalla argued that the liquidator’s conduct in the week after 29 April 2005 was a “sham” intended only to “cover his tracks”. I reject this contention. I find that Mr Rambaldi made a good faith effort to assist Mr Spalla to locate another liquidator or find some other reasonable way of continuing the litigation on behalf of Irlmond.
200It is notable that, well prior to the mediation, Mr Spalla was on notice that ILF might withdraw the indemnity before the appeal was heard. Just before the mediation began, Mr Spalla and Mr Rambaldi discussed obtaining another liquidator and the possibility that ILF might withdraw Mr Rambaldi’s indemnity. Two days before the mediation, Mr Rambaldi had specifically drawn Mr Spalla’s attention and the attention of the others at the meeting that day to this possibility. Further, Mr Spalla was informed by both Mr Rambaldi at this meeting and Mr Borden subsequently that the liquidator would be forced to negotiate a settlement if this occurred. Indeed they specifically alluded to a walk-away offer. Even earlier, on 11 February 2005, Mr Rambaldi wrote to Mr Spalla informing him that, if ILF withdrew his indemnity, he would only be able to continue prosecuting Irlmond’s claims if Mr Spalla deposited $2 million in his trust account. Mr Spalla did not reply to that letter. At trial he said that he did not have the requested funds. Indeed, the matter of ILF withdrawing its support had been raised as early as January 2005 as a real possibility. Plainly enough, by the time of the mediation, Mr Spalla knew or ought to have known that Mr Rambaldi might not be able to continue with the litigation. Consistent with this, he was searching for a new liquidator even before the mediation.
201After the mediation, Mr Rambaldi informed Mr Spalla that he had three options to consider before the Deed was ratified. These options were: (1) depositing $2 million in Mr Rambaldi’s trust account; (2) procuring the appointment of a substitute liquidator; or (3) obtaining the approval of the Court for the officers of Irlmond to conduct the litigation on its behalf. Because of Mr Spalla’s lack of funds, the first option was unavailable. Mr Spalla, with Mr Rambaldi’s help, tried to procure the appointment of a substitute liquidator but one could not be found. In cross-examination, Mr Spalla agreed that Mr Rambaldi co-operated with him in attempting to find another liquidator. Finally, Mr Rambaldi made an application to the Supreme Court of Victoria to give Mr Spalla the opportunity to argue that he should be given leave to conduct the litigation as a director of Irlmond.
202On legal advice, Mr Spalla did not make an application to take over the carriage of the primary proceeding for Irlmond. Having sought his own independent legal advice, Mr Rambaldi did apply to the Supreme Court. Mr Spalla claims that the application to the Supreme Court was not made in good faith because Mr Rambaldi did not support it. Mr Rambaldi explained that he did not support the orders sought by the application because he did not believe that Mr Spalla was an appropriate person to have conduct of the Irlmond claim in the primary proceeding. He explained that, in his view, Mr Spalla was too emotionally involved with the litigation and might not be able to bring sufficient objectivity to the commercial decisions associated with managing litigation on behalf of a company in liquidation. This does not show that Mr Rambaldi brought the application in bad faith. As liquidator of Irlmond, Mr Rambaldi was required to advise the Court of his position in relation to the application. Although he did not support the application, by bringing it he gave Mr Spalla the opportunity to seek an order giving him authority to conduct the litigation. As Hansen J explain in Rambaldi at [18]:
“[D]oubtless out of some thought for the other interests involved, [Mr Rambaldi] has brought this application which may be thought to have been designed to draw Mr Spalla to seek authority to conduct the litigation under the guise of the originating process. As I have said, Mr Spalla takes the opportunity to seek that authority. He wishes to be able to conduct the litigation and, as discussed with counsel, I could make such an order under s.511(1)(b) of the Act if, in my view, it was otherwise appropriate to do so.”
Similarly, I do not find that the application was brought in bad faith. I find that it was filed in a good faith attempt to seek the guidance of the Court and to allow Mr Spalla an opportunity to put his case to the Court. Overall, I find no reason to conclude that Mr Rambaldi acted in bad faith in the week before the Deed was ratified.
Was Settlement So Unreasonable As To Evidence Bad Faith?
203Finally, I turn to the issue of whether the settlement was so unfavourable for Irlmond that it evidences that Mr Rambaldi acted in bad faith. Absent any other evidence of bad faith, the question must be whether or not, in executing the Deed and ultimately settling Irlmond’s claim, Mr Rambaldi acted in a way that no reasonable liquidator could have acted: compare Bridgeport at 161-162. In this context, it must be borne in mind that courts are especially reluctant to second-guess settlement decisions. Public policy favours settlement. As Chesterman J said in Dew v Richardson [1999] QSC 192 at [42], settlement helps “reduce the level of disharmony in society and conserve the resources both of litigants themselves and the community which funds the courts.” Others have seen the virtue of settlement in promoting certainty that permits litigants to deal with their affairs in an orderly way looking to the future. For example, in Kelley v Corston [1998] 3 WLR 246 at 259, Judge LJ said:
“Every lawyer in practice and every judge knows that there is no such thing as the case which is bound to succeed. Experience shows that cases with the brightest prospects of success somehow fail and it is difficult to underestimate the value of the certainty provided by a settlement as opposed to the continuing risks of litigation through to judgment”.
204Mr Spalla’s submission on this issue was largely based on his claim that the creditors of Irlmond got no benefit from the settlement. Mr Spalla argued that, as Irlmond had no funds to pay adverse costs orders, they got no advantage from a settlement that simply protected Irlmond from adverse costs. This submission is based on a fundamental misunderstanding of the responsibilities of the liquidator. A liquidator has a responsibility to minimise the costs incurred by the company regardless of whether the company has the funds to pay them. The Deed benefited the company by providing a release from all claims by the respondents, securing the respondents’ undertaking not to enforce any costs orders against it (which according to Mr Borden were considerable) and its liquidator, and precluding liability arising from potential adverse costs orders in the future. Further, the company’s winding-up was permitted to continue unimpeded by the litigation.
205Mr Spalla also contested Irlmond’s insolvency. The fact is, however, that Finkelstein J found that, as at the date of the appointment of the receiver, Irlmond was insolvent. An appeal against his Honour’s judgment was dismissed. The finding that Irlmond was insolvent when it went into receivership is now res judicata and the subject of issue estoppels. In light of Finkelstein J’s finding, it cannot be said that Mr Rambaldi settled a good claim on behalf of a solvent company, as Mr Spalla would have it. Further, the evidence shows that the primary proceeding needed to yield about $3 million before there could be any return to creditors. The evidence also shows that, at the 27 April 2005 meeting, Mr Spalla and the others in attendance were contemplating accepting any offer between $2 and 3 million. Under the LFA, this would only have permitted the lawyers and others involved in the primary proceeding to be paid out.
206Mr Spalla submitted that the liquidator had received legal advice that Irlmond had a good claim and that the appeal was likely to be successful and that, if Irlmond was successful, then it was unlikely to incur significant costs orders. Mr Spalla submitted that it was unreasonable for the liquidator to disregard such advice and act as he did. Leaving aside the issue of whether the liquidator made the best decision open to him (which does not arise for consideration), numerous factors militated in favour of Mr Rambaldi’s decision to execute the Deed. First, at mediation, the respondents told him that they would make no monetary offer and no such offer was forthcoming from them. Secondly, it is fair to say that the applicants were in difficulties in the primary proceeding. Their statement of claim had gone through over ten drafts and had been struck out three times. Bearing in mind the appeals, which were subject to the usual contingencies of litigation, no trial was imminent. Thirdly, legal fees and other costs had reached a point where the company needed approximately $3 million before unsecured creditors would have seen any return from the litigation. Moreover, the applicants’ solicitors, HWL, had stated that they might not continue with the litigation much longer. Fourthly, Mr Spalla did not have sufficient funds to pay legal fees other than on a ‘no win, no fee’ basis. Thus, it might have been very difficult to find alternative experienced solicitors if HWL withdrew. Fifthly, as already noted, Mr Rambaldi’s indemnity was being terminated, with the consequence that he could not continue as liquidator. Mr Rambaldi reasonably believed that it would not have assisted Irlmond if he applied to Court at this stage because in so doing Irlmond’s and its liquidator’s position would have been disclosed and no offer from the respondents would have been forthcoming at all. Sixthly, Mr Rambaldi negotiated a seven day period of grace, which was of potential benefit to Irlmond, because it allowed other options to be considered. Seventhly, Irlmond and its liquidator obtained releases from all claims by the respondents, as well as from costs orders in the respondents’ favour. These factors all support Mr Rambaldi’s decision.
207Ultimately, there were also additional factors militating in favour of Mr Rambaldi procuring his partners’ consent to the Deed on 6 May 2005, thereby settling the matter. Attempts to find a substitute liquidator had failed. Mr Spalla had neither provided the funds for him to continue nor obtained court approval to conduct the Irlmond claim on its behalf. He had independent counsel’s advice as to the propriety of his conduct.
208Again, it is important to note that the question is not whether Mr Rambaldi made the best decision in the circumstances. Rather, the issue is whether he acted so unreasonably that the Court should set aside his actions. In my view, the terms of settlement provide no reason to conclude that Mr Rambaldi acted in bad faith or otherwise acted so unreasonably that the settlement should be set aside.
CONCLUSION
209By his third further amended notice of motion, Mr Spalla sought a variety of orders. In essence, the relief he seeks is that the Deed be set aside and that he be given leave to conduct the primary litigation on behalf of Irlmond. For the foregoing reasons, I have found no ground for setting aside the Deed. Therefore, I need not consider whether Mr Spalla should be given leave to conduct the litigation on behalf of Irlmond. I would order that the third further amended notice of motion be dismissed.
210On the evidence, there is no basis for finding that Mr Rambaldi acted in bad faith in executing the Deed at the end of the mediation on 29 April 2005. On the contrary, the evidence shows that Mr Rambaldi acted in good faith throughout. He honestly believed on reasonable grounds that it was in the best interests of Irlmond and its unsecured creditors to procure the offer, to which the Deed gave rise.
211I propose to hear the parties on costs after they have had an opportunity to consider these reasons.
I certify that the preceding two hundred and eleven (211) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate:
Dated: 12 September 2006
Counsel for the applicant: The applicant appeared in person Solicitors for the St George parties: Middletons Solicitors for the Deloitte parties: Minter Ellison Counsel for Mr Rambaldi and Irlmond Pty Ltd: Mr L Glick with Mr RS Randall Solicitors for Mr Rambaldi and Irlmond Pty Ltd: Russell Kennedy Dates of Hearing: 14, 15, 16 and 17 March, 7, 26 and 27 April, 22, 23 and 25 May and 12 July 2006 Date of Judgment: 12 September 2006
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