KTC v David (No. 1)

The plaintiff (“KTC”) is a Cayman Islands company. The first defendant (“Mr David”) is currently domiciled in the United States of America. The second defendant (“Mr Singh”) and third defendant (“XALT”) did not take an active role in the applications which are the subject of this judgment. The fourth defendant is the law firm comprising partners trading under the business name Gilbert + Tobin (“G+T”). The fifth defendant (“Mr Bullock”) was, at the relevant time, a partner in G+T. Unless otherwise stated, references to Mr Bullock in these reasons should be understood to include G+T.

The Court had to determine three notices of motion:

Some urgency attended the resolution of the motions. They were heard on 13 and 14 March 2019. On 15 March 2019, the proceedings in the Federal Court which are the reason for the transfer motion were listed for directions before Perram J. I was informed his Honour had indicated that the outcome of the motions could have a significant impact on the management of the case before him. At the end of the hearing I was able to indicate to the parties the orders I would make in relation to the strike out motion and the transfer motion. This judgment resolves those two motions. It has been necessary to allow for further brief written submissions on the jurisdiction motion and I will deliver judgment on that motion after I have had an opportunity to consider those submissions.

The facts of the underlying dispute are complex. The key allegation for present purposes may be summarised in this way. It is alleged that Mr Bullock advised Mr David and entities associated with him in relation to a corporate course of action which was ultimately found by the Grand Court of the Cayman Islands to be a breach of fiduciary duty. In these proceedings KTC alleges that it suffered loss by reason of that breach and seeks to make Mr Bullock accessorily liable on the basis that he had knowingly assisted in Mr David’s (or his company’s) dishonest and fraudulent design.

It is important to note that KTC has not alleged, and has expressly disavowed that it is any part of its case, that Mr Bullock knew that the advice he gave (to the effect that the impugned course of corporate conduct could be lawfully undertaken) was wrong.

The Court has concluded in relation to the strike out motion and transfer motion:

Ms M Loughnan of Queen’s Counsel appeared with Mr B Carew of Counsel for KTC. Mr J A Hogan-Doran of Counsel appeared with Mr E Ball of Counsel for Mr David, Mr J Hutton of Counsel appeared for Mr Singh and XALT. Mr G K Rich of Senior Counsel appeared with Mr G E S Ng and Mr D T Wong of Counsel for G+T and Mr Bullock.

Given the complex history between these parties, I gratefully adopt as adequate for present purposes the summary of the ASOC set out in the submissions filed on behalf of Mr Bullock. Paragraphs [9] to [11] below reproduce that summary.

The claims arise out of the breakdown of what is said to have been a joint venture between:

In particular, it is alleged in the ASOC that:

In so far as Mr Bullock is concerned, it is alleged that, as the responsible G + T partner, Mr Bullock:

It is then important to note the conclusion of Mr Justice Andrew J Jones QC in the Cayman Islands proceedings (In re Emergent Capital Limited (In liq); KTC v RAAL Ltd; Grand Court of the Cayman Islands – Financial Services Division; Mr Justice Andrew J Jones QC; unreported; 23 November 2011):

G+T and Mr Bullock moved on a notice of motion filed on 24 October 2018 which sought this relief:

The notice of motion refers to a statement of claim filed on 25 July 2018. By the time the strike out motion came on for hearing before me, there had been considerable correspondence between the relevant parties concerning the adequacy of the pleading. At a directions hearing on 22 February 2019 I granted leave to KTC to file the ASOC on the basis of an understanding between the parties that the ASOC would become the subject of the strike out motion. This was because Mr Bullock did not accept that the ASOC cured the alleged deficiencies in the statement of claim. On the other hand, without conceding the validity of Mr Bullock’s complaints about the statement of claim, KTC propounded the ASOC as the document which it would otherwise have sought leave to file if the original statement of claim against Mr Bullock were to be struck out. All parties therefore accepted that the most efficient way to resolve the pleading dispute was to focus attention on the ASOC.

UCPR rule 14.28 provides:

UCPR rule 13.4 provides:

In relation to the possible dismissal of the proceedings I respectfully adopt the analysis of the five bench New South Wales Court of Appeal in Shaw v State of NSW [2012] NSWCA 102 (per Barrett JA with whom Beazley, McColl and Macfarlan JJA and McClellan CJ at CL agreed):

No question arose in this case as to whether the introduction of s 56 of the Civil Procedure Act 2005 (NSW) (the “CPA”) had a relevant effect on what would otherwise be the outcome of the application.

The adequacy of the pleading against Mr Bullock must be measured by reference to these fundamental propositions in relation to the cause of action alleged:

Mr Rich SC submitted that the pleading against Mr Bullock did not disclose a reasonable cause of action and, because the ASOC was KTC’s second attempt, it should be dismissed without leave to re-plead. Ms Loughnan QC strenuously disputed that the lengthy and detailed pleading did not disclose a cause of action against Mr Bullock who, she submitted, had clearly moved from being an independent adviser to an active participant in what KTC contended was a fraudulent and dishonest design. If that submission was not accepted, she submitted that KTC should be given an opportunity to re-plead having regard to the Court’s conclusions.

The reasons which I now set out reflect the submissions made on behalf of Mr Bullock, which the Court accepts. However, before setting these out, I begin with two preliminary comments.

First, and intending no disrespect to the detail of Mr Loughnan QC’s submissions by this summary, much of the burden of the argument advanced on behalf of KTC was that Mr Bullock’s arguments asserted an unduly stringent and overly technical standard for the pleading. It was submitted that this was particularly unfair to KTC because Mr Bullock knew what had gone on with Mr David, whereas KTC did not.

Quite apart from the fact that the dispute between these parties has been going on for some years and has already been the subject of the Cayman Islands proceedings, the Court rejects KTC’s general submission as a matter of principle. Although the old forms of action no longer “stand in the path of justice, clanking their medieval chains” (United Australia Limited v Barclays Bank Limited [1941] AC 1 at 29), compliance with UCPR Part 14 in relation to pleading, in particular the need to plead with precision the material facts relied upon to make out the specific causes of action asserted, must be insisted upon.

The Court resolutely rejects an approach to pleading which entails the indiscriminate recitation of large numbers of facts and detailed but insignificant particulars combined with rolled up conclusions, and which is then defended on the basis that at the end of the hearing at least one of the causes of action alleged can be expected to have been established. The “just, quick and cheap” overriding purpose set out in s 56 of the CPA is first and foremost satisfied by a clear and properly thought through pleading.

Second, it is helpful to recall that the basic claim sought to be advanced against Mr Bullock is as old as Barnes v Addy (1873-1874) LR 9 Ch App 244 (“Barnes”) itself. The case which KTC wishes to bring, as was the case in Barnes, is an attempt to fix a solicitor with liability for the misconduct of his client. To understand my reasons for acceding to Mr Bullock’s application, the relevant passage from the judgment of Lord Selborne LC in Barnes (at 253-254) should be borne in mind (emphasis added):

The case against Mr Bullock is pleaded in paragraphs 121 to 127 of the ASOC. The critical conclusory allegation is paragraph 125:

There are at least five difficulties with this paragraph.

First, the clause alleges any or all of the forms of knowledge in relation to any or all of the alleged breaches and fraudulent designs. Mr Hogan-Doran ventured a mathematical expression of how many permutations that raised. It is sufficient to say that it was an extraordinarily large number. That such multiplicity is inappropriate is even more the case when the seriousness of the allegation is taken into account. A pleading in this form is classically one which will cause “prejudice, embarrassment or delay in the proceedings”. In reaching this conclusion I respectfully adopt what fell from French CJ, Gummow, Hayne and Kiefel JJ in Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 (emphasis added):

It is prejudicial to a defendant to have to work through the numerous combinations. A pleading of this kind may suggest that the pleader has failed to give proper attention to what he or she has a proper basis to expect will be able to be proven at the hearing and what facts will be relevant to each alleged breach of duty. In my respectful view, the obligation on a pleader under s 56 of the CPA in a case with multiple possible combinations arising from the same facts is only to plead those which fall on the right side of this question: if allegations A, B and C are those most likely to succeed but do not, how can less certain allegations D, E and F and following be responsibly pleaded?

Two short examples of the importance of avoiding the indiscriminate pleading of combinations will suffice.

First, each alleged breach of duty is quite fact specific. If KTC wishes to allege in respect of a particular breach of duty that Mr Bullock recklessly failed to make such inquiries as an honest and reasonable person would make in respect of the matters said to give rise to the breach, KTC must be in a position to provide proper particulars of the kind of inquiries it will be alleged Mr Bullock failed to make. Those inquiries may be different in relation to each alleged breach of fiduciary duty.

Second, a similar observation can be made if KTC wishes to allege that, in relation to a particular alleged breach, Mr Bullock “knew of circumstances that an honest and reasonable person would have taken to have indicated facts constituting” the alleged breach. Again, KTC would have to consider what particulars it could provide of those circumstances.

The second difficulty with paragraph 125 relates to paragraph 125(iii). This refers to breach of duties allegedly owed to ECL. ECL is not the plaintiff (in fact it has now been dissolved). KTC is not the proper party to assert a cause of action arising from that alleged breach.

Third, the division between paragraph 125(i) – (v) alleging breaches of fiduciary duty and paragraphs (vi) – (viii) referring to the defined “Fraudulent Designs”, creates a division which is inconsistent with the principles set out in paragraph [19] above. In short, knowledge of the alleged breaches of fiduciary duty set out in paragraphs 125(i) – (v) would not result in liability in Mr Bullock unless those breaches were dishonest and fraudulent designs. Similarly, knowledge by Mr Bullock of the “Fraudulent Designs” referred to in paragraph 125(vi) – (viii) will not result in liability in Mr Bullock unless those fraudulent designs constituted breaches of fiduciary duties owed to KTC. As presently pleaded, there appears to be a disconnect between the alleged breaches of fiduciary duty and the allegation of dishonest and fraudulent design.

Fourth, to the extent it might be assumed in favour of KTC that one of the “Fraudulent Designs” consisted of one of the pleaded alleged breaches of fiduciary duty, the chronology of events makes it unrealistic to allege that Mr Bullock had any form of knowledge of the “Fraudulent Design” as pleaded.

To understand this point, it is necessary to appreciate that the particulars of the legal services provided by Mr Bullock to Mr David or RAAL make clear that those services are alleged to have been provided between 11 November 2009 and 13 April 2010. It follows that any matters which KTC says were known to Mr David as constituting a dishonest and fraudulent design must have been known to him in the period 11 November 2009 to 13 April 2010 or have been known to him during that period as intended to take place in the future. By way of example, and to make good the difficulty, the “Fraudulent Design of David” is pleaded in paragraph 109:

In general terms, it can be accepted that the matters alleged in paragraph 109(a) – (c) took place or were known to Mr Bullock during the course of his retainer. However, the presentation of the “Winding-up Proceeding” referred to in paragraph 109(d) took place on 21 May 2010. Other events alleged in paragraph 109 took place months after Mr Bullock’s involvement apparently ceased.

On the case as currently pleaded, it is unrealistic to suggest that Mr Bullock knew (in the relevant sense) of events that were to take place many months in the future. A pleading such as paragraph 109 demonstrates an unprincipled disengagement between the alleged breach of fiduciary duty and whether or not that breach of duty was a dishonest and fraudulent design. The pleading appears to confuse the alleged breach of fiduciary duty (which, for the sake of argument, it can be assumed meets the description of a dishonest and fraudulent design) and its consequences. If the case KTC wishes to make is that the corporate steps that were taken on Mr Bullock’s advice to dilute KTC’s interest in ECL and remove the Kazals as directors of ECL were a breach of a fiduciary duty owed to KTC by Mr David or RAAL, what follows (constituting the bulk of a pleading such as paragraph 109) may be consequences of that breach. However, it is difficult to see how they can be part of the dishonest and fraudulent design of which Mr Bullock could have had knowledge.

Fifth, paragraph 125 of the ASOC itself depends upon paragraph 124A – “by reason of the matters referred to in paragraph 124A”.

Paragraph 124A also suffers from serious difficulties:

The first difficulty is the confusion caused by the use in paragraph 124A(a) of the word “procured”. It might be thought from this that KTC was alleging that Mr Bullock had procured the breaches of trust included in the various paragraphs referred to in paragraph 124A(a). Ms Loughnan QC, quite properly, indicated that her clients’ case was limited to one of knowing assistance rather than directly procuring a breach. That must be so because it is almost impossible to envisage how Mr Bullock could have directly procured a breach of fiduciary duty by Mr David or RAAL unless it was alleged that Mr Bullock knowingly gave false advice.

Second, a further problem with paragraph 124A becomes apparent when the attempt to limit the concept of procuring in the particulars is taken into account. This is most obvious in sub-paragraph (c) of the particulars which identifies that the matters cross-referred to were caused by Mr Bullock’s advice. On a careful reading of the ASOC, only a handful of the matters cross-referred to in paragraph 124A involve the active participation of Mr Bullock. The rest are all matters which KTC apparently wishes to allege were caused by Mr Bullock’s advice. As I already said (see paragraphs [37] and [38] above), many of those matters considerably postdate the period in which Mr Bullock is said to have provided legal services. There is no suggestion that he actively participated in them. It seems abundantly clear that most of the matters cross-referred to in paragraph 124A, because they postdate the time during which Mr Bullock provided the legal services, could not possibly support the pleading in paragraph 125 that “by reason of” those matters Mr Bullock knew (in the relevant sense) all of the matters alleged in paragraph 125.

Finally, it is necessary to consider paragraphs 121A and paragraph 122:

It will be immediately apparent that the cross-reference to paragraph 122 in paragraph 121A makes little sense. KTC’s written submissions said that this was an error and that the cross-reference should have included paragraphs 22-22E, 93, 124 and 124A of the ASOC. The inclusion of paragraph 124A demonstrates the danger of indiscriminate cross-referencing. For reasons which I have already given in relation to paragraph 124A (see paragraphs [37] and [38] above), it makes no sense to suggest that during the course of providing legal services Mr Bullock gained knowledge of many of the matters cross-referred to in paragraph 124A that took place well after his involvement appears to have ceased.

I should record that some of the matters cross-referred to in paragraph 121A (for example paragraph 22E and paragraph 93) involve allegations of legal conclusions such as Mr David owing a fiduciary duty to KTC. Mr Rich SC argued that such a pleading could not stand. The Court disagrees.

Where the person alleged to have had the relevant knowledge is a lawyer, an allegation of a legal conclusion as being known to that individual is not impermissible as a matter of pleading solely by reason of the fact that it involves a legal conclusion. The real issue at trial will be whether other facts alleged to have been known to that person are sufficient for the Court to infer that she or he also knew the matter which is a legal conclusion. For example, it is not a long bow to allege that if lawyer A knows that Mr B is a director of C Pty Ltd, lawyer A knows that Mr B owes fiduciary duties to C Pty Ltd in his capacity as a director of that company.

Paragraphs 121 to 127 of the ASOC will therefore be struck out. Mr Rich SC submitted that leave to re-plead should not be granted, not least because the ASOC should be taken as KTC’s best effort to meet the objections which had been raised on behalf of Mr Bullock. That submission is rejected. This is a legally and factually complex case. Having regard to the facts pleaded in the ASOC I am not satisfied to the requisite high standard that there is no possibility of there being a case to be made against Mr Bullock. I am satisfied that KTC should be given a final opportunity to plead that case if it comes to the view that it is able to do so. How long KTC will be given to re-plead this part of its case should, in my respectful opinion, be a matter for Perram J as part of the case management of these proceedings with the case already in his Honour’s docket.

That being said, KTC and those representing it bear a serious onus. The case KTC wishes to allege is one of fraud against Mr Bullock. It must be properly pleaded and particularised, and KTC’s legal representatives must be satisfied that they have a proper basis on their instructions to make the allegations.

Any further amended statement of claim will have to plead clearly the material facts with appropriate particulars as to:

The question of what Mr Bullock is alleged to have known (in the relevant sense) that would have indicated that the breach was a dishonest and fraudulent design will require particular attention. This is the point which I took to lie at the heart of Mr Rich SC’s submission that in the absence of an allegation that Mr Bullock knew his advice was wrong, the most that could be alleged against Mr Bullock is that he was negligent.

The point can be illustrated by this example. Assume a fiduciary seeks a solicitor’s advice as to whether the fiduciary can undertake a particular transaction without breaching her duty. The transaction is, in the words of Lord Selborne LC (see paragraph [25] above), “admitting of doubt as to the view which a Court of Equity might take” of it. The natural and ordinary inference is that the fiduciary intends only to enter into the transaction if she is advised that it is lawful for her to do so. The fiduciary gives instructions to the solicitor about matters A, B and C. On the basis of those instructions, the solicitor advises that entry into the transaction will not be a breach of the fiduciary’s duty. The transaction is done by the solicitor preparing the necessary paperwork. Later a court determines that the transaction was in breach of the fiduciary’s duty.

The result of the court’s finding is that there has been a fraud in the equitable sense. However, applying the very example given in Barnes (see the emphasised passage in paragraph [25] above), in this event the solicitor will have no accessorial liability for the fiduciary’s breach. The breach of duty does not become a dishonest design because of the court’s finding of breach of duty. The fact that the solicitor’s advice was (unbeknownst to the solicitor) wrong or negligent would make no difference.

It is difficult to see how the conduct constituting the breach could be a dishonest design if the fiduciary came to the solicitor for advice as to whether the transaction was lawful (and presumably would not have been entered into if told that it was not lawful). In other words, how, without more, can what is ultimately found to be a breach of duty be a dishonest design if it was undertaken on the basis of legal advice that it could lawfully be done? To plead that the conduct constituting breach was a dishonest design would require the pleader to allege other facts which the solicitor knew (in the relevant sense) that bespeak dishonesty (for example, facts such as the intention of the new trustee in Barnes to steal the trust fund or the conduct of the employee in Hasler to supply warehouse services to Optus which he, on behalf of Optus, approved).

While not by the consent of all parties, there was no substantial opposition to the transfer motion.

There are on foot in the Federal Court proceedings brought by Mr Singh and a related company against Charif Kazal and Adam Kazal (“C & A Kazal”). The proceedings are currently in the docket of Perram J.

The main allegation in those proceedings is that C & A Kazal made false representations to the public about Mr Singh arising from the events which also give rise to these proceedings. All parties recognised that the claims in those proceedings and the defences proposed to be filed by C & A Kazal will involve consideration of many of the same events as are in issue in these proceedings.

Most, if not all, of the events which inform these proceedings have already been considered in the Cayman Islands proceedings. A multiplicity of proceedings traversing the same facts is undesirable for a number of reasons including the expense to the parties, the possibility of inconsistent findings and using up the valuable public resource of access to the courts more than once.

For these reasons, there is a strong case for these proceedings to be cross-vested to the Federal Court to be managed by Perram J with the proceedings commenced by Mr Singh. Once all matters arising from the three motions which I have heard are resolved (including costs), I will make an order transferring these proceedings to the Sydney Registry of the Federal Court.