Clements v McGregor[2016] QSC 258

SUPREME COURT OF QUEENSLAND

1. In June 2015 the plaintiffs (the applicants) commenced proceedings against the defendants claiming damages for negligence, breach of contract and breach of various sections of the Australian Securities Investment Commission Act 2001 and the Corporations Act 2001.
2. The first defendant is the applicants’ former financial planner. The third defendant is the Australian Financial Services Licensee of which the first defendant was an “authorised representative”.
3. This application concerns the identity of the second defendant. The applicants plead that the second defendant employed the first defendant in its business as a provider of financial services. This is now acknowledged not to have been possible because the second defendant was not incorporated until after the events the subject of the claim.
4. The applicants seek an order removing the second defendant and substituting “Holman McGregor Financial Services (a firm)” (HMFS).
5. The defendants do not object to the removal of the second defendant, but the second defendant wants its costs of the proceedings. There is no reason such an order should not be made.

Rule 69 Uniform Civil Procedure Rules

6. In their application the applicants seek an order under r 376 or, alternatively, r 69. The argument proceeded on the basis that the orders were only sought under r 69.
7. Rule 69, so far as is relevant, provides:

“69Including, substituting or removing party

1. The court may at any stage of a proceeding order that—

1. a person who has been improperly or unnecessarily included as a party, or who has ceased to be an appropriate or necessary party, be removed from the proceeding; or

2. any of the following persons be included as a party—

1. a person whose presence before the court is necessary to enable the court to adjudicate effectually and completely on all matters in dispute in the proceeding;

2. a person whose presence before the court would be desirable, just and convenient to enable the court to adjudicate effectually and completely on all matters in dispute connected with the proceeding.

2. However, the court must not include or substitute a party after the end of a limitation period unless 1 of the following applies—

1. the new party is a necessary party to the proceeding because—

…

3. the proceeding was started in or against the name of the wrong person as a party, and, if a person is to be included or substituted as defendant or respondent, the person is given notice of the court's intention to make the order; or

4. the court considers it doubtful the proceeding was started in or against the name of the right person as a party, and, if a person is to be included or substituted as defendant or respondent, the person is given notice of the court's intention to make the order;

…

6. for any other reason—

1. a claim made, or ground of defence raised, in the proceeding before the end of the limitation period can not be maintained; or

2. relief sought in the proceeding before the end of the limitation period can not be granted;

unless the new party is included or substituted as a party.”

8. The matter which attracted the most attention during the submissions was the operation of r 74(5). It provides:

“74Amendment of proceedings after change of party

1. If an order is made changing or affecting the identity or designation of a party, the plaintiff or applicant must—

1. file an amended copy of the originating process within the time specified in the order, or if no time is specified, within 10 days after the order is made; and

2. serve the amended originating process on any new party within the time specified in the order.

…

5. However, for a limitation period, a proceeding by or against a new party is taken to have started when the original proceeding started, unless the court orders otherwise.”

9. HMFS accepts that it is appropriate that it be joined in substitution for Holman McGregor Financial Services Pty Ltd. The issue which has to be decided, though, is whether, under r 74(5) I should “order otherwise”, that is, make an order that the proceeding against HMFS is taken to have started from the date that the applicants file their amended claim and further amended statement of claim.

What was HMFS?

10. At the relevant time, HMFS was a partnership consisting of the following:

●Holman Corporation Pty Ltd

Director: Gregory Holman

Shareholders: Gregory Holman and Claire Stephens

●Malarosh Pty Ltd

Director: Robert McGregor

Shareholder: Robert McGregor

●Benk  Pty Ltd

●RAJ Enterprises Pty Ltd

●Kamico Pty Ltd

●FAA Software Pty Ltd

11. RAJ Enterprises Pty Ltd and FAA Software Pty Ltd are irrelevant. RAJ has been deregistered and FAA ceased to be involved in 2004.
12. HMFS was deregistered or ceased to exist in December 2008. An entity with the same name was registered in March 2009. It was a partnership with the same partners as the previous entity except that RAJ and FAA had been replaced by two other, irrelevant entities.
13. Holman McGregor Financial Services Pty Ltd came into existence in February 2012. Its current director is Robert McGregor – the first defendant. Its current shareholders include Malarosh Pty Ltd. A previous shareholder was Holman Corporation Pty Ltd.
14. It can be seen that the entities and people who have been associated with this business undertaking from its commencement in 2001 have been Holman Corporation Pty Ltd and Malarosh Pty Ltd and, consequently, Gregory Holman and Robert McGregor.

Should the Court order otherwise?

15. Rule 74(5) establishes the default position, namely, that unless the court orders otherwise, the amended proceeding against HMFS will be taken to have started when the original proceeding started, that is, June 2015. When can the default position be disturbed and who has the onus?
16. Some assistance can be gained by considering the former provision in r 69(2)(g). Rule 69(2) limits the power granted by r 69(1)by its provision that the court must not include or substitute a party after the end of a limitation period unless one of a series of specified circumstances applies. Until its amendment in 2004, r 69(2) contained this provision:

“(g)for another reason the court considers it just to include or substitute the party after the end of the limitation period.”

17. The former r 69(2)(g) was considered in Limpus v State of Qld & Ors^[1] where Jerrard JA said (at [20]) that it placed an evidential onus on a potential defendant to identify the prejudice to it. I consider that r 74(5) has a similar effect in that it places such an onus on a potential defendant seeking to disturb the default position.
18. The applicant has not provided the respondents with a draft amended statement of claim setting out the changes which would be made if this application were to be granted. Although the liability which will be alleged to rest on those who make up the proposed new second defendant may be based simply upon the fact that that they were partners, that has yet to be confirmed.
19. Mr O'Brien, who appeared for the proposed second defendants, submitted that his clients had suffered prejudice as a result of the delay of the applicant in seeking to join them to the proceeding. While he accepted that there was some continuity in respect of the current second defendant and the proposed second defendant – through the companies Holman Corporation Pty Ltd and Malarosh Pty Ltd as well as Mr McGregor’s direct involvement as the first defendant – he pointed out that Benk Pty Ltd and Kamico Pty Ltd had no involvement with the current second defendant and ceased to be involved with HMFS in August 2013.
20. Mr Holman swore an affidavit in which he said that he had been informed of this proceeding when it arose in June 2015 by Mr McGregor. His company, Holman Corporation Pty Ltd had ceased to be a shareholder, it appears, at the same time he ceased to be a director in February 2016.
21. Ms Heyworth-Smith QC, who appeared for the applicant, accepted that her client had been informed in August 2015, through the second defendant’s pleading, that it had not been in existence at the time material to the pleading. The delay of some 12 months in bringing this application was sought to be explained by the parties having engaged in a mediation. Some excuse was proffered for the delay on the basis that there was some hope that a mediation – which would possibly involve insurers – might bring the matter to an end even though the parties were misdescribed. Nevertheless, it is difficult to understand why the applicant, upon becoming aware that the second defendant could not be liable, did not take immediate action to rectify the pleading.
22. There is an issue on the pleadings about the availability of the limitation defence to the defendants. As Mr O'Brien pointed out in his submissions: this application was brought 11 years after the first alleged representations, nine years after the last pleaded statement of advice, and 13 months after the plaintiffs became aware that the second defendant had not been incorporated at the relevant time. Further, even though the applicants were aware that the second defendant should not have been joined, they took part in case flow reviews and did not investigate this issue until July 2016.
23. The partners of the proposed second defendant rely upon the prejudice which they say they have suffered as a result of the delay as a reason for disturbing the default position. In that argument, they are entitled to point to the entire period of time which has elapsed since the last alleged breach –  a “defendant is entitled to rely on not just prejudice which has arisen since the claim was originally made, but also on the prejudice which existed at the time the claim was initially made.”^[2]
24. While the delay in bringing this application has been substantial, I am not satisfied that the proposed second defendant has demonstrated prejudice or sufficient prejudice for the default position to be disturbed. The pleading by the applicants, in its current form, seeks to engage the second defendant on the basis that it was a provider of “financial services” under both the Corporations Act and the ASIC Act as well as on the basis that it was the employer of Mr McGregor. The alleged breaches arise out of statements said to have been made by Mr McGregor and written advices given by him and the other defendants. It is not suggested that any of the natural persons associated with Benk Pty Ltd or Kamico Pty Ltd were involved in the making of the representations. Further, there is no evidence, for example, that any of the entities which made up HMFS have disposed of records which might otherwise have been available.
25. I will make an order removing the second defendant as a party to the proceeding and substituting “Holman McGregor Financial Services (a firm)” in its place. I direct that the applicants file and serve an amended claim and statement of claim within seven days of the publication of these reasons.
26. The applicants seek an order that the costs of this application be the parties’ costs in the cause. The joinder of the company as the second defendant was a blunder of the applicants’ own making. It could easily have been avoided. I order that the applicants pay the outgoing second defendant’s – that is, Holman McGregor Financial Services Pty Ltd’s – costs of the proceedings. I also order that the applicants pay the costs of the application of the first and third defendants and the incoming second defendant – that is, Holman McGregor Financial Services (a firm).