MG Corrosion Consultants Pty Ltd v Gilmour [2010] FCA 1390

FEDERAL COURT OF AUSTRALIA

MG Corrosion Consultants Pty Ltd v Gilmour [2010] FCA 1390 Citation: MG Corrosion Consultants Pty Ltd v Gilmour [2010] FCA 1390

Parties: MG CORROSION CONSULTANTS PTY LTD (ACN 084 715 177) v MALCOLM STEWART GILMOUR and SOLA-KLEEN PTY LTD (ACN 009 059 607)

File number: WAD 256 of 2010

Judge: GILMOUR J

Date of judgment: 26 November 2010

Catchwords: COURTS AND JUDGES – apprehended bias – adverse findings as to credit made in a related judgment – whether reasonable apprehension of bias - recusal

Legislation: Corporations Act 2001 (Cth) ss 181–183, 237, 247A

Cases cited: Antoun v R (2006) 224 ALR 51 cited Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 referred to Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 applied Johnson v Johnson (2000) 201 CLR 488 referred to Livesey v New South Wales Bar Association (1983) 151 CLR 288 applied Smits v Roach (2006) 227 CLR 423 referred to Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583 referred to Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293 referred to

Date of hearing: 8 and 26 November 2010

Place: Perth

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 21

Counsel for the Plaintiff: Mr D H Solomon

Solicitor for the Plaintiff : Solomon Brothers

Counsel for the Defendants: Mr K A Dundo

Solicitor for the Defendants: Q Legal

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 256 of 2010

BETWEEN: MG CORROSION CONSULTANTS PTY LTD

(ACN 084 715 177)

Plaintiff

AND: MALCOLM STEWART GILMOUR

First Defendant

SOLA-KLEEN PTY LTD (ACN 009 059 607)

Second Defendant

JUDGE: GILMOUR J DATE OF ORDER: 26 NOVEMBER 2010 WHERE MADE: PERTH

THE COURT ORDERS THAT:

1. The proceeding be referred to the WA District Registrar for re-assignment to another Judge of the Court. 2. Costs be in the cause. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 256 of 2010

BETWEEN: MG CORROSION CONSULTANTS PTY LTD

(ACN 084 715 177)

Plaintiff

AND: MALCOLM STEWART GILMOUR

First Defendant

SOLA-KLEEN PTY LTD (ACN 009 059 607)

Second Defendant

JUDGE: GILMOUR J DATE: 26 NOVEMBER 2010 PLACE: PERTH

REASONS FOR JUDGMENT 1 The defendants made an oral motion on 8 November 2010 that I recuse myself in this proceeding on the grounds of apprehended bias. Following argument on that day and on 26 November 2010 I acceded to the motion and made orders that the proceeding be referred to the WA District Registrar for re-assignment to another judge of the Court and for costs to be in the cause. These are my reasons for so ordering.

Background 2 Mr Alberto Vinciguerra owned 30 of the 100 ordinary shares issued in MG Corrosion Consultants Pty Ltd (MGCC). The remaining 70 ordinary shares were owned by Sola-Kleen Pty Ltd (Sola-Kleen). Prior to 18 July 2000, Mr Malcolm Gilmour, the first defendant, was the sole director of MGCC. Between 18 July 2000 and 22 April 2004, Mr Vinciguerra and Mr Gilmour were the directors of MGCC and then between 22 April 2004 and 15 January 2008 only Mr Gilmour was a director. Between 15 January 2008 and 5 May 2008, Mr Gilmour and Mr Trevor Harradine were directors of MGCC and since 5 May 2008, Mr Gilmour, Mr Harradine and Mr Kenneth Byfield were directors. 3 Mr Gilmour was the sole director and shareholder of Sola-Kleen. Mr Tony Armenti was the external accountant for MGCC. 4 In 2008 Mr Vinciguerra sought leave pursuant to s 237 of the Corporations Act 2001 (Cth) (Corporations Act) to commence proceedings in the name of MGCC against Mr Gilmour, Mr Armenti and Sola-Kleen. Mr Vinciguerra claimed, in the draft statement of claim, that Mr Gilmour breached his duties to MGCC under ss 181–183 of the Corporations Act as well as his fiduciary duties. It was also alleged that Mr Armenti and Sola-Kleen were involved in those breaches or received property with notice of the breaches. The alleged breaches were that Mr Gilmour caused MGCC to incur unnecessary or inflated expenses for his benefit and/or the benefit of Sola-Kleen. The priniciple element of those expenses were large management fees that Mr Gilmour allegedly caused MGCC to pay to Sola-Kleen each year. It was accepted by MGCC that notice had been given under s 237(2)(e)(i) of the Corporations Act. 5 I granted the leave sought on 21 July 2010: Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293. 6 Earlier, in November 2006, Mr Vinciguerra had applied for orders pursuant to s 247A of the Corporations Act to inspect the books of MGCC. In Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583 I made orders allowing that inspection. The application was supported by a draft statement of claim. In accordance with the orders a Mr Trevor Gorey, an accountant, inspected the books of MGCC and provided Mr Vinciguerra with a report regarding the results of the investigation. MGCC instructed a Mr Ruthven to comment on paragraphs of the draft statement of claim and he produced a report. Mr Ruthven concluded that between 2003 and 2007 management fees paid by MGCC to Sola-Kleen were significantly overstated. The draft statement of claim asserted that MGCC had incurred excessive expenses in the amount of $2,057,968. The Ruthven report disagreed with this view. Mr Ruthven died on 11 January 2010. Mr Gorey never met with him to resolve the differences. In its defence to the application for leave under s 237, MGCC claimed that its two independent directors believed it would be irresponsible to commence proceedings in light of the Ruthven report. However, it transpired that Mr Harradine, said to be an independent director, and Mr Gilmour were also the directors and only shareholders of Power Savers International (Australia) Pty Ltd. 7 The asserted apprehension of bias arises from the fact that, in the leave application, I made adverse findings in respect of Mr Harradine's credit. These were that on the question of his independence from Mr Gilmour his affidavit demonstrated a lack of candour as well partisanship toward Mr Gilmour and the then defendant, MGCC. 8 I now set out paras [33]-[46] of my reasons for judgment where those findings are set out in context: 1. Mr Harradine and Mr Byfield were appointed as directors of the defendant for the purpose of acting as independent directors in conducting an independent investigation with no involvement by Mr Gilmour. Their asserted independence was, understandably, a matter of central importance given Mr Gilmour's personal interest in the matters complained of by the plaintiff. 1. The defendant asserted, by a letter from its then solicitors, Wojtowicz Kelly, dated 21 April 2008 that "Mr Harradine is not in any way related to Sola-Kleen Pty Ltd or Malcolm Gilmour". However, Mr Harradine and Mr Gilmour are the directors and only shareholders of Power Savers International (Australia) Pty Ltd. This was evidenced by annexure "CSW-2" to the affidavit sworn by Christopher Stephen Williams on 15 May 2008 that Mr Harradine was appointed as a director of that company in 1998. Mr Gilmour's and Mr Harradine's involvement in Power Savers International was not disclosed by the defendant either in the Wojtowicz Kelly's letter or otherwise or by Mr Gilmour or Mr Harradine in their affidavits. 1. Mr Harradine swore a supplementary affidavit on 16 May 2008. It is not expressly stated to be in response to Mr Williams' affidavit. Mr Harradine, in para 2 of this affidavit said that he did not disclose information pertaining to his directorships or interest in companies other than the defendant and Sola-Kleen because he did not believe that they had any material effect on how he exercised his judgment in his role as a director of the defendant. Mr Harradine's personal opinion in this respect is not to the point. He swore his affidavit in a context where his independence was being questioned by the plaintiff and he, in effect, was asserting his independence. "Independence" in that context plainly was meant to convey his independence from Mr Gilmour. It cannot mean merely that he has no financial interest in the outcome of this application or the foreshadowed litigation or that he has no legal or beneficial interest in the defendant. The Wojtowicz Kelly letter of 21 April 2008 said that Mr Harradine was "not in any way" related to Sola-Kleen or Mr Gilmour. This was no off-hand remark. It was an unequivocal statement made in response to a letter from the plaintiff's solicitors dated 17 April 2008 included in which the "independence" of Mr Harradine was questioned. It pointed out that Mr Harradine was until 2003 the defendant's accountant and that he had recently been issued with one "A" class share in the defendant. 1. The issue of the share was not explained by the defendant's then solicitors in its letter of 21 April 2008 although it was later explained in Mr Harradine's affidavit of 14 May 2008 that he was issued the share to enable the defendant's board to have a quorum in the event that the plaintiff failed to attend a meeting of the defendant's members. In addition to asserting that Mr Harradine had no relationship with Mr Gilmour, the letter of 21 April 2008 stated "If you have any evidence to the contrary, please provide it to us". Such evidence ought to have been provided by each of Mr Gilmour and Mr Harradine. Plainly enough it was not. Mr Harradine is a professional accountant. I would expect that he is familiar with the concept of independence in the present context. Indeed he asserts as much in his affidavit sworn on 14 May 2008. 1. The excerpt I have quoted from the letter of 21 April 2008 was less than forthright. This is not a criticism of Wojtowicz Kelly as I infer that the letter was written on the basis of less than forthright instructions. Mr Harradine, for his part, in his affidavit sworn on 14 May 2008 made no mention of this relationship with Mr Gilmour although he referred to the fact that he had held a number of public and proprietary company directorships in Australia and overseas during his career. He did not explain his involvement with Mr Gilmour in Power Savers International in his supplementary affidavit of 16 May 2008 or at all. He should have done so. 1. Mr Gilmour, in his affidavit sworn on 16 May 2008 referred to Mr Harradine's affidavit sworn on 15 May 2008. I take this to be a mistaken reference to Mr Harradine's affidavit of 16 May 2008. He said he had nothing further to add to what Mr Harradine had said. Again he too failed to say anything at all about Power Savers International. I regard the failure to mention his involvement with Mr Harradine in Power Savers International as demonstrating, on the part of Mr Gilmour, a lack of candour on the issue of Mr Harradine's asserted independence upon which the defendant has placed so much reliance in this application. 1. In my opinion, an explanation was called for both from Mr Gilmour and Mr Harradine in the circumstances of this application. I infer that any such explanation by Mr Gilmour and Mr Harradine would not have supported the assertion that Mr Harradine is independent of Mr Gilmour. Accordingly, it is not merely the fact of the relationship but the failure of both Mr Gilmour and Mr Harradine to mention it in their affidavits sworn prior to Mr Williams' affidavit of 15 May 2008 or, when exposed in Mr Williams' affidavit, to explain it, which leads me to conclude not only that Mr Harradine is not independent but is, to the contrary, partisan towards the defendant and Mr Gilmour. … 1. Mr Harradine, in his affidavit sworn on 14 May 2008 deposed that he had received the financial records of the defendant for the financial years 2003 to 2007 inclusive. He said that as a result of what he had been told by Mr Armenti that the management fees paid by the defendant to Sola-Kleen were fees for its use of Sola-Kleen's premises, equipment and staff. Mr Harradine, himself an accountant, proceeded to give reasons as to why, in his opinion, these management fees were, in effect, reasonable. 1. Mr Ruthven, contrary to the position taken by Mr Harradine, concluded that a number of impugned expenses, including a significant portion of the management fees that were paid, were overstated. In particular, Mr Ruthven concluded that, between 2003 and 2007, the management fees paid by the defendant to Sola-Kleen were overstated by an amount of $382,027. These conclusions are at such odds with the opinion of Mr Haradine expressed by him after his review of the defendant's financial records that they add to my view that Mr Harradine in relation to this matter ought not be regarded as independent and objective. 1. The Ruthven Report concluded that although management fees payable to Sola-Kleen were overstated other expenses had been understated, in an amount almost equal to that in which expenses had been overstated, resulting in the defendant's net profit being understated during the period from 2001 to 2007 in an amount of $45,013. 1. However, given the view I have reached as to Mr Harradine's lack of independence and moreover his lack of candour in his affidavit I give little weight to the findings in the Ruthven Report for present purposes. This casts no adverse shadow upon the late Mr Ruthven. I am simply, for present purposes not prepared to accept that he was fully instructed with all relevant material for the purpose of preparing his report. 1. Mr Ruthven did not perform any separate verification validation or audit of information and documents produced to him for the purposes of his report, by the defendant, Sola-Kleen, Mr Gilmour and Mr Armenti. 1. The defendant made no closing submissions in reply to these criticisms of the lack of independence of Mr Harradine.

Consideration 9 The motion was supported by affidavits by each of Mr Harradine and Mr Gilmour sworn 23 November 2010. 10 I have set out below the entirety of Mr Harradine's affidavit: 1. I am a director of the Plaintiff and was the accountant of the Plaintiff for the financial years ending 30 June 2001, 30 June 2002 and until January 2003, at which time I sold my accounting practice to Mr Tony Armenti and Mr Marinko Pecotic. 2. The following facts are within my own personal knowledge save as otherwise stated. 3. I refer to the affidavit of Graham Edward Ruthven sworn 20 February 2009 in Federal Court Proceedings WAD 90 of 2008 and, in particular, the calculation of management fees owed by the Plaintiff to the Second Defendant, being for the financial year ending 30 June 2001, $171,330, and for the financial year ending 30 June 2002, $167,122. 4. During the period I July 2000 to January 2003, I was also the accountant for the Second Defendant, Sola-Kleen Pty (Sola-Kleen). 5. In or about November 2002, I met with the First Defendant, Malcolm Gilmour and Albert Vinciguerra, at the offices of Sola-Kleen, which offices were also used by the Plaintiff. 6. At that meeting, there was discussion about the fact that Sola-Kleen had paid expenses on behalf of the Plaintiff, and had provided management services, for which it was entitled to be reimbursed and paid by the Plaintiff (at that point in time), which was not then in a financial position to do so. 7. I suggested that since the Plaintiff conducted its accounts on a cash basis (not accruals) the management fees be paid and expenses recouped at such time as the Plaintiff had sufficient funds, and that when paid they would be entered in the accounts. 8. Mr Gilmour and Mr Vinciguerra said words to the effect that they accepted that advice, that the management fees and expenses would only be paid and recouped by the Plaintiff to Sola-Kleen when the Plaintiff had sufficient funds. 9. Mr Gilmour and Mr Vinciguerra then directed me to finalise the accounts on that basis, and so I did not include the fees and expenses in the Plaintiff's accounts which is the normal manner when accounts are prepared on a cash basis. 10. There was no dispute about the Plaintiff's obligation to pay them; it was simply agreed that it would do so when it had the funds. 11. I informed Mr Armenti, when he purchased my practice, that the management fees and expenses payable to Sola-Kleen should be brought to account in due course when the plaintiff could pay and we discussed the calculation of the management fee at that time. My recollection is that I provided a sample of the Phillips case management fee calculation to Mr Armenti. 12. For the period 1 July 2001 to January 2003, I had calculated the management fees (including expenses) that would be charged by Sola-Kleen to the Plaintiff during that period. I provided that information to Mr Armenti so that he could calculate the management fees and expenses for the financial year ending 30 June 2003 and for future years in the same manner as had previously been agreed between Messrs Gilmour and Vinciguerra, as deposed to earlier. 13. The Plaintiff could not function without the assistance of Sola-Kleen, as it had insufficient cash flow, and that was the reason for it being, agreed that Sola-Kleen was to be paid later by the Plaintiff. 14. The Plaintiff used the offices and storage facilities of Sola-Kleen, as well as its staff, computers, software, office furniture, telephone, even postage stamps, for all of which it was to pay to Sola-Kleen when able to do so. This was agreed between Messrs Gilmour and Vinciguerra in my presence. 11 Accordingly, the evidence of Mr Harradine is relevant to an important issue in these proceedings. The liability of the plaintiff to pay management fees and expenses, for the financial years ending 30 June 2001 and 2002 and from 1 July 2002 to January 2003 and to reimburse the second defendant for expenses paid by it on behalf of the plaintiff. 12 The test as to whether there is an apprehension of bias is whether "a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide": Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at [6]; Johnson v Johnson (2000) 201 CLR 488 at [11]; Antoun v R (2006) 224 ALR 51 at [1], [51], [82]; Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577 at [110]. 13 The application of this principle requires two steps. First, it requires the identification of what it is said might lead a judge to decide a case other than on its legal and factual merits. Second, there must be an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits: Ebner v Official Trustee in Bankruptcy at [8]; Smits v Roach (2006) 227 CLR 423 at [53], [56]. 14 I was referred to the following passage of the High Court in Livesey v New South Wales Bar Association (1983) 151 CLR 288 at 294: In a case such as the present where there is no allegation of actual bias, the question whether a judge who is confident of his own ability to determine the case before him fairly and impartially on the evidence should refrain from sitting because of a suggestion that the views which he has expressed in his judgment in some previous case may result in an appearance of pre-judgment can be a difficult one involving matters "of degree and particular circumstances may strike different minds in different ways" (per Aickin J. in Shaw (1980) 55 ALJR at p 16). If a judge at first instance considers that there is any real possibility that his participation in a case might lead to a reasonable apprehension of pre-judgment or bias, he should, of course, refrain from sitting. (Emphasis added) 15 It is apparent then that the mere fact that a judge has expressed in a judgment in some previous case or, as here, a previous and related case does not give rise to an automatic requirement for recusal. It will, as the Court observed, involve matters "of degree and particular circumstances may strike different minds in different ways". 16 Later the High Court in Livesey, at 300, stated: It is, however, apparent that, in a case such as the present where it is not suggested that there is any overriding consideration of necessity, special circumstances or consent of the parties, a fair-minded observer might entertain a reasonable apprehension of bias by reason of prejudgment if a judge sits to hear a case at first instance after he has, in a previous case, expressed clear views either about a question of fact which constitutes a live and significant issue in the subsequent case or about the credit of a witness whose evidence is of significance on such a question of fact. (Emphasis added) 17 Counsel for MGCC stated in the clearest of terms that the evidence of Mr Harradine in his affidavit in support had never been disclosed previously and was not only in issue but that the credit of Mr Harradine and it seems also of Mr Gilmour upon their respective allegations would be challenged at trial. 18 The findings I made concerning the credit of Mr Harradine were expressed in strong terms. His credit will be an issue at trial as indeed it seems will be that of Mr Gilmour, who in his supporting affidavit corroborates the evidence which it is said will be given by Mr Harradine. In my earlier judgment I also made an adverse finding in relation to Mr Gilmour on the same issue of Mr Harradine's asserted independence, which I described at [38], as demonstrating a lack of candour. 19 Against that background I am satisfied that what was said in Livesey (at 293-294) is apt: [The] principle is that a judge should not sit to hear a case if in all the circumstances the parties or the public might entertain a reasonable apprehension that [the judge] might not bring an impartial and unprejudiced mind to the resolution of the question involved in it. (Emphasis added). 20 The question is not one of probability but rather the existence of a real and not remote possibility: Ebner at [7] per Gleeson CJ, McHugh, Gummow and Hayne JJ. There is, in this case, in my view, a real possibility that it may be perceived that I have pre-judged Mr Harradine's credit. It matters not, in those circumstances, that I have not formed any such pre-judgment. 21 For these reasons, I recused myself from further hearing of this matter. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Associate: Dated: 10 December 2010