ACN 007 528 207 Pty Ltd (in Liquidation) v Bird Cameron and Ors (No 4) No. Scciv-99-1392

ACN 007 528 207 PTY LTD (IN LIQUIDATION) V BIRD CAMERON AND ORS (NO 4)
[2002] SASC 232

JUDGE BURLEY. By application dated 25 February 2002 (Document 81), the plaintiff has sought leave to file an amended statement of claim in terms of the proposed amended statement of claim, a copy of which is Exhibit RKB1 to the affidavit of Mr Beissel sworn on 25 February 2002. The defendants oppose the application to amend.
At the hearing of the application Mr Brohier appeared for the plaintiff and Mr Strawbridge the defendants.
In essence, the plaintiff seeks damages for allegedly negligent advice given by accountants in respect of what has been referred to in the pleading as the Management-Buy-Out Transaction and the Haynes Transaction. The claim is not based solely on alleged negligent advice but, for the purposes of this application, that expression is a sufficient description of the nature of the claim pursued by the plaintiff against the defendants.
According to the pleading, the negligent advice was given by a firm of accountants who traded under the name “Bird Cameron”, which is the first defendant. It is also alleged that some of the advice was given by the second defendant, BPM Pty Ltd. It is not contended that any advice relating to the two transactions referred to was given by the fourth defendant. The fourth defendant claims that the current statement of claim of the plaintiff does not disclose a cause of action against it. The plaintiff does not agree with this contention, but the plaintiff says, in order to make it clear, it should be given leave to amend paragraph 1.9(b) of the statement of claim as set out in Exhibit RKB1.
The relevant parts of paragraph 1.9(b) in the current statement of claim are as follows:
“Further or in the alternative to paragraph 1.9(a) the second defendant, from 1 January 1989, or in the alternative 1 July 1989 or in the alternative 15 December 1989, carried on a chartered accountants practice under the name Bird Cameron ... The fourth defendant took over the obligations of the second defendant (including liabilities) and hence is liable to the plaintiff for the conduct of the second defendant as pleaded herein. The plaintiff refers to and repeats paragraph 1(y) of the defence of the first and second defendants.”
Paragraph 1(y) of the defence pleads that from 1 December 1995 Birdanco (the fourth defendant) took over BPM’s role in the practice in lieu of BPM.
It is not strictly necessary for me to decide the point on this application, but it must be said that paragraph 1.9(b) as it is currently pleaded may fall a long way short of being sufficient to put the defendants on notice as to the basis upon which it is alleged that Birdanco has taken over liabilities of either Bird Cameron or BPM Pty Ltd or both. This is apparent from the somewhat intricate amendment which the plaintiff now wishes to insert. The proposed amendment consists of twelve additional paragraphs under the heading “Particulars”. As I understand it, these particulars, taken in combination, are said to support the contention that the fourth defendant “took over the obligations of the second defendant (including liabilities) and hence is liable to the plaintiff for the conduct of the second defendant”.
Before setting out the additional twelve paragraphs, it is appropriate to mention that it is currently pleaded, and no change is sought by way of amendment, in paragraph 1.9(b), that the fourth defendant is liable to the plaintiff for the conduct of the second defendant. This seems to be the only place in the current and proposed statements of claim where the liability of Birdanco is limited to a responsibility for the actions of BPM.
I also mention that in paragraph 1.9(a)(ii) of the statement of claim it is pleaded that from a series of alternative dates, “the said firm” (which I take to be a reference to the first defendant) licensed BPM to operate its accountancy practice except for audit and insolvency work.
The twelve additional paragraphs are as follows:
“PARTICULARS
1.Prior to December 1995 the second defendant (‘BPM’) acted for Warlan pursuant to the retainer (‘the retainer’) pleaded in paragraph 1.12 below.
2.By virtue of an oral agreement entered into on about 30 November 1995 BPM transferred, inter alia, its right to provide the Accountancy Services pleaded in paragraph 1.10 below (‘the Accountancy Services’) to Bird Cameron Partners. The partners of Bird Cameron Partners from time to time, were directors of BPM. The oral agreement is evidenced by:
A      a minute of a meeting of directors of BPM held on 27 November 1995;
B      a minute of a meeting of the partners of Bird Cameron Partners held on 27 November 1995;
C      an undated agreement entitled Agreement for Mutual Release, executed in 1996 or 1997 but which purports to have effect from 30 November 1995.
3.The transfer which was for stamp duty purposes described as a surrender of a license was for nominal consideration, and resulted in BPM losing its principal asset, namely the accounting practice it had been operating and the income stream therefrom. BPM was thereby severely prejudiced, in particular in its ability to pay its creditors, including contingent creditors (which at that time included Coles Myer Ltd, by virtue of a claim it had against BPM in relation to which insurance had been denied and which included Warlan).
4.By virtue of an oral agreement made on about 30 November 1995 between Bird Cameron Partners and the fourth defendant (‘Birdanco’), Birdanco agreed to carry on the said accounting practice. The agreement is evidenced by:
A      a minute of a meeting of the directors of Birdanco held on 30 November 1995;
B      the minute of a meeting of Bird Cameron Partners, referred to in particular 2(B) above;
C      an undated agreement entitled a Licence Agreement between Bird Cameron Partners and Birdanco executed in 1996 or 1997, which purports to reduce to writing the terms of the last mentioned oral agreement, (‘the BCP-Birdanco Agreement’).
5.The partners of Bird Cameron Partners from time to time were directors of Birdanco.
6.Pursuant to clause 8(d) of the BCP-Birdanco Agreement, Bird Cameron Partners undertook to use their best endeavours to induce, inter alia, clients of BPM to engage Birdanco to do their work. Inter alia, BPM’s clients included Warlan.
7.A     Warlan’s consent was deliberately not sought by Birdanco, BPM      or Bird Cameron Partners in relation to the transactions pleaded in particulars 2-5 above nor in relation to Birdanco providing services in lieu of BPM (which Birdanco did unilaterally, from December 1995, pursuant to the retainer). Further no adequate or any notice was given to Warlan of the said matters. The plaintiff refers to a memorandum of Mr RG Gibson dated 30 May 1996.
BWarlan’s position was thereby prejudiced by the said transactions in that and in particular given matters pleaded in particular 7(A) above;
(i)BPM was, to the knowledge of it, Birdanco and Bird Cameron Partners, left without any ability to meet any claim brought against it by Warlan, or in relation to any uninsured portion of such a claim;
(ii)Warlan was precluded from objecting to the said transactions or seeking undertakings, assumptions of liabilities or indemnities from Birdanco and/or Bird Cameron Partners to the effect that its interests would not be prejudiced as a result of the said transactions.
8.The claims brought in herein in relation to the MBO and the Haynes Transactions (see paragraphs 2 and 7 below) were potential claims at the time of the said transactions, of which BPM, Birdanco and Bird Cameron and/or Bird Cameron Partners should have been aware or had the requisite knowledge so as to have been aware. The plaintiff refers to:
A the evidence of Mr Heggie in examinations pursuant to section 597 of the then Corporations Law on 14 May and 28 August 1997 to the effect that a conflict of interest pleaded in paragraphs 4.4(d), 5.4(a) and 10.4 below was known to him and BPM. As Mr Heggie was also a director of Birdanco and a partner of Bird Cameron Partners the said conflict of interest was known to Birdanco and Bird Cameron and/or Bird Cameron Partners and;
B      the evidence of the defendants’ expert Mr Ross Haslam contained in a report dated 21 September 2000 to the effect that at the time of the MBO transaction Warlan could not sustain the interest expense occasioned thereby (page 72) and at the time of the Haynes transaction the payment occasioned by that transaction should not have been made (page 45). The facts upon which Mr Haslam’s conclusions are drawn were known to Mr Heggie and hence, BPM, Birdanco and Bird Cameron and/or Bird Cameron Partners at the time of the said transactions and the same conclusions were able to be drawn at the time of the transactions.
9.In the premises Birdanco impliedly represented to Warlan that its position would not be prejudiced by the said transactions and Birdanco would assume a responsibility at law for any prior existing liabilities of BPM to Warlan.
10.Warlan acted on the said implied representation to its detriment in that it did not act as referred to in particular 7(B) above, and Birdanco is thereby estopped from denying that it has assumed the prior liabilities of BPM to Warlan.
11.Further by reason of the matters pleaded in particulars 1-10 above, Birdanco holds its assets subject to a constructive trust in favour of Warlan in relation to its claim against BPM brought in these proceedings.
12.Alternatively the effect of the said transactions and Birdanco’s assumption of liability to provide the Accountancy Services to Warlan pursuant to the retainer was an implied novation of the retainer, in the circumstances pleaded in paragraph 8 above, such that Birdanco by reason of the novation became liable for all liabilities of BPM pursuant to the retainer, and by reason of the retainer, including, inter alia, the claims the subject of these proceedings.”
Paragraph 1 does not appear to be consistent with paragraph 1.12 of the statement of claim which refers to a retainer struck between the plaintiff and persons or entities other than BPM.
Paragraph 2 refers to the transaction where BPM is alleged to have transferred its right to provide accountancy services to an entity referred to as Bird Cameron Partners.
In paragraph 3, the plaintiff asserts that BPM divested itself of its principal asset for a nominal consideration thereby severely prejudicing its abilities to make payments to its creditors, including contingent creditors of which the plaintiff was one.
Paragraph 4 next refers to an agreement between Bird Cameron Partners and the fourth defendant, Birdanco, whereby the fourth defendant would carry on the accounting practice.
In paragraph 7 the plaintiff pleads that its consent was deliberately not sought to the transactions referred to in paragraphs 2 to 5, nor was any notice given to the plaintiff of these transactions. The plaintiff further pleads in paragraph 7 that the plaintiff’s position was prejudiced by those transactions because of the divesting of assets and because the plaintiff had no opportunity to seek undertakings or indemnities from Bird Cameron Partners or the fourth defendant at a time when, as set out in paragraph 8 of the particulars, the plaintiff had potential claims against its accountants.
In explaining paragraphs 1 to 12, Mr Brohier submitted that there were three alternative bases to support the contention that Birdanco was now liable for any damages that either Bird Cameron or BPM might have to pay in respect of the claims pursued against them by the plaintiff. First, he submitted that by reason of the implied representation made by Birdanco to Warlan as pleaded in paragraph 9, and the fact that the plaintiff acted to its detriment in relation to that implied representation, the fourth defendant was now estopped from denying that it has assumed the prior liabilities of BPM to Warlan. Secondly, it was contended that, in the circumstances, a constructive trust arose whereby the property belonging to Birdanco was held in trust by it in favour of the plaintiff to the extent that the plaintiff was able to establish any claim for damages against BPM.
The third basis relied upon was that of an implied novation such that Birdanco became liable for the liabilities of BPM.
In relation to the estoppel argument, reliance was placed upon such cases as Waltons Stores (Interstate) Limited v Maher and Another (1988) 164 CLR 387 and The Commonwealth of Australia v Verwayen (1990) 170 CLR 394. In the latter case, Brennan J (as he then was) referred to Waltons Stores v Maher (at 428). His Honour said that the majority judgments established “that equitable estoppel yields a remedy in order to prevent unconscionable conduct on the part of the party who, having made a promise to another who acts on it to his detriment, seeks to resile from the promise”.
As I understand the plaintiff’s submission, it is that Birdanco impliedly represented to the plaintiff that the position of the plaintiff would not be prejudiced by the transactions relating to the restructuring of the accountancy practice and that Birdanco would assume a responsibility at law for any prior existing liabilities of BPM to the plaintiff. It is alleged that the plaintiff acted to its detriment in reliance upon the implied representation.
I have some difficulty in accepting that the plaintiff may pursue this aspect of its claim against Birdanco based on an estoppel which arises from an alleged implied representation. The difficulty arises because the plaintiff asserts that the implied representation arose out of the change in the structure of the accountancy practice when combined with the assertion that the plaintiff was not informed of the changes. However, accountancy services were thereafter provided to the plaintiff, not by the earlier entities which provided accountancy services but by a different entity. Such an approach does not sit comfortably with the analysis of estoppel by conduct made by Deane J in Verwayen (at pp 444 and 445). In that passage, in a series of numbered paragraphs, Deane J sets out the elements of estoppel by conduct. His Honour refers to the “departure by one party from the subject matter of an assumption which has been adopted by the other party as the basis of some relationship, course of conduct, act or omission which would operate to that other party’s detriment if the assumption be not adhered to for the purposes of the litigation”. His Honour consistently refers to such an assumption when dealing with the essential elements of estoppel by conduct.
In light of Deane J’s analysis of estoppel by conduct in Verwayen, I do not think it is open to the plaintiff to plead estoppel by conduct in the manner set out in the proposed amendments. It is, in my view, quite artificial to talk about a representation having been made by implication and, it having been made, the plaintiff relying upon such a representation to its detriment. I accept that a representation may arise by implication from the circumstances of a given case. However, even where representation arises only by implication, the person to whom the representation is made must have an understanding of the nature of that representation, particularly if it is said that the representee relies upon the implied representation. It seems to me to be a contradiction to say on the one hand that the plaintiff was not told of the structural changes to the accountancy practice and yet became aware, by implication, that its position was not to change and thus it would not object to those structural changes.
For these reasons I do not consider that the plaintiff has adequately pleaded, either in the current or proposed pleading, its case based on estoppel. I do not mean to suggest that if the plaintiff abandons the concept of an implied representation and reliance upon that representation and substitutes the concept of a mutual assumption as to existing facts and a purported departure from that assumption, estoppel by conduct arises if only to the extent of allowing it to be pleaded. If such a course is undertaken it will be for the plaintiff in due course to reformulate its amendments to bring itself within the recognised equitable principles.
In support of the plea that a constructive trust had arisen, the plaintiff relied upon Bahr and Another v Nicolay and Others [No 2] (1987-1988) 164 CLR 604. In that case A sold a parcel of land to B on the basis that upon the expiration of a three year period, B would sell back the land to A for a specified purchase price. B subsequently sold the land to C before the expiry of the three year period. The contract between B and C contained a provision acknowledging the existence of the repurchase provision in the earlier contract. The property was transferred to C who informed the original owner A that he recognised the repurchase clause and would agree to sell the land to A for the stipulated purchase price. C subsequently refused to do so and A sought specific performance. It was held that in the circumstances a constructive trust arose between A and C which required C to transfer the land to A in exchange for the stipulated purchase price. That case is very different from the claim pursued by the plaintiff in this action. Whilst I recognise that it is not my function to decide disputed points of law on an application for leave to amend, the plaintiff must demonstrate that there is some arguable basis for the amendment contended for.
In my view Bahr v Nicolay does not support an argument that a constructive trust arose between Birdanco and the plaintiff such that Birdanco held its assets on trust for the plaintiff to the extent of any claim that the plaintiff might be able to establish in respect of negligent advice or any other cause of action arising from advice received from one or other manifestation of the accountancy practice. Why, one might ask, would a constructive trust arise which has the effect of making the plaintiff a secured creditor where, if the plaintiff’s claim was solely to be against BPM, it would be an unsecured creditor? Why should the plaintiff be in a position where it ranks as a secured creditor thereby taking priority over other ordinary creditors? It seems to me, that if the plaintiff is to resort to equity for protection, then it must bring itself within the requirement of estoppel by conduct. If it cannot do so, it can hardly be said that it can pursue as an alternative, a better position in equity, namely that the fourth defendant holds its assets on trust for the plaintiff.
For these reasons I do not think that there is any substance to the plaintiff’s claim against the fourth defendant based on an alleged constructive trust.
I turn to a consideration of whether or not there has been an adequate pleading of a novation in the proposed amendments. In the circumstances set out in paragraphs 1 to 12 of the amendment, the plaintiff wishes to plead, in the alternative to the estoppel point and to the point based on a constructive trust, that there was an implied novation of the retainer. This is raised in paragraph 12 and places emphasis upon paragraph 8. The plaintiff relies upon the decision of the Privy Council in Rolfe and Anor v Flower Salting & Co (1866) LR 1 PC 27. That was a partnership case and the question arose whether a debt incurred by a former partnership was taken on by the partners of a new partnership which replaced the former partnership and, in addition, whether or not the creditor discharged the former partnership of the indebtedness by accepting that the new partnership had made itself responsible for payment of the debt of the former partnership. The case was commented on by the learned authors in Higgins and Fletcher, “The Law of Partnership”, Australia and New Zealand, 8th Edition, at pages 204-205. The learned authors said:
“The newly constituted firm continued to trade under the same name [William Rutledge and Co] and in the same manner, keeping the same books of account as the old firm. The old firm was indebted to the respondent company to the amount of £80,000 and it proved that this debt and the interest payable in respect of it were regularly recorded in the appellant firm’s books of account, to which the new partners T and S, at all material times, had full access. The respondent company [the creditor] continued to deal with the firm as newly constituted. It was held, affirming the judgment of the Supreme Court of Victoria, first that the creditors, by dealing with the newly constituted firm with full knowledge of the change in its membership, had impliedly agreed to accept the new firm as debtor in the place of the old firm and secondly, that the incoming partners, T and S, by their conduct in not disputing the entries in the firm’s books of account, had impliedly agreed to accept joint liability with the partners of the old firm for all the debts shown in those accounts.”

Whilst I accept that as a matter of partnership law, in given circumstances one partnership may take over the liability of another with the approval of the creditor such that the debt becomes solely the debt of the new partnership, the matters sought to be pleaded in paragraphs 1 to 12, and in particular paragraph 8, do not sufficiently form the basis for the proposed pleading.
In this case, a contingent debt is referred to, namely a claim for damages based on negligent advice in relation to the management by the Haynes transaction. I do not think it matters that the debt is a contingent debt for the purposes of at least the pleading. Paragraph 8 sets out the factual basis upon which it is asserted that the relevant persons either were or should have been aware of the existence of the contingent debt. However, that is as far as the proposed pleading goes. It does not deal with the question of whether or not the new partnership, Birdanco, included that potential liability in its own books of account. Nor does the proposed pleading deal with the facts upon which the plaintiff relies to support the contention that the plaintiff as contingent creditor accepted that the new partnership would be responsible for discharging the liability to the exclusion of the original partnership.
In the absence of such details, there cannot be a sufficient pleading, whether it be based on novation or upon principles of partnership law. For these reasons I do not consider that the third basis relied upon by the plaintiff in relation to the proposed amendments to paragraph 1.9(b) have been made out.
For these reasons the application by Document 81 should be refused.

[2002] SASC 232

25 July 2002