Collins Commercial Pty Ltd v Australia Industrial Park Pty; Ltd and Ors

[2011] VCC 951

IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE
CIVIL DIVISION
COMMERCIAL

GENERAL DIVISION

Case No. CI-09-06188

COLLINS COMMERCIAL PTY LTD	Plaintiff
v
AUSTRALIA INDUSTRIAL PARK PTY LTD	First Defendant
and
STEVEN LOOI	Second Defendant
and
LYNDON MEADOWS PTY LTD	Third Defendant
(ACN 050 134 720)

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JUDGE:	HIS HONOUR JUDGE GINNANE
WHERE HELD:	Melbourne
DATE OF HEARING:	7 July 2011
DATE OF JUDGMENT:	13 July 2011 - Revised 20 July 2010
CASE MAY BE CITED AS:	Collins Commercial Pty Ltd v Australia Industrial Park Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2011] VCC 951

REASONS FOR JUDGMENT
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Catchwords: CONTRACT – alleged default under loan agreement and liability under guarantee – defence that lender breached loan agreement – defence of economic duress

PRACTICE – plaintiff’s summary judgment application – questions to be tried – defences arguable – Civil Procedure Act 2010, ss.63,64 and 76; County Court Civil Procedure Rules, O22 r 2.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P Erlich	P & B Law
For the Defendants	Mr S Pitt	Donaldson Trumble Lawyers Pty Ltd
HIS HONOUR:

1          The plaintiff seeks summary judgment against the first two defendants. The litigation arises out of a proposal to develop land in China in conjunction with the Longnan Government, which was looking for investors to acquire and develop land for residential and commercial purposes. Mr Looi incorporated the first defendant, Australia Industrial Park Pty Ltd (“AIP”), as a joint venture vehicle.

2          The plaintiff’s claim at this point is for the sum of $270,928.75, being part of the loan made by Mr E. Theophilous, a director of the plaintiff and also a director of AIP.

3          The plaintiff’s claim relies on events said to have caused a default under a Loan Agreement, by which monies were advanced by the plaintiff to the first defendant, AIP, and guaranteed by the second defendant, Mr Looi. The default pleaded is that in the opinion of the plaintiff, AIP was insolvent, its only purpose being to conduct a partnership, which no longer operated, and it having no income. The plaintiff pleads that demands were made under the Guarantee and therefore the debt is owing.

4          The defendants do not dispute that the affidavit of Mr Theophilous was sufficient to verify the facts upon which the claim is based.

5 An issue arises whether this summary judgment application is to be determined under Rule 22.02 (1) or s.63 of the Civil Procedure Act. The relevant test under Rule 22.02, is whether there is a question which ought to be tried and under s 63 of the Civil Procedure Act, whether the defence has real prospects of success.

6 The determination of which provision applies depends on whether the Court has begun to hear and determine the proceeding within the meaning of s.76 of the Civil Procedure Act. Because of the chequered interlocutory history of this proceeding, including it seems at one stage it being struck out, the determination of whether the transitional provisions in s.76 of the Civil Procedure Act apply is not straightforward. The preferable course is to express a view in respect of both provisions. If I was required to determine that question, I would conclude that the Court has not yet begun to hear and determine the proceeding in the sense referred to in s.76.

7          Because it is conceded that Mr Theophilous’ affidavit verifies the facts on which the claim is made, it is necessary to consider the issues raised by the affidavit of Mr Looi. In describing them I am, of course, not making findings accepting Mr Looi’s account – that is not the current question. Rather I am examining the issues that Mr Looi’s account of events raise. Some detail of the matters stated in Mr Looi’s affidavit is required because of the nature of his defences.

8          Between late 2007 and March 2009, Mr Looi spent approximately $110,000, much of which came from his wife, pursuing the joint venture proposal. In early 2009, he approached Mr Theophilous, who had had some experience in selling land overseas. Mr Theophilous introduced him to possible financiers and informed him that he was interested in the project and, perhaps in providing some funding through the acquisition of shares in AIP. Mr Looi and Mr Theophilous travelled to China in April 2009. At that time Mr Theophilous gave Mr Looi $5,000. They again travelled to China in May 2009 where a contract for a long-term lease and development rights for an industrial project was entered into between the Longnan Government and AIP. The obligations of that contract required AIP to provide a deposit of $200,000 by June 2009.

9          Upon their return to Australia in May 2009, Mr Theophilous told Mr Looi that he was enthusiastic about the project and proposed that he would purchase 30 per cent of the shares in AIP. According to Mr Looi, they agreed on a sum of $650,000. Mr Looi stated that he wanted to be reimbursed approximately $200,000 for the money and time he had expended, and the balance of the funds was to be used towards further expenses and for the payment of the deposit to the Longnan Government. It said that there was a further term of the arrangement that Mr Theophilous was to raise a further $1,500,000 to fund the establishment of offices to sell the land. Mr Looi states that Mr Theophilous agreed verbally to these arrangements and that he regarded the transaction as a simple sale of shares under which Mr Theophilous would pay him $650,000.

10        In June 2009, Mr Kotzman, solicitor, who had previously acted for Mr Looi, or interests associated with him, and now was acting as solicitor for both Mr Theophilous and Mr Looi, rang him to say that before he made any payment, Mr Looi would have to sign documents and also transfer 30 per cent of the shares in the capital of AIP. There was a suggestion that some of those shares would be transferred to the third defendant, Lyndon Meadows Pty Ltd. Mr Kotzman stated that his client would be providing a total of $650,000 to AIP by way of loan in order to secure its entitlement to the partnership.

11        On the same day, Mr Looi’s accountant, Mr Ting, replied to Mr Kotzman, disputing that the money would be paid by way of loan, but rather would be Mr Theophilous’ contribution to the joint venture. Mr Kotzman replied that Mr Theophilous felt it appropriate for there to be security and in effect that a personal guarantee from Mr Looi would be required.

12        Mr Looi and Mr Theophilous met the next day. According to Mr Looi’s account, Mr Theophilous said that for the funding of the loan to occur, a guarantee by Mr Looi was non-negotiable. Mr Looi did not agree to this but understood that if he did not, there would not be any further funding provided and repayment of amounts already paid would be required. Mr Looi swears that he felt substantial pressure because they had booked travel to China in less than ten days’ time and according to the contract with the Longnan Government, they had to pay the $200,000 deposit. He also states he was under severe financial pressure because of the amount of funds his wife had expended on the project. If he did not receive the funding from Mr Theophilous, he and his wife would have been in a very precarious financial position.

13        Mr Theophilous presented him with a piece of paper stating that the $650,000 was to be treated as a loan. He stated words to the effect that if he did not sign the paper then that would be the end of the dealings between them. Mr Looi signed the piece of paper.

14        On 8 June 2009, Mr Theophilous met with Mr Looi and drove him to the offices of Mr Kotzman’s firm, P & B Law. They then drove to the offices of a firm of solicitors called Chua Tan & Associates, who had had previous dealings with Mr Looi. Various agreements were left with Ms Tan, a solicitor, who indicated that she would need some time to review them. Mr Looi told her the matter was extremely urgent as the documents had to be executed before 12 June 2009.

15        Two days later, Mr Theophilous again met Mr Looi and presented him with various company related documents, share certificates and transfer forms that included transfer of 30 per cent of his shares in AIP to the plaintiff. They then travelled to an ASIC office to lodge the documents. Mr Looi states that he understood that they were attending a share registry.

16        Mr Theophilous then drove Mr Looi to the offices of Ms Tan, where she gave him a general explanation of the documents by which the company was loaning $650,000 to AIP and explained that he was going to give a personal guarantee. He states that Ms Tan suggested that all directors of AIP, ie including Mr Theophilous. should sign the Guarantee. Mr Looi says that he did not receive any advice regarding the Partnership Deed. Ms Tan provided a Solicitor’s Certificate certifying that she had explained to him the general nature and effect of the Guarantee, including the risk of loss of any security property and other assets owned by the Guarantor. Mr Looi signed the Certificate stating that “the above information is true”.

17        Mr Looi proceeded to execute the Loan Agreement, the Guarantee and the Partnership Agreement which in Clause 6.6 stated:

“The initial capital for the partnership shall be comprised of a loan provided by Collins in an amount of $650,000. The Loan shall be repayable in accordance with the Loan Agreement executed between the parties. Further funding for the Development shall be provided by way of the Development Loan which shall be secured against the Partnership Property and be non recourse against the directors or representatives of the Partners.”

18        Mr Looi states that at no stage prior to their execution was he provided with either the original bound documents or, copies, or drafts in order to consider them. He states that he executed the documents because he felt he had no choice, given that the alternative probably meant financial ruin for him and his wife, and that he did not know that he was signing documents potentially exposing him to liability.

19        Mr Looi and Mr Theophilous then went to his wife’s office, who also signed the documents. She had received no legal advice regarding them.

20        Thereafter, Mr Theophilous provided Mr Looi with a cheque payable to him personally for $200,000. He states that he never had any direct control over the balance of the funds although he understood that approximately $370,000 was transferred into an account in Hong Kong which was controlled by a solicitor and Mr Sze, who was appointed to administer a sister company to AIP.

21        The China proposal did not proceed it seems because the Longnan Government wanted the work to proceed at a faster pace. According to Mr Looi, Mr Theophilous had not managed to raise any further funds. After deducting the deposit paid to the Longnan Government and the reimbursement of expenses, that only $201,049.63 was going to be available. Mr Theophilous and Mr Looi decided to pause the discussions about the project. They returned to Australia on 1 July 2009 and shortly thereafter informed the Longnan Government that they were unable to proceed with the industrial park at that time.

22        Around 6 July 2009, Mr Theophilous presented Mr Looi with a piece of paper which requested that Mr Sze return the balance of funds held by him on behalf of AIP, an amount of approximately $370,000. Mr Looi refused to consent, and Mr Theophilous signed the document and forwarded it to Mr Sze on 5 July 2009. That document, which is dated 5 July 2009, stated:

“We, Steven Looi and Emanuel Michael Theophilos, hereby authorise you to return US$303,000 less your expenses to Heres Pty Ltd by telegraphic transfer to the following account … .”

23        The document was signed by Mr Theophilous for and on behalf of AIP. Mr Looi in effect disputes that Mr Theophilous had any authority to sign that request or to obtain that money. His case is that Mr Theophilous’ action constituted a unilateral return of capital and was a breach of the Loan Agreement. Clause 4 of the Loan Agreement provided that AIP must repay the loan on the repayment date: namely, eighteen months from 12 June 2009, which would have been on 11 or 12 December 2010 and not earlier.

24        On 12 August 2009, Mr Theophilous wrote to Mr Looi demanding repayment of some $299,000. On 22 September 2009, P & B Law wrote to Mr Looi indicating that the project had been terminated and the partnership repaid part of the loan, and asserting that the plaintiff had the right to demand the repayment of the balance of the monies due under the Loan Agreement. On 7 October 2009, P & B Law issued a Notice of Demand to Mr Looi for repayment of $307,245.42. On or about 23 December 2009, the plaintiff served a Notice of Demand for $330,643.88, in respect of which Mr Theophilous stated in his affidavit:

“The monies owing under the Loan Agreement were required to be paid on 12 December 2010 and shortly after that I instructed the Plaintiff’s Solicitors to issue a Notice of Default and Demand for Payment under the guarantee.”

25        Two principal arguments were put on behalf of the first and second defendants. I will deal with them in the reverse of the order they were advanced. The first argument that I consider is that the plaintiff wrongly removed capital of the partnership and this prevented it from further commercial dealings. I have referred to the letter from Mr Theophilous to Mr Sze requesting payment of money to Heres Pty Ltd. The argument put was that the terms of the Loan Agreement were breached by the plaintiff giving this direction and that either AIP or Mr Looi had a claim against the plaintiff or Mr Theophilous for damages for breach of the Loan Agreement or for restitutionary relief.

26        The plaintiff’s pleading about the breach of the Loan Agreement is important, because ultimately the claims made under the Loan Agreement, coupled with the demands made under the Guarantee, are the foundations of its case. The breaches of the Loan Agreement that are pleaded in paragraph 8 of the Amended Statement of Claim deal with what is called the “first demand” and allege that an event of default occurred as at 7 October 2009. In the opinion of the plaintiff, the first defendant was insolvent in breach of Clause 6(b) of the Loan Agreement and “insolvent” within the meaning of the Corporations Act.

27        There are further particulars given about those allegations. They include that the enterprise, the subject of the partnership, had been discontinued. Importantly, in particular (g) it is asserted that by telephone call to Mr Sze, the partnership’s Hong Kong solicitor, the first defendant’s directors, Mr Looi and Mr Theophilous, jointly authorised Mr Sze to return the balance of proceeds of the loan held by him to the plaintiff. As previously stated, that is a matter put in issue by Mr Looi who, as I read his affidavit, asserts that he gave no such authority.

28        If at trial it were proved that Mr Looi had given no such authority, then the argument upon which the plaintiff puts its case may not be established. If it is shown by AIP that the plaintiff or Mr Theophilous had no authority under the Loan Agreement to call for the repayment of the money, then there is an arguable case that the plaintiff has breached the Loan Agreement. In that event, any insolvency of AIP, or any reasonable opinion formed about its insolvency and its failure to repay the loan, may be found to be attributable to that conduct and the failure of AIP to repay the sum due on 12 December 2010 may well be attributable to that conduct. In those circumstances, there may well be a defence available to the first and second defendants in respect of the plaintiff’s claim.

29 Because of that argument, I do consider that there is a question that ought to be tried under Rule 22.02, or that under s.63, it cannot be said the defence had no real prospects of success. In addition, under s.64, it is a case that should go to trial.

30        The other defence argued relied on principles of economic duress as discussed in the judgment of McHugh J in Crescendo Management Pty Ltd v Westpac Banking Corporation;[1] namely, whether there had been any pressure applied which had induced the person to enter into the contract and whether that pressure was illegitimate. Most of the relevant authorities deal with cases where there has been a threat to break a contract.

[1] (1988) 19 NSWLR 40

31        The plaintiff’s counsel argued that the economic duress argument had never previously been pleaded, that there was no prior contract, that could have been breached and that all that happened was some hard bargaining or a change in negotiating stance. The plaintiff also pointed out that it was not shown that it knew of the defendants’ difficult financial circumstances.

32        However, I consider that it is arguable in all the circumstances that a defence of economic duress may be available. Whilst it is true that most of the authorities where the defence has been established, involve threats to break existing contracts, the identification of what, if any, legal arrangement existed between Mr Theophilous or the plaintiff and Mr Looi and AIP prior to the execution of the suite of documents in June 2009, should be explored at trial. Counsel for the defendants pointed me to a list of expenses incurred prior to the execution of the main documents, that he relied on to suggest there was a pre-existing contract between the parties. Even if there were not, the reach of the principles of economic duress is still developing. I consider that the possible application of that defence is a matter that justifies the grant of leave to defend.

33        The third matter argued involved allegations of breaches of various provisions of the Partnership Agreement. They were not argued in the detail that enabled me to form any view about whether there were arguable breaches of those provisions that would justify granting leave to defend. So while not preventing the defendants from raising those matters in their defence, I do not base my decision on them.

34 For the two matters mentioned, I do consider that this is a matter where the first and second defendants have established that there is a question which ought to be tried and that under s.63 of the Civil Procedure Act, that these defences do have real prospects of success. The case should go to trial.

35        I will order that the defendants have leave to defend.

Costs
36	Having now heard argument about the costs of this application, I consider that the costs should be costs in the proceeding.
37	There was no dispute that the plaintiff had established its proofs. I have identified two possible defences as a basis for giving leave to defend. However, that conclusion is some distance from saying that the plaintiff has acted in any way inappropriately in bringing this summary judgment application.
38	The authorities point to a difference of views on whether costs should follow the event or should be costs in the proceedings, when a summary judgment application fails. Ultimately costs are discretionary and their award will depend on the circumstances of the particular case. In this case, I consider that the appropriate exercise of discretion is that the costs of the application for summary judgment should be costs in the proceeding.

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