Compaq Computer Australia Pty Ltd v Merry, Howard
[1996] FCA 212
•26 Mar 1996
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION No NG 520 of 1994
BETWEEN:
COMPAQ COMPUTER AUSTRALIA PTY LIMITED
Applicant
-and-
HOWARD MERRY
First Respondent
DAVID PAYES
Second Respondent
COLIN BUNNETT
Third Respondent
MICHAEL SHARP
Fourth Respondent
ROBERT BASSAT
Fifth Respondent
ALAN JEFFREY KRASS
Sixth Respondent
IAN HORMAN
Seventh Respondent
GREG THOMSON
Eighth Respondent
Coram: Olney J
Place: Melbourne
Date: 26 March 1996
MINUTE OF ORDERS
THE COURT ORDERS THAT:
Subject to the exclusion of paragraphs 17 to 21B and to the correction of typographical and drafting errors, the applicant have leave to file and serve within 7 days from this date an amended statement of claim in the form exhibited to the affidavit of Jacinta Ellis sworn 9 February 1996.
The applicant pay the respondents' costs of the application to amend and any costs thrown away by the amendment.
The directions hearing be adjourned to 2 April 1996.
All outstanding motions which presently stand adjourned be filed for hearing on 2 April 1996.
NOTE: Settlement and entry of orders is dealt with in rule 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION No NG 520 of 1994
BETWEEN:
COMPAQ COMPUTER AUSTRALIA PTY LIMITED
Applicant
-and-
HOWARD MERRY
First Respondent
DAVID PAYES
Second Respondent
COLIN BUNNETT
Third Respondent
MICHAEL SHARP
Fourth Respondent
ROBERT BASSAT
Fifth Respondent
ALAN JEFFREY KRASS
Sixth Respondent
IAN HORMAN
Seventh Respondent
GREG THOMSON
Eighth Respondent
Coram: Olney J
Place: Melbourne
Date: 26 March 1996
REASONS FOR JUDGMENT
By notice of motion filed on 9 February 1996 the applicant seeks leave to amend the application herein and to further amend the statement of claim.
This is not the first occasion on which leave has been sought to amend the statement of claim. Most recently the applicant sought such leave by motion filed on 20 November 1995 which was heard by Ryan J on 24 November 1995. On that occasion a draft of the proposed amended statement of claim (the November 1995 draft) was exhibited to an affidavit sworn in support of the motion. After hearing argument Ryan J made orders, inter alia:
That the applicant replead the draft further amended statement of claim which is Annexure B to the affidavit of Jacinta Ellis sworn 23 November 1995 and filed herein on the basis that paragraphs 6(b), 17, 18, 21, 24, 25, 26 and 27 have been struck out of the said draft pleading.
That the applicant file and serve by 9 February 1996 a motion returnable on 22 February 1996 for leave further to amend its statement of claim supported by an affidavit exhibiting the repleaded draft referred to in paragraph 1 of this Order.
The motion presently under consideration was filed in response to the second order. A draft of the proposed repleaded statement of claim (the February 1996 draft) is exhibited to an affidavit of Jacinta Ellis sworn 9 February 1996.
It is appropriate to set out a brief overview of the November 1995 draft for the purpose of identifying the content of the several paragraphs which Ryan J found to be unacceptable and to detail the changes proposed in the February 1996 draft.
In the course of its business of importing and suppling computer products the applicant supplied goods on credit to Hisoft Computers Pty Limited (Hisoft) for resale. The first to sixth respondents (inclusive) were at relevant times directors of Hisoft and the seventh and eighth respondents were officers of the company. (It is common cause that Hisoft is in receivership although that fact has not been pleaded). In March 1992 the applicant had refused to supply further products to Hisoft on credit and in June 1992 following negotiations between the applicant and certain directors of Hisoft, the applicant and Hisoft executed an agreement (the trust agreement) whereby, in consideration of the applicant supplying it with computer products for resale to certain nominated customers, Hisoft agreed to sell such products only to the nominated customers, to hold the proceeds of such sales on trust for the applicant, and immediately upon receipt of such proceeds to pay the same to the applicant. Between 5 June 1992 and 29 September 1992 Hisoft placed orders with the applicant pursuant to the trust agreement and the applicant supplied products to Hisoft (the trust stock). In paragraph 6 of the November 1995 draft the applicant pleaded:
(a) Each of the first to the fourth and the sixth to the ninth respondents knew of the foregoing matters and, in particular, knew that the applicant was, as and when requested to do so by Hisoft, supplying computer products to Hisoft pursuant to the trust agreement.
(b)The fifth respondent knew that in March 1992 the applicant had been refusing to supply further products to Hisoft on credit, and knew also that supply on credit by the applicant has since resumed, and intentionally avoided making enquiries in respect of the circumstances under which Hisoft had been able to obtain the resumption of supply of computer products on credit from the applicant.
The applicant says (in paragraphs 7, 8 and 9) that in breach of the trust agreement Hisoft:
a)sold trust stock to customers who were not nominated customers;
b)did not hold the proceeds from the sale of the trust stock on trust for the applicant;
c)appropriated such proceeds to its own use;
d)did not immediately on receipt of the proceeds of sale of trust stock pay the same to the applicant but paid the same into its own account.
The foregoing matters are pleaded in paragraphs 1 to 9 (inclusive) of the November 1995 draft. In particulars pleaded to paragraph 8 it is said that between 5 June 1992 and 15 October 1992 various payments (totalling in all $1,497,857) were made to the first, third, seventh, eighth and ninth respondents and to a company which is not a party. (The ninth respondent is no longer a party to the proceeding).
Paragraphs 10 to 16 (inclusive) of the November 1995 draft are headed "Trade Practices Act" and plead a claim under s 52 based on essentially the same facts as are pleaded in paragraphs 1 to 9. It is unnecessary to refer further to the Trade Practices Act claim other than to observe that in particulars pleaded in respect of paragraph 15 it is said that the applicant supplied stock to Hisoft under the trust agreement to a total value of $3,682,898.58 and received payment or returned stock to the value of only $2,916,873.03 leaving the sum of $766,025.55 outstanding by Hisoft to the applicant for stock sold under the trust agreement.
Paragraphs 17 to 21 (inclusive) of the November 1995 draft are headed "Direct Fiduciary Duty". Three of the paragraphs referred to in Ryan J's order of 24 November 1995 (namely paragraphs 17, 18 and 21) come under this heading. In the February 1996 draft this part of the pleading is abandoned and in lieu thereof the applicant seeks to plead a case pursuant to s 1324 of the Corporations Law.
Paragraphs 22 to 24 of the November 1995 draft are headed "Involvement in Breaches of Fiduciary Duty by Hisoft". It is said that Hisoft owed the applicant certain fiduciary duties arising from the trust agreement and that by reason of the matters pleaded in paragraphs 7, 8 and 9 Hisoft breached the duties and (in paragraph 24) that the first, third, seventh, eighth and ninth respondents knowingly, unconscionably or dishonestly received from Hisoft monies which Hisoft was obliged to retain on trust for, and pay to, the applicant. This latter paragraph is one that Ryan J referred to in the order of 24 November 1995.
The final cause of action pleaded in the November 1995 draft (paragraphs 25 to 27 (inclusive)) relates to an alleged breach by the respondents of a duty of care said to be owed to the applicant. This cause of action is not repeated in the February 1996 draft.
To the extent that the February 1996 draft repleads paragraphs referred to in the order of 24 November 1995, it is only necessary to refer to the former paragraphs 6(b) and 24. I propose therefore to initially consider the response made by the applicant in the February 1996 draft in relation to those paragraphs.
The obvious objection to the former paragraph 6(b) is its lack of particularity. In the February 1996 draft the former paragraph 6(a) is repeated as paragraph 6A and new paragraphs 6B and 6C are pleaded in place of the former 6(b). The new paragraphs assert:
6B As a director of Hisoft, the fifth respondent:
(a)at all material times had access to the books, records and accounts of Hisoft;
(b)in March 1992 knew that the applicant had refused to supply further computer products to Hisoft;
(c)between about 5 June 1992 and 25 September 1992 knew that the applicant had resumed supplying computer products to Hisoft without requiring immediate payment on delivery for such products;
(d)between about March 1992 and September 1992 knew that there was no improvement or no significant improvement in
Hisoft's financial position or in its capacity to pay its debts as and when they fell due;
(e)was at all material times under a continuing duty to obtain up-to-date information as to Hisoft's terms of trading with its major suppliers, including the applicant, and as to Hisoft's capacity to pay its debts as and when they fell due, including its capacity to pay for computer products which it obtained from the applicant;
(f)between about 5 June 1992 and 25 September 1992 intentionally refrained from making inquiries in respect of the circumstances under which and the basis upon which Hisoft had been able to obtain a resumption of the supply of computer products to it by the applicant;
(g)in about September 1992, authorised permitted or allowed Hisoft to make the payments referred to in paragraph 8 hereunder; and
(h)at or about the time that Hisoft made the payments referred to in paragraph 8 hereunder, intentionally refrained from making any inquiries as to the source of funds which Hisoft used or proposed to use to make such payments, and as to whether such payments could be made by Hisoft without prejudicing the applicant or any creditors of Hisoft.
PARTICULARS
The fifth respondent knew of the matters referred to in sub-paragraphs (b), (c) and (d) as a result of discussions at meetings of directors of Hisoft on 17 February 1992, 18 March 1992, 22 April 1992 and 21 May 1992. The fifth respondent attended each of these meetings.
As to the intentional avoidance of enquiry referred to in sub-paragraph (f), the applicant relies upon the affidavit of the fifth respondent sworn 28 September 1995 and filed in these proceedings.
The matters referred to in sub-paragraphs (a) and (e) arise as a matter of law.
The matters referred to in paragraphs (g) and (h) are to be inferred from paragraphs 4(a) and (d) of the said affidavit of the fifth respondent.
6CBy reason of the foregoing matters, between about 5 June 1992 and 25 September 1992, the fifth respondent knew of circumstances which would indicate to an honest and reasonable man that, and intentionally refrained from making inquiries which would have revealed that, the applicant was supplying computer products to Hisoft on conditions agreed between Hisoft and the applicant that:
(a)Hisoft would sell the products only to nominated customers;
(b)Hisoft would hold all proceedings(sic) of sale of those products on trust for the applicant; and
(c)immediately upon receipt of the proceeds of sale of those produces(sic) Hisoft would pay the same to the applicant.
Whether or not the applicant can make good at trial the facts asserted in paragraph 6B upon which it relies to support the conclusion pleaded in paragraph 6C is not presently relevant. The applicant has in my opinion remedied the defect that was apparent in the former paragraph 6(b) having satisfied its obligation to assert the facts upon which it relies in formulating this aspect of its case against the fifth respondent.
The focus of paragraph 24 has shifted from an assertion (in the November 1995 draft) that the first, third, seventh, eighth and ninth respondents received from Hisoft money which Hisoft was obliged to retain for and pay to the applicant to the following:
Each of the first to fourth and sixth respondents knowingly caused, procured, permitted or assisted Hisoft to breach the terms of the trust agreement, or alternatively participated in breaches of Hisoft of the trust agreement, by:
(a)selling computer products supplied by the applicant to customers who were not nominated customers as identified in the particulars of paragraph 7 hereof;
(b)not holding the proceeds of sale of such computer products on trust for the applicant and instead appropriating the same to Hisoft's own use, as identified in the particulars of paragraph 8 hereof, and
(c)paying the proceeds of sale of the sale(sic) computer products into Hisoft's own account immediately on receipt of such proceeds, as identified in the particulars of paragraph 9 hereof.
PARTICULARS
The knowledge of the said respondents is to be inferred from the facts and matters referred to in paragraphs 1 to 9, 15 and 16 hereof (including the particulars of those paragraphs).
Here again the applicant, in exposing the facts on which it relies, has made a satisfactory response to the order made by Ryan J in relation to the repleading of paragraph 24. The applicant has however gone further than the allegations contained in the previous paragraph 24, and in the new paragraph 25 has made a similar allegation against the fifth respondent. The only essential difference between the case pleaded in paragraph 24 and that pleaded in paragraph 25 is that in the latter case it is asserted that in addition to the other matters previously pleaded, the knowledge of the fifth respondent is to be inferred from the affidavit sworn by him on 28 September 1995. In my opinion the new form of paragraph 24 overcomes the objection that the previous form of the paragraph lacked the necessary particularity. So far as paragraph 25 is concerned, I am satisfied that on the face of it, it raises facts which if found could support the conclusion pleaded.
I turn now to the new paragraphs 17 to 21B in which the applicant seeks to plead a claim for damages against the first to sixth respondents pursuant to s 1324 of the Corporations Law.
The basis of the Corporations Law claim is found in the provisions of ss 232(4) and (6) of the Law which provide that in the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances (s 232(4)) and that an officer or
employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person (s 232(6)). By virtue of s 1324 the Court has power on the application inter alia of a person whose interests have been affected by the conduct, to grant an injunction to restrain a person who has engaged in conduct that, inter alia, constituted a contravention of the Corporations Law from engaging in such conduct (s 1324(1)) and pursuant to s 1324(10), in circumstances in which the Court has power under the section to grant an injunction, the Court may order the person concerned to pay damages to any other person.
The Court's power to award damages under s 1324(10) arises only in circumstances in which the Court may grant an injunction under the section, but on the facts of this case there is presently no occasion to seek an injunction as the conduct complained of has already occurred and there is no threatened future conduct to restrain. However, the Court's power to grant an injunction restraining a person from engaging in conduct may be exercised whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind (s 1324(6)(a)). Whilst there may be some basis to argue to the contrary I do not think that the present motion is the appropriate vehicle to finally decide whether the combined effect of the various provisions of the Corporations Law to which reference has been made give rise to a cause of action for damages. The case is at least arguable.
The substance of the case pleaded against the first six respondents is found in paragraphs 17 to 19, the full text of which is as follows:
As a director of Hisoft each of the first, second, third, fourth, fifth and sixth respondents was under a fiduciary duty to Hisoft:
(a)to exercise reasonable care and diligence in carrying out the duties of a director;
(b)to avoid a conflict between his duty to Hisoft and his private interest;
(c)not to make improper use of his position to gain an advantage for himself or for any other person; and
(d)not to prejudice the interests of creditors or beneficiaries of Hisoft by dissipating assets under Hisoft's control.
PARTICULARS
The duties arise as a matter of law
In breach of the fiduciary duty referred to in sub-paragraphs 17(a), each of the first, second, third, fourth, fifth and sixth respondents failed to exercise responsible care and diligence to ensure that:
(a)Hisoft sold stock procured under the trust agreement only to nominated customers;
(b)Hisoft held the proceeds of sale of that stock on trust for the applicant; and
(c)Hisoft, immediately on receipt of the proceeds of sale of that stock, paid those proceeds into the applicant's bank account.
In breach of each of the fiduciary duties referred to in sub-paragraphs 17(a), (c) and (d), each of the first, second, third, fourth, fifth and sixth respondents made improper use of his position to gain an advantage for himself or for others, and prejudiced the interests of the applicant as a beneficiary and/or creditor of Hisoft, by causing, procuring, authorising, permitting or allowing Hisoft to make the payments referred to in paragraph 8 hereof.
In paragraph 21 it is asserted that by reason of the matters referred to in paragraphs 17, 18 and 19 each of the first 6 respondents contravened ss 232(4) and (6) of the Corporations Law.
The allegation in paragraph 19 that the 6 respondents caused, procured, authorised, permitted or allowed Hisoft to make the payments referred to in paragraph 8 is not supported by any assertion of facts. It is not said how it is that the respondents caused, procured, authorised, permitted or allowed Hisoft to make the payments. In paragraph 8 the allegation is that Hisoft made the payments. Nothing is there said concerning the part (if any) the 6 respondents played in relation to the making of the alleged payments other than that 4 of them (the first, third, seventh and eighth) were recipients of various sums so paid. As the applicant seeks to attach liability to pay the balance of the sale proceeds received under the trust agreement to each of the 6 respondents it is necessary that it identify the conduct engaged in by each respondent which is said to contravene ss 232(4) and (6) of the Corporations Law and which would give rise to an exercise of power under s 1324. This has not been done and in the circumstances I would not be prepared to grant leave to amend the statement of claim in the terms of paragraphs 17 to 21B.
Subject to the exclusion of paragraphs 17 to 21B and to the correction of various obvious typographical and drafting errors, the applicant will have leave to file and serve within 7 days an amended statement of claim in the form exhibited to by the affidavit of Ms Ellis sworn 9 February 1996. The applicant must pay costs of the present motion and any costs thrown away by the amendment. It will be necessary for directions to be given to facilitate the provision of any further and better particulars that may be required and for the pleading of amended defences.
The respondents have emphasised that their opposition to the present motion should not to be regarded as an abandonment of other motions which presently stand adjourned whereby they seek orders striking out the statement of claim. In view of the leave to amend which the applicant has now obtained the respondents will have leave to amend their pending strike out motions so as to refer to the statement of claim as further amended pursuant to this decision.
I certify that this and the preceding 11 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney
Associate:
Dated:
Heard: 22 February 1996
Place: Melbourne
Judgment: 26 March 1996
Appearances:
Mr P. Jopling (instructed by Ebsworth & Ebsworth) appeared for the applicant.
Mr L. Glick (instructed by Arnold Bloch Leibler) appeared for the first, second, third, fourth, sixth, seventh and eighth respondents.
Mr M. Dreyfuss (instructed by N. Bassat) appeared for the fifth respondent.
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