Delryk Pty Ltd v McKay atf the Kaylin Retirement Fund

[2009] WASC 305

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   DELRYK PTY LTD -v- McKAY atf THE KAYLIN RETIREMENT FUND [2009] WASC 305

CORAM:   LE MIERE J

HEARD:   4 AUGUST 2009

DELIVERED          :   16 OCTOBER 2009

FILE NO/S:   CIV 1495 of 2005

BETWEEN:   DELRYK PTY LTD (ACN 076 256 525)

Plaintiff

AND

McKAY atf THE KAYLIN RETIREMENT FUND
First Defendant

KAYE LYNETTE McKAY
Second Defendant

Catchwords:

Practice and procedure - Application for summary judgment - Application to strike out paragraphs of statement of claim - Turns on own facts

Legislation:

Limitation Act 1935 (WA)
Rules of the Supreme Court 1971 (WA), O 16

Result:

Leave to bring summary judgment application out of time refused
Application to strike out paragraphs of statement of claim granted

Category:    B

Representation:

Counsel:

Plaintiff:     Mr J L Sher

First Defendant             :     Mr G D Cobby

Second Defendant         :     Mr G D Cobby

Solicitors:

Plaintiff:     Taylor Smart

First Defendant             :     Brickhills

Second Defendant         :     Brickhills

Case(s) referred to in judgment(s):

Barnes v Addy (1874) LR 9 Ch App 244

Dey v Victorian Railways Commissioners (1949) 78 CLR 62

Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87

Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 70 ACSR 1

1. LE MIERE J: The defendants apply for summary judgment pursuant to O 16 of the Rules of the Supreme Court 1971 or alternatively that a number of paragraphs of the re‑amended statement of claim be struck out on the basis that they do not disclose a reasonable course of action, or alternatively are embarrassing and likely to delay the fair trial of the action.

Extension of time

1. Order 16 r 1(1) provides that an application by a defendant for summary judgment is to be brought within 21 days after appearance or at any later time by leave of the court. The writ, indorsed with a statement of claim, was filed on 28 April 2005 and an appearance entered by the defendants on 9 May 2005. Accordingly, the defendants require leave to bring the application.

2. The defendants submit that the reasons underlying the delay in bringing the application are the difficulties caused by the death of the late Ken McKay (McKay) in March 2002 and the inability of the defendants to obtain access to relevant documents.  Those matters are set out in the affidavit of Kaye Lynette McKay (Mrs McKay) sworn 4 March 2009.  The defendants submit that the question of leave to bring the application out of time should be considered in the context of the strength of the plaintiff's case for summary judgment.  I will defer consideration of whether the defendants should have leave to bring the application until after I have considered the merits of the application.

Bases of defendants' applications

1. The defendants apply for summary judgment, or alternatively to strike out paragraphs of the statement of claim, on the grounds that:

   1.the plaintiff's claim based on the first limb of Barnes v Addy (1874) LR 9 Ch App 244, that is recipient liability, is untenable, the defendants not having received any property subject to any fiduciary obligation;

   2.there is nothing to suggest that Mrs McKay had knowledge of any dishonest or fraudulent design on the part of McKay with the consequence that any claim based on the second limb of Barnes v Addy, that is knowing assistance, must fail at trial; and

   3.to the extent that there is any claim sought to be founded in contract, that claim is untenable and in any event statute barred.

Legal principles – summary judgment

1. Order 16 r 1(1) provides that the court may order that judgment be entered for the defendant if satisfied that the action is frivolous or vexatious, that the defendant has a good defence on the merits or that the action should be disposed of summarily.

2. In Dey v Victorian Railways Commissioners (1949) 78 CLR 62 Dixon J said:

   The application is really made to the inherent jurisdiction of the court to stop the abuse of its process when it is employed for groundless claims.  The principles upon which that jurisdiction is exercisable are well settled.  A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury.  The fact that a transaction is intricate may not disentitle the court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process or is vexatious.  But once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process (91).

3. In Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 Mason, Murphy, Wilson, Deane and Dawson JJ said (omitting reference to authorities):

   The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried … In our view, it is not possible to say without doubt, on the whole of the material, that there is no question to be tried concerning the payment of the deposits by the appellants.  The facts which are established are inconclusive, but the respondent, as well as the appellants, was in a position to establish conclusively the payment of the deposits if that fact could be established and, given the opportunity, it did not do so.  That leaves, we think, a question to be tried and, although the appellants have not succeeded in positively establishing a defence, they should not in the circumstances be debarred from defending the action (99).

Factual matrix

1. The action concerns two life insurance policies issued by Norwich Union Life Australia Ltd (Norwich).  The first policy, described by the parties as the Old Policy, is policy no 7612034 issued by Norwich on 7 January 1998.  The life insured was McKay.  The policy owner was the plaintiff.  The second policy, described by the parties as the New Policy, is policy no 7613408 issued by Norwich on 24 November 1998.  The life insured is McKay.  The policy owner is the first defendant, that is, Mrs McKay as trustee for The Kaylin Retirement Fund.

2. The plaintiff pleads in the re‑amended statement of claim that in or about March 1997 McKay and Rodney Carter (Carter), a director of the plaintiff, entered into an oral agreement. One of the terms of the oral agreement is said to be that the plaintiff would take out key man life insurance policies over the lives of Carter and McKay to ensure that if either one or both of them died, the proceeds of the policies could be used to discharge the business debts of the plaintiff, as well as the personal debts of McKay and Carter and the debts of their wives, all of which individuals were to be guarantors of the various business debts of the plaintiff [8(j)]. The plaintiff says that it took out the Old Policy in accordance with the March 1997 agreement [9].

3. The plaintiff says that the plaintiff, Carter, McKay, Mrs McKay and others entered into a written heads of agreement dated 6 March 1998 (the 1998 HOA) [13]. The plaintiff says that the express terms of the 1998 HOA include, in effect, that the plaintiff deliver to Norwich an irrevocable authority authorising Norwich to pay to the Accountant the sum of $1 million payable under the insurance policy taken out by the plaintiff over the life of McKay. The Accountant was to pay the sum received to creditors of the plaintiff in reduction of the debts and liabilities of the plaintiff and refund any surplus to the plaintiff [14]. The plaintiff says that the 1998 HOA, to which Mrs McKay was a party, required the maintenance of key man insurance over the life of McKay.

4. In October 1998 McKay and Mrs McKay requested Norwich to transfer the benefits from the Old Policy to a new policy to be owned by the first defendant.  On 22 October 1998 McKay, purporting to act on behalf of and with the authority of the plaintiff, requested that the ownership of the Old Policy be transferred to the first defendant.  For the purposes of these applications, it is accepted by the defendants that McKay had no authority to do so on behalf of the plaintiff.

5. On 25 November 1998 Norwich cancelled the Old Policy and issued the New Policy.  By letter of 25 November 1998 to the first defendant, Norwich said that 'the alteration to your policy has now been completed'.  The letter then gave details of the New Policy and the premium payable under it.

6. It is common ground that the result of Mr and Mrs McKay requesting the transfer of the Old Policy and Norwich issuing the New Policy was that the Old Policy was cancelled and a new policy was issued.  The defendants accept for the purposes of these applications that in causing Norwich to cancel the Old Policy, McKay breached a fiduciary duty he owed to the plaintiff.

7. McKay died on 1 March 2002.  On or about 21 November 2002 Norwich paid to the first defendant the proceeds payable under the New Policy.

The plaintiff's causes of action

1. The defendants submit that the re‑amended statement of claim pleads causes of action based on the principles enunciated in Barnes v Addy and a cause of action for breach of contract.  The Barnes v Addy principles stem from the notion that a person who has been knowingly concerned in a breach of trust, or who receives trust property transferred in breach of trust, may be personally liable to the beneficiaries of the trust.  It is convenient to refer to what has become known as the two limbs of Barnes.

2. The first limb of Barnes is concerned with the liability of a person as recipient of trust property.  For the recipient of trust property to be held liable for knowing receipt, the trustee must have misapplied trust property and the third party must have received trust property.  At the time of receiving the trust property the third party must have known of the trust and of the misapplication of the trust property:  The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 70 ACSR 1, Owen J [4748].

3. The second limb of Barnes is concerned with the liability of a person as an accessory to the trustee's breach of trust.  The third party must knowingly have participated and assisted in breaches of duty by the fiduciary.  Any breach of trust or fiduciary duty must be dishonest and fraudulent:  Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ [179].

The first limb claim

1. The defendants submit that there can be no liability under the first limb because the defendants did not receive any trust property.

2. The plaintiff's case appears to be based on the notion that the benefit of the Old Policy, or the benefits to which the policy owner was entitled under the Old Policy, was transferred to the New Policy, or the owner of the New Policy.  This appears, in part, to be based upon statements made by McKay and Norwich at the time to the effect that the benefits of the Old Policy were transferred to the New Policy or that ownership of the Old Policy was transferred from the plaintiff to the first defendant.  Neither the pleadings nor the evidence are consistent with that notion.  It was common ground on the hearing of these applications that the Old Policy was cancelled and the first defendant took out the New Policy, which was a new policy issued by Norwich.

3. McKay was a tetraplegic following a diving accident in 1990 and was confined to a wheelchair. In his affidavit sworn 20 May 2009 Carter deposes that the Old Policy took many months to arrange due to the medical reports required as a result of McKay's previous medical history [12]. In the course of the hearing of these applications, there was discussion about the relevance of these matters. There was discussion about whether the request by McKay and Mrs McKay to transfer the Old Policy to the first defendant rather than for the first defendant to take out a new policy enabled the first defendant to take advantage of the issue and existence of the Old Policy. However, no case based upon such considerations is pleaded and the plaintiff did not advance a case based upon such considerations.

4. The plaintiff's case based upon the first limb of Barnes v Addy cannot succeed because the defendants did not receive any trust property.  The proceeds of the New Policy were received under the contract of insurance taken out by the first defendant.  The proceeds did not result from the Old Policy.  The Old Policy was not, as a matter of law, transferred to the first defendant.  The defendants accepted for the purposes of this application that McKay breached his fiduciary duty to the plaintiff by cancelling the Old Policy.  However, there was no breach of duty in taking out the New Policy.  McKay was at liberty to take out, or cause to be taken out, a policy of insurance on his life in addition to the Old Policy.  There was no conflict of interest in McKay taking out an additional policy of life insurance.  Indeed McKay had earlier taken out another life insurance policy with Westpac.  The plaintiff did not suggest that McKay committed any breach of fiduciary duty in doing so.  If McKay had assigned the Old Policy to the first defendant or caused it to be assigned to the first defendant that would have been a breach of fiduciary duty owed to the plaintiff.  But that did not happen.  McKay did not breach a fiduciary duty owed to the plaintiff by taking out, or causing to be taken out, the New Policy.  The New Policy, or the proceeds of it, did not become trust property.

The second limb claim

1. Counsel for the defendants submitted that the plaintiff's claim under the second limb could not succeed because Mrs McKay did not have knowledge of any dishonest or fraudulent breach of fiduciary duty by McKay.  Knowledge in the second limb of Barnes v Addy includes:

   (i)actual knowledge;

   (ii)wilfully shutting one's eyes to the obvious;

   (iii)wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make; or

   (iv)knowledge of circumstances which would indicate the facts to an honest and reasonable man:  Farah Constructions Pty Ltd v Say‑Dee Pty Ltd, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ [171] ‑ [178].

2. The plaintiff pleads in the re‑amended statement of claim that the first defendant received the proceeds of the New Policy knowing that she had no entitlement to the proceeds in that:

   (a)she knew that the plaintiff was the beneficiary of the Old Policy;

   (b)she had never sought or received from the plaintiff its authority, permission or consent to cancel the Old Policy, replace it with the New Policy and receive the policy proceeds; and

   (c)at the time she signed the risk proposal form for the New Policy, the first defendant knew or should have known that the result of her request to the insurer would be the cancellation of the Old Policy and its replacement by the New Policy [21].

3. The defendants submit that the evidence establishes that the first defendant did not know that the plaintiff was the beneficiary of the Old Policy.  The defendants submit that the sole evidence that Mrs McKay knew that the plaintiff was entitled to the proceeds under the Old Policy or that the plaintiff's consent to the transfer of that policy was required is that she executed the 1998 HOA.

4. In her affidavit sworn 20 July 2009 in support of the defendants' application for summary judgment, Mrs McKay swears that she was not involved in the preparation of the 1998 HOA, cannot recall ever reading the 1998 HOA prior to the commencement of this action [11] and does not recall reading it before she signed it. Mrs McKay swears that she would have signed the 1998 HOA simply because her husband asked her to do so as she trusted him [12]. Mrs McKay swears that she signed a risk proposal form for the New Policy because she was told by her husband words to the effect to sign the document to provide life insurance covering his life for the benefit of the first defendant. She says she made no further enquiry about the risk proposal because she trusted her husband [15]. Mrs McKay swears that she did not know, or believe, that consent of the plaintiff was required for the risk proposal form [16]. Mrs McKay says that she was unaware that the plaintiff was the beneficiary of the Old Policy [18] and she did not know that by signing the risk proposal form that Norwich would cancel the Old Policy and issue a new policy in its place [20] and she did not know or believe that she had caused the Old Policy to be cancelled [21].

5. The defendants submit, in effect, that the plaintiff cannot establish that Mrs McKay was knowingly involved in McKay's breach of fiduciary duty in causing the Old Policy to be cancelled because of her affidavit evidence to which I have referred.  That is not a sufficient ground for summarily dismissing the plaintiff's claim.  The power to order summary judgment should never be exercised unless it is clear that there is no real question to be tried.  It is not possible to say without doubt that there is no question to be tried concerning Mrs McKay's knowledge that the plaintiff was the owner of the Old Policy and, by requesting Norwich to cancel the Old Policy, she knowingly participated in a dishonest breach of fiduciary duty by McKay.

The contract claim

1. The alleged breach of contract caused Norwich to cancel the Old Policy and issue the New Policy.  That occurred on 22 October 1998 or at the latest 24 November 1998.  The writ did not issue until 28 April 2005.  The plaintiff concedes that by then the plaintiff's claim for breach of contract was barred by the Limitation Act 1935.

Conclusion

1. Insofar as the re‑amended statement of claim pleads a claim based upon the first limb of Barnes v Addy, it discloses no reasonable cause of action and should be struck out.  Insofar as the statement of claim pleads a claim for damages for breach of contract, it discloses no reasonable cause of action and should be struck out.

2. I am not satisfied that the statement of claim, insofar as it pleads a case based on the second limb of Barnes v Addy, discloses no reasonable cause of action or is embarrassing or likely to delay the fair trial of the action.  I am not satisfied that the plaintiff's claim, insofar as it is based upon the second limb of Barnes v Addy, is frivolous or vexatious or that the defendants have a good defence on the merits or that the action should be disposed of summarily.

3. The action is not frivolous or vexatious and I am not satisfied the defendants have a good defence on the merits or that the action should be disposed of summarily.  The defendants' defence to the claim based on the second limb of Barnes v Addy depends on findings of fact.  The contentious facts concern Mrs McKay's knowledge of the contents of, and obligations created by, the 1998 HOA and more broadly her knowledge of the allegedly dishonest or fraudulent act of McKay in causing the Old Policy to be cancelled and the New Policy to issue in breach of his fiduciary duty owed to the plaintiff.  I refuse leave to bring the application for summary judgment out of time because the application depends on the finding of contested facts.

4. I will hear the parties as to which paragraphs of the statement of claim should be struck out so as to give effect to these reasons.