Environinvest Ltd v Pescott; Environinvest Ltd v Blackburne Pty Ltd
[2011] VSC 325
•19 July 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No 4438 of 2010
IN THE MATTER OF ENVIRONINVEST LIMITED
(RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
(ACN 080 743 791)
| ENVIRONINVEST LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) AND ORS | Plaintiffs |
| v | |
| ROGER NEIL PESCOTT & ORS | Defendants |
No 6004 of 2010
| ENVIRONINVEST LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | Plaintiff |
| v | |
| BLACKBURNE PTY LTD (IN LIQUIDATION) AND ORS | Defendants |
JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 May 2011 | |
DATE OF JUDGMENT: | 19 July 2011 | |
CASE MAY BE CITED AS: | ENVIRONINVEST LIMITED v PESCOTT & ORS; ENVIRONINVEST LIMITED v BLACKBURNE PTY LTD & ORS | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 325 | |
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Civil Procedure – Application to strike out pleading; Supreme Court (General Civil Procedure) Rules 2005, rule 23.01; Civil Procedure Act 2010 (Vic), s 18
Corporations – Pleading a breach of s 180 or a contravention of s 182 of the Corporations Act 2001 (Cth)
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Evans | Maddocks |
| For the Second, Third and Eighth Defendants in proceeding 4438 | Ms M Sharpe | Millens |
| For the Tenth Defendant in proceeding 4438 (Third Defendant in proceeding 6004) | Mr T Di Lallo | Lord Commercial Lawyers |
| For the Eleventh Defendant in proceeding 4438 (Fourth Defendant in proceeding 6004) | Mr F G A Beaumont QC with Mr S Pitt | Mills Oakley |
HIS HONOUR:
Introduction
Applications have been made by some defendants in proceedings 4438 of 2010 and 6004 of 2010, to strike out substantial parts of the statement of claim in each case. Both proceedings were authorised by the liquidator of Environinvest Ltd, James Patrick Downey. In proceeding 4438 he is a plaintiff. Both proceedings arise out of the collapse of the Environinvest group of companies and the managed investment schemes operated by Environinvest, as Responsible Entity. They were commenced to recover losses alleged to have been suffered by Environinvest as a result of transactions authorised by its former directors. Claims are made against the former directors, members of the Pescott family and associated entities.
Environinvest is one of three plaintiffs in 4438 and the only plaintiff in 6004. Mr Downey is the second plaintiff in 4438. The third plaintiff in 4438 is STY (Afforestation) Pty Ltd. The liquidator is, for practical purposes, the plaintiff in both proceedings. It is not entirely clear why STY is a plaintiff.
In both proceedings the liquidator claims compensation from former directors, who include Clive Randal Dossetor and Grant Anthony Robertson. The claims are made pursuant to s 1317H of Corporations Act 2001 (Cth). The basis for the claims in proceeding 4438 are breaches of the duty imposed by s 180 of the Act and contraventions of s 182 of the Act. The basis for the claims against the directors in proceeding 6004 are breaches of the duty imposed by s 180 of the Act. The allegation of breach of duty imposed under s 182 of the Act misunderstands the nature of the provision. Section 182 prohibits certain conduct.
Messrs Dossetor and Robertson are the tenth and eleventh defendants respectively in proceeding 4438, and the third and fourth defendants in proceeding 6004. Both directors applied to have the following paragraphs in proceeding 4438 struck out on substantially the same grounds:
23, 36, 36A, 37, 38, 39, 40, 42, 43, 58, 58A, 59, 60, 61, 62, 64, 65, 80, 80A, 81, 82, 83, 84, 86, 87, 102, 102A, 103, 104, 105, 106, 108, 109, 124, 124A, 125, 126, 127, 128, 130, 131, 138, 151A, 152, 153, 156, 157, 159, 160, 167, 180A, 181, 182, 185, 186, 188, 189, 196, 209A, 210, 211, 214, 215, 217, 218, 225, 238A, 239, 240, 243, 244, 246, 247, 254, 267A, 268, 269, 270, 271, 272, 273, 275, 276, 283, 296A, 297, 298, 301, 302, 304, 305, 312, 325A, 326, 327, 330, 331, 333, 334, 341, 354A, 355, 356, 359, 360, 362 and 363.
The directors’ primary contention was that the liquidator had failed to plead a material fact and had demonstrated that he was unable to do so. The material fact was the value of certain property at the time it was acquired by Environinvest. The liquidator alleged that the property was worth ‘substantially less’ than the price paid by Environinvest.
Mr Dossetor made a separate application in proceeding 4438 to strike out further paragraphs on the basis that they involved inconsistent allegations and were embarrassing. He submitted that the following coupled paragraphs were inconsistent:
135 and 136; 164 and 165; 193 and 194; 222 and 223; 251 and 252; 280 and 281; 309 and 310; 338 and 339.
In proceeding 6004 Mr Dossetor applied to have the following paragraphs struck out:
17, 18, 23, 24, 25, 27, 35, 37, 37A, 38, 39, 43, 47, 48, 53, 54, 56, 57 and 58.
The basis for his application was that the allegations against him failed to disclose a reasonable cause of action or were embarrassing. He submitted that the pleading failed to particularise important allegations of knowledge, and failed to attribute a value to property alleged to have been acquired by Environinvest at ‘substantially less’ than the true value at the time. Many of his contentions mirror those made by the directors in 4438.
Caroline Pescott, Euan Pescott and Maridale (Victoria) Pty Ltd are the second, third and eighth defendants respectively in proceeding 4438. They applied to strike out paragraphs 366 to 373 of the statement of claim in that proceeding. They submitted that the allegations did not disclose a cause of action. The basis for their application was quite different to the applications made by the directors and will be dealt with separately.
Proceeding 4438
There was a common theme to sets of allegations made by the liquidators against the directors in proceeding 4438. In substance, the liquidator alleged that the directors authorised the acquisition of property by Environinvest, knowing that the price paid was greater than its value, and that there was a corresponding benefit to Euan Pescott, Roger Pescott, Blackburne Pty Ltd, Caroline Pescott, Brabourne Pty Ltd, Mt Ross Pastoral Pty Ltd, Eurambeen Pty Ltd, Maridale or Carnac Pty Ltd, all of whom are defendants. The liquidator alleged that by their conduct the directors breached duties imposed under ss 180 and 182 of the Act. By way of example, in paragraphs 24 to 45, the liquidator alleged that the directors authorised transactions, including the execution of an option agreement, resulting in the purchase of a plantation of trees from Euan Pescott. The liquidator alleged that the value of the trees ‘was substantially less than’ the purchase price of $1,076,253.46. He alleged that Messrs Dossetor and Robertson knew or ought to have known of that fact by reason of their position as directors.
The liquidator alleged that a reasonable person in the position of the directors would not have resolved to approve the option agreement and made the payment, because they would have known that the value of the trees ‘was substantially less than the price paid’. Like allegations are made in relation to the purchase of trees from Roger Pescott, Blackburne and Caroline Pescott. In each case the directors are alleged to have acted in breach of their duty, under s 180 or s 182 of the Act.
The directors submitted that the words ‘substantially less’ were inappropriately vague and embarrassing. They submitted that they were entitled to be informed by the liquidator of what he alleged was the true value of the trees at the time of the relevant agreements and acquisition by Environinvest. They submitted that the use of such vague language denied them an opportunity to know the nature of the case against them and to properly meet those claims in their defences.
There are five sets of claims involving transactions for the purchase by Environinvest of trees. The allegations directly relevant to the directors are found in the following paragraphs:
36A to 40; 58A to 62; 80A to 84; 102A to 106 and 124A to 128.
The complaint made by the directors about those paragraphs was much more than a complaint about an absent particular. They contended that the liquidator did not have the evidence to support the allegations. They submitted, in effect, that the liquidator had commenced the proceeding without an evidentiary foundation, although they did not go so far as to allege an abuse of process.
There was a further category of claims, made by the liquidator against the directors, in relation to cropping projects. While the subject matter of each transactions was different, the alleged effect was the same – the directors authorised the acquisition of property by Environinvest, knowing that the price paid was greater than the value of the property acquired. Once again, the liquidator employed the phrase, ‘substantially less’ when attributing a value to the property acquired. These allegations are found in the following paragraphs:
151A to 157; 180A to 186; 209A to 215; 238A to 244; 267A to 273; 296A to 302; 325A to 331 and 354A to 360.
In each such case the liquidator alleged that Messrs Dossetor and Robertson approved the transfer by Roger Pescott, a family member or an associated entity, of an interest in a cropping management agreement, pursuant to an option agreement. He alleged that the value of the transaction to Environinvest was ‘substantially less’ than the price paid. All such approvals are alleged to have been made in breach of duty imposed under s 180 or s 182 of the Act.
Mr Dossetor’s separate complaints, about apparently inconsistent paragraphs, were made in connection with the cropping agreement allegations. He submitted that in respect of each transaction an agreement had been alleged under which a person became entitled to certain payments (for example, para 135), but that it was also alleged that, pursuant to the very same agreement, that person was liable to make payments to Environinvest for the very same amount. Whilst the apparently inconsistent paragraphs form part of the background to the claims made against the directors, the inconsistency, if any, is not an essential part of the liquidator’s case against them.
In response to the directors’ submission that he had failed to attribute a value to the property acquired by Environinvest, the liquidator argued that proceedings brought by liquidators fell into a special class, and did not require such definition in the pleading. He submitted that liquidators suffered a special disadvantage. The liquidator argued that he had assumed control of a substantial volume of material, and could not be expected to particularise allegations such as the true value of an asset, until he had obtained expert reports. He proposed to obtain these prior to trial.
When commencing the proceeding, Mr Downey deposed to his belief that the amounts paid by Environinvest to Roger Pescott, Euan Pescott and Blackburne for trees were far greater than the values of the trees acquired. In a supplementary affidavit, sworn 11 May 2011, Mr Downey went further and said that:
Based on my further investigations and the information available to me at the present time, I believe that the value of Euan Pescott trees was nil, and more likely the trees represented a liability of approximately $9,000 having regard to the reversion costs which were obligations contained in the growers leases. The value of Roger Pescott’s trees was also nil, and more likely the trees represented a liability of approximately $12,115 inclusive of reversion costs and the value of Blackburne Pty Ltd’s trees was approximately $4,686 inclusive of reversion costs.
Mr Downey did not provide any basis for his belief. On one view, Mr Downey’s affidavit sworn 11 May 2011 may be taken as further particulars, specifying negative values of the assets acquired. But the directors’ real complaint was much more fundamental. They submitted that in the absence of a proper basis for the allegations, they should never have been made. A notice to produce, directed to Mr Downey, did not result in the production of any supporting expert opinion or other material which might justify values attributed to the property allegedly worth ‘substantially less’ than the price paid. The directors submitted that it was apparent that the liquidator did not have a proper basis to commence, or to now advance his case.
Put in this way, the basis for the applications by Messrs Dossetor and Robertson assumed the character of an allegation of abuse of process, although they did not overtly advance such a case. Instead, they relied on the absence of particularity in the pleading as to the value of the property, to argue that it was unjust to require them to plead to the case alleged against them in the absence of more definition.
This is not a case in which an allegation that an item of property is worth ‘substantially less’ than the price paid, is relevant only to quantification of damages or compensation. In such circumstances, the claimant may be justified in commencing a proceeding before having obtained expert material. Even then, a delay in specifying a value may be prejudicial to a defendant, or to the efficient disposition of court business. In the present case, however, the allegation concerning value is central to the liquidator’s allegations of breach of duty and contravention. The liquidator alleges that the directors knew that the value of the property acquired was ‘substantially less’ than the price. As presently formulated, the allegation of knowledge is crucial to establish each claim.
Having regard to the nature of the case sought to be advanced by the liquidator, it is impossible to overlook the significance of the directors’ challenge to the factual foundation. While the directors relied primarily on rule 23.02 of the Rules of Court, which authorises a court to strike out a pleading in the prescribed circumstances, they also invoked the overarching obligations under the Civil Procedure Act 2010 (Vic). Section 18 provides:
18 Overarching obligation—requirement of proper basis
A person to whom the overarching obligations apply must not make any claim or make a response to any claim in a civil proceeding that—
(a) is frivolous; or
(b) is vexatious; or
(c) is an abuse of process; or
(d)does not, on the factual and legal material available to the person at the time of making the claim or responding to the claim, as the case requires, have a proper basis.
The principles to be applied in the exercise of the power under Rule 23.02 are well understood. Weinberg J (as he then was), in McKellar v Container Terminal Management Services Ltd[1] said:
[1](1999) 165 ALR 409.
[21]The purpose of pleadings is to define the issues and thereby to inform the parties in advance of the case they have to meet so as to enable them to take the steps necessary to deal with it: Dare v Pulham (1982) 148 CLR 658 at 664.
[22]In Mitanis v Pioneer Concrete (Vic) Pty Ltd (1997) ATPR ¶41-591 Goldberg J observed at 44,151ff:
"Pleadings occupy an important role in present day litigation notwithstanding the flexibility of case management principles. They are not to be treated as pedantry or mere formalism: Esso Petroleum Co Ltd v Southport Corporation [1956] AC 218, 241. In Banque Commerciale SA En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 Mason CJ and Gaudron J said at 286:
‘The function of pleadings is to state with sufficient clarity the case that must be met: ... In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness.’
It has been established for many years that the most fundamental rule of pleading is the rule found in O11 r2 ... It is also important to recognise and accept that there is a clear distinction between pleadings and particulars. In Bruce v Odhams Press Ltd [[1936] 1 KB 697] Scott J in the Court of Appeal said at 711-713:
‘...but it is beyond question that there is a radical distinction (between a statement of material facts and particulars) and nonetheless so that in cases near the dividing line there is a penumbra where the two may and often do overlap, just as between night and day there is a zone of doubt which we call dusk ...
The cardinal provision in r4 is that the statement of claim must state the material facts. The word "material" means necessary for the purpose of formulating a complete cause of action; and if any one "material" fact is omitted; the statement of claim is bad; it is "demurrable" in the old phraseology, and in the new is liable to be "struck out" ...
The function of "particulars" under r6 is quite different. They are not to be used in order to fill material gaps in a demurrable statement of claim - gaps which ought to have been filled by appropriate statements of the various material facts which together constitute the plaintiff's cause of action. The use of particulars is intended to meet a further and quite separate requirement of pleading, imposed in fairness and justice to the defendant. Their function is to fill in the picture of the plaintiff's cause of action with information sufficiently detailed to put the defendant on his guard as to the case he has to meet and to enable him to prepare for trial. Consequently in strictness particulars cannot cure a bad statement of claim. But in practice it is often difficult to distinguish between a "material fact" and a "particular" piece of information which it is reasonable to give the defendant in order to tell him the case he has to meet; hence in the nature of things there is often overlapping.’
...
These principles were restated more recently by Burchett J in Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd (1996) ATPR ¶41-522. At 42,679 his Honour said:
‘The primary function (of a statement of claim) is to tell the defending party what the claim is that he has to meet. That is a matter of elementary and natural justice; the claim cannot be answered until it is known. When a sufficient defence has been filed to a sufficient statement of claim, a further function will generally have been performed - that of defining the question or questions for decision. This definition is required, of course, from an early stage, or else discovery and other interlocutory procedures are likely to prove misdirected, wasteful and unproductive. In order to achieve these fundamentals, a statement of claim must set out clearly, not just the bare claim that is made, but also "the material facts on which it is based", including facts that, if not specifically pleaded, might take the other party by surprise: Federal Court Rules, O4, r6; O11, r2, r10.’"
[23]A number of authorities support the proposition that a statement of claim must contain material facts, being the facts necessary for the purpose of formulating a complete cause of action, and that it is not sufficient simply to plead a conclusion drawn from unstated facts: see for example Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 at 114-115 per Fisher J; H 1976 Nominees Pty Ltd v Galli (1979) 40 FLR 242 at 246-247 per Northrop J; Pioneer Electronics Australia Pty Ltd v Edge Technology Pty Ltd [1999] FCA 142 at para7 per Kenny J. A statement of claim which simply repeats the language of a provision of the Act, and then baldly asserts a contravention of that provision, without more, will be struck out.
[24]In Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 RD Nicholson J stated at 462-463:
“The motion for strike out is brought pursuant to O20 r2 and/or O11 r16 of the Federal Court Rules. The grounds relied upon are that the pleadings referred to disclose no reasonable cause of action, are scandalous, frivolous and/or vexatious and may prejudice, embarrass or delay the fair trial of the action.
A cause of action is every allegation of fact which the plaintiff must prove to establish the right to the relief claimed ... A ‘reasonable cause of action’ means a cause of action with some chance of success, when considering the allegations of fact contained in the challenged pleading alone. The terms ‘vexatious’ and ‘frivolous’ have been used interchangeably ... ‘Frivolous’ has been held to be apt to describe proceedings in which the plaintiff's claim is so obviously untenable that it cannot possibly succeed ... ‘Vexatious’ has been held to be apt to describe an action which is a sham and which cannot possibly succeed ...”
[25]For a statement of claim to disclose a cause of action it must set out the material facts which give rise to the cause of action. A cause of action for misleading and deceptive conduct is not established unless the statement of claim sets out the circumstances which gave the representation its deceptive and misleading character at the time it was made. Mere non-fulfilment of a statement as to a future matter does not establish that the statement was relevantly misleading and deceptive: Pioneer Electronics Australia Pty Ltd v Edge Technology Pty Ltd (supra).
I would echo the observations made by Harper J (as he then was) in Downer Connect Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd:[2]
Litigation is sometimes conducted to judgment with barely a glance at the pleadings. It remains generally true that good pleadings are an important, and often crucial, element in the civil justice system. When well drawn, as they always should be, they form the touchstone by which the issues are identified and the relevance of the evidence assessed.
Consistently with this, one of their primary purposes is to reveal to the opposite party how the party pleading puts its case. On reading a well-drawn statement of claim, the defendant to whom it is directed will be able to say: “These are the material facts that will be the subject of the plaintiff’s evidence. They tell a coherent, comprehensible story; and, to the extent that any additional evidence is to be called that might cause me to be taken by surprise, here is that evidence outlined in the particulars.”
A complaint that the pleadings do not achieve this end is often met with the response that the opposite party knows very well, from documents and perhaps other sources, what the case against it is. This is no answer at all, at least unless the relevant documents are properly incorporated into the pleading. It is, as a general proposition, true to say that each pleading should be sufficient in itself. And although an element in an adversarial process, pleadings are themselves intended to be the opposite of adversarial, at least to the extent that they must, if they are to perform one of their proper functions, inform the opposite party of the case that party will have to meet at trial.
But pleadings have another important audience: the Judge or Magistrate. In most cases, the opposite party will have the assistance of some knowledge of the factual background – some knowledge, in other words, of the facts against which the pleadings can be assessed. The tribunal of fact will never be in that position. The pleadings must therefore be drawn so as to allow the impartial and uninformed reader to know what the case is about. This end cannot be achieved unless the pleadings form a coherent narrative, of material fact, with the necessary detail included as particulars. They must be drawn with a careful eye to the evidence that will necessarily be called if the case is to be made out. If the party pleading does not have that evidence, then the case ought not go to trial. Indeed, it is generally true to say that it ought not to proceed beyond the point at which the party pleading appreciates, perhaps because the very act of pleading reveals it, that there is and will remain a gap in the evidence upon which the cause of action or defence is based and without which that cause of action or defence will fail.[3]
[2][2008] VSC 77, [1]–[4].
[3]Emphasis added.
As a general observation, the pleadings in both proceedings are confusing, often circular, and sometimes inconsistent. They are not a coherent narrative. In some instances, the particulars do little more than repeat a substantive allegation, while in others, the particulars contain substantive, unpleaded, allegations of material fact. The pleadings have conceptual and structural problems which make it virtually impossible for a reader, such as a judge, approaching the pleadings without the assistance of background knowledge, gaining a clear understanding (or at times any understanding at all) of the essential elements of each cause of action. The pleadings suggest that the liquidator has great difficulty in formulating his case against the directors.
A liquidator is not excused from the obligations imposed on all litigants who commence proceedings in this and other courts. Allegations should only be made in a proceeding when there is a factual foundation. Section 18 of the Civil Procedure Act does not introduce a novel constraint. There are, of course, additional obligations imposed on solicitors and counsel when drafting pleadings, and commencing a proceeding on behalf of a litigant.
Section 180 of the Corporations Act requires directors to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in their position would exercise. The allegations made by the liquidator that the directors breached their duties under s 182 of the Act, misunderstands the nature of that provision. Section 182 prohibits certain conduct. I take the liquidator to be alleging that each director made improper use of his position to gain an advantage for another or to cause detriment, in contravention of s 182 of the Act. The allegations of breach and contravention, as presently formulated, depend substantially, if not entirely, upon the proposition that, by reason of their office, the directors knew or ought to have known the economic consequence to Environinvest (or benefit to another) of transactions in which Environinvest acquired an asset. Liability for a contravention of s 182 depends upon proof of impropriety and purpose.
The first claim against the directors concerns the acquisition by Environinvest of a plantation owned by Euan Pescott, at a price of $1,076,253.46. Coincidentally, that is the amount alleged to have been paid by Euan Pescott as management fees for the establishment of the plantation. The liquidator might mean to imply, but does not allege, that the transaction was designed to ensure that Euan Pescott recovered his management costs.
36A.At the time of making the resolution referred to in paragraph 27 above [granting Euan Pescott a put option in relation to the plantation], each of Roger Pescott, Dossetor and Robertson knew, or ought to have known by reason of their position as directors of EL, that the value of the Euan Pescott Trees at that time was substantially less than $1,076,253.46.
PARTICULARS
The resolution referred to at paragraph 27 above was made at or about the same time as each of the resolutions referred to at paragraphs 49, 71, 93 and 115 of this statement of claim.
Given that EL could incur significant losses if the Euan Pescott BEP Option, the Roger Pescott BEP Option, the Blackburne BEP Option, the Caroline Pescott Eucalyptus Option and the Roger Pescott Eucalyptus Option (as defined herein) was exercised, if the value of the interests the subject of those options were worth less than the amount which EL would be required to pay to the option holders if they exercised the options, each of Roger Pescott, Dossetor and Robertson as directors of EL should have informed themselves of the approximate value of the Euan Pescott Trees at the time of making the resolution.[4]
[4]Emphasis added.
As will be obvious from the subsequent paragraphs in the pleading, the allegation of knowledge is the basis for the alleged impropriety, proof of which is necessary to establish a contravention of s 182 of the Act. In my opinion, the particulars given under paragraph 36A are wholly inadequate to support the allegation of knowledge, but they emphasise the dependency of the case on establishing that at a particular time the directors knew of the price/value discrepancy. There is some uncertainty as to whether the relevant time for a determination of the price/value discrepancy, is the date of the option agreement or the resolution. The liquidator seems to have fixed on the date of the resolution, although the resolution purports to approve an agreement made years earlier. There is no challenge by the liquidator to 1 July 1999, as the date of the option agreement. That being so, the value of the trees at the date of the resolution, 2007 or 2008, may be irrelevant.
The particulars also contain a substantive allegation – that the directors should have informed themselves of the real value of the asset. There is no such allegation of material fact, and no corresponding allegation that they did not do so. The pleading continued:
37.In the premises above, in resolving that EL enter into the Euan Pescott BEP Option Deed, each of Roger Pescott, Robertson and Dossetor breached their duties, as set out at paragraphs 15 to 17 above [s 180 duties], in that a reasonable person who was a director of EL in EL’s circumstances as at the date of the resolution:
(a)Would have known that the value of the Euan Pescott Trees as at that time was substantially less than $1,076,253.46;
(b)Would have known that the making of the resolution would cause significant detriment to EL if the Euan Pescott BEP Option were exercised by Euan Pescott, given the difference in value between the amounts then paid by Euan Pescott pursuant to the Euan Pescott BEP Management Deed and the value of the Euan Pescott Trees; and
(c)Therefore would not have resolved that EL enter into the Euan Pescott BEP Option Deed.[5]
[5]Emphasis added.
While the directors are alleged to have acted in breach of their obligations imposed under s 180 of the Act, because they ‘would have known’ that the value of the trees was ‘substantially less’, no particulars are provided. The pleading is circular and confusing, in that it alleges a breach by reference only to what a reasonable director would have known, predicated on an absent assumption – that the directors did not satisfy themselves by some means of the value of the asset at the relevant time and that the transaction was detrimental to Environinvest. The pleading continued,
38.Further, in resolving that EL enter into the Euan Pescott BEP Option Deed, each of Roger Pescott, Robertson and Dossetor breached their duties, as set out at paragraph 18 above [s 182], in that in making the resolution each of them either:
(a)knew that the value of the Euan Pescott Trees as at that time was substantially less than $1,076,253.46: or
(b)recklessly or intentionally failed to make sufficient inquiries so as to ascertain the value of the Euan Pescott Trees as at that time.
PARTICULARS
The making of the resolution, where Euan Pescott was Roger Pescott’s brother, and where the making of the resolution was not in EL’s interests, given the difference in value between the amounts then paid by Euan Pescott pursuant to the Euan Pescott BEP Management Deed and the value of the Euan Pescott Trees, was an improper exercise of the powers of Roger Pescott, Robertson and Dossetor as directors of EL, to Euan Pescott’s advantage, and to EL’s detriment.[6]
Further particulars may be provided prior to trial.
[6]Emphasis added.
In paragraph 38, the liquidator picks up the allegation contained in the particulars under paragraph 36A – failing to ‘make sufficient inquiries’ – without addressing what ought to have been, but was not, done. No proper particulars are given. In this paragraph the liquidator is to be taken to be alleging a contravention of s 182 of the Act. Buried within the particulars under paragraph 38 is an allegation of ‘improper exercise of power’, with no support other than the relationship between Euan and Roger Pescott, and the ubiquitous allegation concerning ‘the difference in value’. The pleading is unsatisfactory in form and substance. It is circular and is absent a vital element – a basis for the allegation of impropriety. If that is the best the liquidator can do, the allegation should never have been made. The pleading continued:
39.EL has suffered loss and damage by reason of the breaches by Dossetor, Robertson and Roger Pescott of their duties, as set out at paragraph 0 and 38 above.
PARTICULARS
But for the making of the resolution referred to at paragraph 27 above, EL could not have been required to accept the Euan Pescott Trees in exchange for the liability to pay Euan Pescott $1,076,253.46.
EL’s loss is the difference between the sum of $1,076,253.46, and the value of the Euan Pescott Trees as at the time of making of the resolution.
Further particulars will be provided prior to trial.
Paragraph 39 does not make sense. There are no duties alleged in ‘paragraph 0 and 38 above’, unless what is meant is the duty mentioned in paragraphs 37 and the contravention mentioned in paragraph 38.
The allegation that the directors contravened s 182 of the Act fails to grapple with the requirement to prove impropriety – ‘must not improperly use their position’; and purpose - to gain an advantage or cause detriment. These elements are not supplied by the bare allegation that a transaction was authorised that may, in hindsight, have resulted in a bad bargain for Environinvest. The particulars provided do not address the requisite knowledge or impropriety. Merely to demonstrate a disparity, between price and value, even a substantial difference, is not enough. Impropriety is not established by proof of a bad bargain. Nor is it established by a mere failure to make inquiries.
The dependency of the liquidator’s case on proof of knowledge, made it essential for him to be satisfied, prior to alleging impropriety and purpose, of a factual foundation for the allegation. A necessary first step would have been to satisfy himself of the existence of credible and admissible evidence that the value of the property at the time of the option agreement or resolution was less than the price to be paid, and that there was evidence from which that knowledge may be inferred.
The failure of the pleading to articulate a value of the property, coupled with the evidence given by the liquidator in his two affidavits, and his failure to produce supporting material, coincide to demonstrate the absence of a proper foundation for the allegation of breach of ss 180 and contravention 182 of the Act. In my opinion paragraphs 36A to 40; 58A to 62; 80A to 84; 102A to 106 and 124A to 128 all suffer from the same defects, and should be struck out.
The next category of allegations are those relating to the cropping projects. The allegations made in paragraphs 151A to 157 provide a satisfactory example of the common theme.
151A.At the time of making the resolution referred to in paragraph 151 above, each of Roger Pescott, Dossetor and Robertson knew, or ought to have known by reason of their position as directors of EL, that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, including the present value of the ‘Farmer’s Entitlement’ which might be payable in the future under the Roger Pescott Cropping Management Agreement (as described as paragraph 135 above), was substantially less than $61,248.67.
PARTICULARS
The resolution referred to at paragraph 151 above was made at or about the same time as each of the resolutions referred to at paragraphs 180, 209, 238, 267, 296, 325 and 354 of this statement of claim.
Given that EL could incur significant losses if the Roger Pescott Cropping Option, the Caroline Pescott Cropping Option, the Blackburne Cropping Option, the Brabourne Cropping Option, the Mt Ross Cropping Option, the Eurambeen Cropping Option, the Maridale Cropping Option, and the Carnac Cropping Option (as defined herein) were exercised, if the value of the interests the subject of those options were worth less than the amount which EL would be required to pay to the option holders if they exercised the options, each of Roger Pescott, Dossetor and Robertson as directors of EL should have informed themselves of the approximate value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement at the time of making the resolution.
152.In resolving that EL enter into the Roger Pescott Cropping Option Deed, each of Roger Pescott, Robertson and Dossetor breached their duties, as set out at paragraphs 15 to 17 above, [s 180] in that a reasonable person who was a director of EL in EL’s circumstances as at the date of the resolution:
(a)Would have known that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, including the present value of the ‘Farmer’s Entitlement’ which might be payable in the future under the Roger Pescott Cropping Management Agreement (as described at paragraph 138 above), was substantially less than $61,248.67;
(b)Would have known that the making of the resolution would cause significant detriment to EL if the Roger Pescott Cropping Option were exercised by Roger Pescott, given the difference in value between the amount which Roger Pescott was then liable to pay EL pursuant to the Roger Pescott Cropping Management Agreement (as set out at paragraph 136 above) and the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement; and
(c)Therefore would not have resolved that EL enter into the Roger Pescott Cropping Option Deed.
153.Further, in resolving that EL enter into the Roger Pescott Cropping Option Deed, each of Roger Pescott, Robertson and Dossetor breached their duties, as set out at paragraph 18 above, [s 182] in that in making the resolution each of them either:
(a)knew that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, including the present value of the ‘Farmer’s Entitlement’ which might be payable in the future under the Roger Pescott Cropping Management Agreement (as described at paragraph 138 above), was substantially less than $61,248.67; or
(b)recklessly or intentionally failed to make sufficient inquiries so as to ascertain the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement as at that time.
PARTICULARS
The making of the resolution, where Roger Pescott was a director of EL, and where the making of the resolution was not in EL’s interests, given the difference in value between the amounts then paid by Roger Pescott pursuant to the Roger Pescott Cropping Management Agreement and the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, as set out at paragraph 138 above, was an improper exercise of the powers of Roger Pescott, Robertson and Dossetor as directors of EL, to Roger Pescott’s advantage, and to EL’s detriment.
Further particulars may be provided prior to trial.
154.Further or in the alternative to paragraphs 151 to 153 above, in resolving that EL exercise the Roger Pescott Cropping Option, each of Robertson and Dossetor breached their duties, as set out at paragraphs 16 and 17 above, [s 180] in that a reasonable person who was a director of EL in EL’s circumstances as at the date of the resolution:
(a)Would have known that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, including the present value of the ‘Farmer’s Entitlement’ which might be payable in the future under the Roger Pescott Cropping Management Agreement (as described at paragraph 138 above), was substantially less than $61,248.67;
(b)Would have known that the making of the resolution would cause significant detriment to EL, given the difference in value between the amount which Roger Pescott was then liable to pay EL pursuant to the Roger Pescott Cropping Management Agreement (as set out at paragraph 136 above) and the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement at the time of the making of the resolution; and
(c)Therefore would not have resolved that EL exercise the Roger Pescott Cropping Option.
PARTICULARS
Robertson and Dossetor knew or should have known, had they made inquiries, that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, as set out at paragraph 138 above was much less than the amounts then paid by Roger Pescott pursuant to the Roger Pescott Cropping Management Agreement.
EL relies upon the fact that by 6 July 2007, Dale Morris of Primary Yield was able to prepare, and circulate to personnel of EL, including Robertson and Roger Pescott, a spreadsheet which set out the estimated present value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement.
Further particulars will be provided prior to trial.
155.Further, in resolving that EL exercise the Roger Pescott Cropping Option, each of Robertson and Dossetor breached their duties, as set out at paragraph 18 above [s 182], in that in making the resolution each of them either:
(a)knew that the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, including the present value of the ‘Farmer’s Entitlement’ which might be payable in the future under the Roger Pescott Cropping Management Agreement (as described at paragraph 138 above), was substantially less than $61,248.67; or
(b)recklessly or intentionally failed to make sufficient inquiries so as to ascertain the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement as at that time.
PARTICULARS
The making of the resolution, where Roger Pescott was a director of EL, and where the making of the resolution was not in EL’s interests, given the difference in value between the amounts then paid by Roger Pescott pursuant to the Roger Pescott Cropping Management Agreement and the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement, as set out at paragraph 138 above, was an improper exercise of the powers of Robertson and Dossetor as directors of EL, to Roger Pescott’s advantage, and to EL’s detriment.
Further particulars may be provided prior to trial.
156.EL has suffered loss and damage by reason of the breaches by Dossetor, Robertson and Roger Pescott of their duties, as set out at paragraphs 0 to 155 above.
PARTICULARS
But for the making of the resolution referred to at paragraph 142 above, EL could not have been required to accept Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement in exchange for the liability to pay Roger Pescott $61,248.67.
Further or in the alternative, by making the resolution of 22 June 2007 to exercise the Roger Pescott Cropping Option, Dossetor and Robertson caused EL to accept Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement in exchange for the liability to pay Roger Pescott $61,248.67.
EL’s loss is the difference between the sum of $61,248.67, and the value of Roger Pescott’s interest under the Roger Pescott Cropping Management Agreement as at 22 June 2007, alternatively as at 7 September 2007.
Further particulars will be provided prior to trial.
157.In the premises above, each of Roger Pescott, Robertson and Dossetor is required to compensate EL for its loss and damage, pursuant to section 1317H of the Act.[7]
[7]Emphasis added.
With the exception of paragraph 154, which includes a reference to evidence in the particulars, these allegations adopt essentially the same format, and suffer from the same defects, as the earlier category involving the sale of trees. In my opinion paragraphs 151A-156, 180A -186, 209A-214, 238A-243, 267A-272, 296A-301, 325A-330, 354A-359 should be struck out.
Furthermore, in my opinion the liquidator should not be permitted to replead a case against the directors, alleging a breach of s 180 or a contravention of s 182 of the Act, unless and until he can demonstrate that he has a proper basis to make such allegations.
The inconsistency complaints advanced on behalf of Mr Dossetor[8] are further examples of a confusing and sometimes convoluted pleading. If an allegation of a civil penalty contravention is to be advanced against directors it ought to be capable of clear and concise expression, so that the defendants and the court are aware of precisely how the allegation of breach of duty or impropriety is to be advanced at trial. While those paragraphs form part of a confusing pleading, I do not consider them as necessarily inconsistent, as Mr Dossetor submitted. In any event, they do not form part of the case pleaded directly against the directors, and I do not propose to strike them out.
[8]Paragraphs 135 and 136, 164, and 165, 193 and 194, 222 and 223, 251 and 252, 280 and 281, 309 and 310, 338 and 339.
The submissions made on behalf of the second, third and eighth defendants fall into a separate category. The relevant allegations by the liquidator are at paragraphs 366 to 373. The allegations are curious in that the liquidator set out to establish joint and several liability of those defendants on the basis that transactions involving them were recorded in one running loan account described as the ‘Pescott group loan account’. The liquidator alleges that the transactions were recorded at the direction of Roger Pescott, for and on behalf of members of his family including Euan and Caroline. He alleges that Euan, Caroline, Maridale and others, whose transactions were recorded in the account, authorised Roger Pescott to treat the debits and credits on an aggregated basis for the benefit and detriment of each of them. At the heart of the liquidator’s case for joint and several liability are the following paragraphs:
370.EL agreed with Roger Pescott for and on behalf of members of his family (including Euan Pescott and Caroline Pescott), and related entities of Roger Pescott, including Blackburne, Brabourne, Mt Ross, Eurambeen, Maridale and Carnac, that he could maintain the Pescott Group Loan Account on the aggregated basis described in paragraph 367 above (the “Pescott Group Loan Account Agreement”).
371.It was a term of the Pescott Group Loan Account Agreement that in respect of each of the persons whom Roger Pescott directed EL to record transactions between them and EL by way of entries into the Pescott Group Loan Account, that those persons would be jointly and severally liable with each other in EL for any net debt owed to EL by the parties to the Pescott Group Loan Account.
372.The final position of the Pescott Group Loan Account, following the liquidation of EL, is presently unknown to EL, but is estimated to exceed $10,000,000.
The defendants submitted that the facts alleged did not support a claim for joint and several liability for the net debt owed to Environinvest by the parties to the loan account. I agree. It is one thing for the liquidator to calculate, by reference to transactions, the obligation, if any, of a person whose borrowings were aggregated with others. But it is impermissible to sidestep what may be a difficult task, and attribute liability to all participants, on a joint and several basis, for the whole of the loan account merely because a single aggregated account was maintained.
The basis for the liquidator’s case is an alleged agreement, which he would have the court infer from the manner in which the loan account was conducted by Roger Pescott. Even if the liquidator’s allegation of authorisation to conduct the loan account is correct, it does not lead to the consequence that one participant has agreed to become liable for the debts of another. I would strike out paragraphs 366 to 373 inclusive.
Proceeding 6004
The pleading in proceeding 6004 has many of the same characteristics as the pleading in 4438. As against the directors, the liquidator relies only upon breaches of the duties imposed under s 180 of the Act. There are essentially two transactions involved, although there are numerous components. The first transaction concerns a property known as Eurambeen, and the second, the properties known as Beenak and Mt Myrtalia. In relation to Eurambeen, the liquidator alleges an agreement between Environinvest and Blackburne, described as the ‘Sale of Assets Deed’, under which Blackburne agreed to sell Eurambeen to Environinvest for $3,783,961. Under the deed, Environinvest agreed to execute a land sale contract and in consideration of the sale issue various shares to Blackburne.
The liquidator alleges that while the shares were issued, Environinvest and Blackburne failed to execute a land sale contract. The land was never conveyed to Environinvest. The liquidator alleges that the parties to the transaction ‘waived’ the obligation to execute the land sale contract. It should be noted that the pleaded obligation is only that of Environinvest ‘to execute a standard land sale contract in respect of Eurambeen’. The liquidator further alleges that the land has been transferred to Arnac Pty Ltd, in breach of the trust. The case against the directors is based upon their alleged knowledge of the events giving rise to the trust, and their failure to take any step to prevent the transfer to Arnac, or secure the interest of Environinvest. Mr Dossetor submitted that the basis for the trust was unclear. He also complained that paragraph 23 was devoid of necessary particulars of knowledge.
The liquidator pleaded a complex set of transactions in paragraphs 11–17, involving a terms contract under which Blackburne agreed to purchase Eurambeen, followed by the Sale of Assets Deed, under which he alleges that Environinvest was required to execute the land sale contract. The structure of the pleading is curious for a number of reasons, not least because of a later inconsistent plea, relating to the same property – Eurambeen – but concerning an earlier transaction. The most relevant allegations against the directors, in the first Eurambeen claim, are as follow:
13.By a deed dated 30 October 2000 between EL and Blackburne (Sale of Assets Deed), Blackburne agreed to sell its interest in Eurambeen to EL, for a price of $3,783,961.
Particulars of the Sale of Assets Deed
The Sale of Assets Deed was in writing, and described as a Sale of Assets Deed. A copy of the Sale of Assets Deed is in the possession of the solicitors for EL and is available for inspection by appointment.
14. There were terms of the Sale of Assets Deed, among others, that:
(a)the assets to be sold by Blackburne to EL were described in Schedule 1 to the Sale of Assets Deed, and included Eurambeen;
(b)EL agreed to execute a standard land sale contract in respect of Eurambeen, which contract would be subject to the terms and conditions of the Sale of Assets Deed: clause 1.2, Schedule 1;
(c)in consideration for the sale of the assets specified in Schedule 1 to the Sale of Assets Deed (which included Eurambeen), EL would issue to Blackburne non-redeemable ordinary shares in EL with a value equal to the value of the assets after an adjustment of the liabilities assumed as specified in Schedule 2 to the Sale of Assets Deed, that is to a value of $225,240: clause 2.1, Schedules 1 and 2.
(d)EL would issue one share to Blackburne for every fifty cent value of the assets after an adjustment for the liabilities assumed as specified in Schedule 2 to the Sale of Assets Deed, that is to a value of $225,240: clause 2.2;
(e)EL and Blackburne agreed that they would do, or cause to be done, all things necessary to give effect to the Sale of Assets Deed, including the execution of all documents as may be necessary, desirable or reasonably required to give full effect to the provisions of the Sale of Assets Deed and the transactions contemplated by it: clause 5.1.
15.Pursuant to the terms of the Sale of Assets Deed set out at paragraphs 14(c) and 14(d) above, on or about 30 October 2000, EL issued to Blackburne 450,478 non-redeemable ordinary shares in EL (Share Issue).
16.Despite the term of the Sale of Assets Deed set out at paragraph 14(b) above, EL and Blackburne did not execute a sale of land contract in respect of Eurambeen, which contract was subject to the terms and conditions of the Sale of Assets Deed.
17.In or about 2000, EL and Blackburne agreed to waive the term of the Sale of Assets Deed set out at paragraph 14(b) above.
Particulars of the waiver
The waiver is to be inferred from the facts that:
1.EL and Blackburne were not arm’s length parties, sharing a common director, Roger Neil Pescott;
2.at all material times between 30 October 2000 and 30 June 2006, EL recorded Eurambeen in its books and records as an asset owned by it, to the knowledge of Roger Neil Pescott;
Further particulars may be provided prior to trial.
There is nothing novel about parties to a contract reaching a subsequent agreement to discharge one another from their obligations. Other considerations may intrude, such as the purpose for which a party acted, the duties owed by directors to a company, or accrued rights, to mention just a few. Further, the only obligation pleaded in relation to the execution of the land sale contract is that of Environinvest. In the absence of any obligation on Blackburne to do the same, or to convey the land, the pleaded basis for the trust in favour of Environinvest involves an unstated assumption. There is a logical flaw in the pleading, which may be explained by the earlier transaction, but no explanation is advanced. Consequently, the role of paragraphs 15 and 16 in the creation of the trust are uncertain. Finally, the particulars of waiver under paragraph 17 seem to have nothing to do with the allegation.
The pleading continued:
18.By reason of the matters set out above, at all material times after 30 October 2000, Blackburne held the fee simple for Eurambeen on trust for EL (the Trust), and EL was:
(a)beneficially entitled to the fee simple in Eurambeen;
(b)entitled to call for a transfer of Eurambeen by Blackburne to it.
19.By a transfer of land form T1 dated 9 October 2007 (T1), Blackburne purported to transfer the fee simple in Eurambeen to Arnac Pty Ltd ACN 107 421 330 (‘Arnac’), in breach of the Trust.
20.The T1 was delivered by EL to Arnac on or before 29 January 2008.
21.The T1 was registered with the Land Titles Office on 1 March 2008, at which time Arnac became the registered proprietor of the fee simple in Eurambeen.
22.By reason of Blackburne’s breach of the Trust, EL has suffered loss and damage.
Particulars
Eurambeen was worth approximately $11.9 million at 9 October 2007. EL has lost the whole of the value of Eurambeen.
The pleading against the directors depends upon their knowledge and awareness of the misconceived, or at least confusing, basis for the alleged trust. The pleading continued,
23.Further, by reason of their positions as directors of EL, each of Dossetor, Robertson or Pescott knew or ought to have known of the matters set out at paragraph 18 above.
Particulars
At all times between 30 October 2000 and 30 June 2006, Eurambeen was recorded in EL’s books and records as an asset of EL with a book value in excess of $4,000,000. As directors of EL since before 30 October 2000, each of Dossetor, Robertson and Pescott ought to have been aware of the existence of such a substantial asset as Eurambeen, being recorded as an asset of EL.
Further, as directors of EL since before 30 October 2000, each of Dossetor, Robertson and Pescott ought to have been aware of the circumstances and transactions, as set out in paragraphs 12 to 16 above, by which EL acquired beneficial ownership of Eurambeen, and that Blackburne, not EL, was the registered proprietor of Eurambeen, given the value of Eurambeen as shown in EL’s books and records.
Further particulars may be provided prior to trial.[9]
[9]Emphasis added.
Having regard to the later inconsistent allegations concerning the alternative Eurambeen case, involving an option agreement, which seems factually at odds with the Sale of Assets Deed case, the allegation of breach, based on knowledge of the facts and legal consequences, attracts great uncertainty. Further, the particulars do not support the allegation. They are argumentative. At best, they go no further than to suggest that the directors knew that Eurambeen was recorded in the books of account of Environinvest at a particular time. The particulars also contain an allegation of knowledge, which seems no more than a repetition of paragraph 23, which directs attention back to ‘the matters set out above’ in paragraph 18. The pleading continued:
24.At no time between October 2000 and March 2008 did Dossetor, Robertson or Pescott make attempts to cause EL to seek:
(a)to have Eurambeen transferred to it by Blackburne, as it was entitled to seek;
(b)to protect its interest in Eurambeen from being dealt with by Blackburne in breach of the Trust, by lodging a caveat over the titles to Eurambeen recording its beneficial interest in the fee simple to Eurambeen.
25.The failure on the part of Dossetor, Robertson and Pescott to cause EL to seek either of the matters set out at paragraph 23 [sic] above constituted a breach by each of them of their duties, as set out at paragraphs 8 to 10 above, in that a reasonable person who was a director of EL in EL’s circumstances between October 2000 and March 2008:
(a)would have known of the matters set out in the particulars to paragraph 23 above; and
(b)would have realised that as the certificates of title for Eurambeen did not record EL being the beneficial owner of Eurambeen, or claiming by way of caveat any proprietary interest in Eurambeen;
(c)would have caused EL to take one or other of the steps identified in paragraph 24 above;
(d)alternatively to (b) and (c), would have made inquiries so as to ascertain whether the certificates of title for Eurambeen recorded EL as being the beneficial owner of Eurambeen, or claiming by way of caveat any proprietary interest in Eurambeen, and upon learning that this was not the case, have caused EL to take one or other of the steps identified in paragraph 24 above.
26.Had EL obtained a transfer of Eurambeen from Blackburne, or lodged a caveat over the titles to Eurambeen recording its beneficial interest in the fee simple to Eurambeen, prior to the registration of the T1 on 1 March 2008, the T1 could not have been registered.
27.EL has suffered loss and damage by reason of the breaches by Dossetor, Robertson and Pescott of their duties, as set out at paragraph 25 above.
Particulars
EL refers to and repeats paragraph 26 above.
Eurambeen was worth approximately $11.9 million at 9 October 2007. EL has lost the whole of the value of Eurambeen.[10]
[10]Emphasis added.
The deed as pleaded does not seem to expressly impose on Blackburne an obligation to transfer the property. Given the nature of the transaction, that may be implied, but it is not pleaded. The alternative Eurambeen case, based on an agreement predating the Sale of Assets Deed, may provide some clue. Pleadings are not, however, intended as a puzzle to test the ingenuity of the reader or the patience of the court.
Thus, paragraph 24 proceeds on the basis of an unstated assumption. Paragraph 25 is a rolled up and confusing plea. One might have thought that a pleading of this kind might have commenced with an allegation of what a reasonable person in the position of the directors would have done, followed by an allegation of what was not done, concluding with an allegation of breach. The rolled up allegation in paragraph 25 is embarrassing, but more importantly, it is fundamentally flawed.
Paragraph 25(a) is probably an attempt by the pleader to convert the allegation found in the particulars under paragraph 23 (to the effect that the directors had knowledge of the matters alleged in paragraphs 12 to 16) into an allegation of material fact. Such a contrivance is impermissible. Moreover, the significance of paragraphs 12 to 16, the alleged agreement to waive the obligation to execute a land sale contract in paragraph 17, and the creation of the trust is unclear as a foundation for the allegation of knowledge of the trust. Paragraphs 16 to 27 are bad in form and substance, and should be struck out.
The pleaded transactions in relation to Beenak and Mt Myrtalia commenced with an agreement made in October 2000 under which a company, STY (Afforestation) Pty Ltd agreed to sell the properties to STY (Holdings) Pty Ltd. That contract was apparently performed and in 2004 STY Holdings agreed to sell Beenak to Environinvest for $1,380,000. The price was paid by Environinvest, although it was never registered as owner. The liquidator alleges that on about 22 June 2007, Environinvest transferred its interest in Beenak back to STY Holdings for $1,380,000. The allegation made against the directors is that they authorised the transfer when they ought to have known that the ‘value of Beenak at the time was more than $1,380,000’.
Mr Dossetor submitted that paragraphs 35 and 37A should be struck out. The liquidator alleged:
35By reason of their positions as directors of EL, each of Dossetor, Robertson or Pescott knew or ought to have known of the matters set out at paragraphs 32 to 34 above.
Particulars
As at 30 June 2005, Beenak was recorded in EL’s books and records as an asset of EL with a book value of $1,380,000. As directors of EL between 30 June 2005 and 2008, each of Dossetor, Robertson and Pescott ought to have been aware of the existence of such a substantial asset as Beenak, being recorded as an asset of EL.
Further, as directors of EL since before December 2004, each of Dossetor, Robertson and Pescott ought to have been aware of the circumstances and transactions, as set out in paragraphs 32 and 33 above, by which EL acquired beneficial ownership of Beenak, and that STYH, not EL, was the registered proprietor of Beenak, given the value of Beenak as recorded in EL’s books and records.
Further particulars may be provided prior to trial.[11]
[11]Emphasis added.
The pleading mirrors paragraph 23, although the particulars under paragraph 35 are repetitive of the substantive allegation, and unhelpful. They are inadequate to support the allegation of knowledge of the matters set out in paragraphs 32 to 34, involving the sale of Beenak by STY Holdings to Environinvest.
Mr Dossetor submitted that the particulars are required of the allegation in paragraph 37. I agree. The liquidator should provide particulars of authorisation by Messrs Robertson, Dossetor and Pescott. In paragraph 37A the liquidator alleged,
37AAt the time when Robertson, Dossetor and Pescott authorised the transfer of Beenak by EL to STYH, each of them knew, or ought to have known by reason of their position as directors of EL, that the value of Beenak at that time was more than $1,380,000.
Particulars
Given that EL incur significant losses if the authorisation was given, if the value of Beenak was more than $1,380,000, each of Pescott, Dossetor and Robertson as directors of EL should have informed themselves of the approximate market value of Beenak at the time of giving the authorisation.
Had they done so, then it is to be inferred that they would have obtained determined that the market value of Beenak was more than $1,380,000.[12]
[12]Emphasis added.
The particulars under paragraph 37A assume an absent fact, that the value of Beenak at the relevant time was more than $1,380,000. They provide no particulars at all. Further, if the liquidator intends to rely on the allegation in paragraph 37A to support a breach of s 180 of the Act, he cannot support the allegation by particulars which in effect raise a different substantive allegation - that the directors should have informed themselves of the market value. Paragraph 37A should be struck out.
Paragraph 38 is similar in style and composition to paragraph 25. It proceeds on the assumption that the value of the Beenak property was more than $1,380,000. It essentially repeats allegations made in paragraph 35, without supporting particulars. Paragraph 38 should be struck out. Consequently, paragraph 39 should also be struck out.
The next category of claims in relation to the properties concern put and call options. The first such option is the ‘Eurambeen Put and Call Option Deed’. The liquidator alleges that on 1 July 2000 Blackburne granted to Environinvest an option to purchase all of Blackburne’s right title and interest in Eurambeen. It should be remembered that the Sale of Assets Deed, under which the liquidator alleged that Blackburne sold Eurambeen to Environinvest, was dated 30 October 2000. The put and call option case seems to proceed on a factual basis that is wholly inconsistent with the Sale of Assets Deed case.
The allegations against the directors in relation to the put and call option case is predicated on a conclusion to be drawn from the fact that Environinvest had paid the price for Eurambeen, pursuant to the put and call option, in the sum of $3,783,961. The Eurambeen Put and Call Option Deed apparently records that Environinvest had already paid Blackburne $3,783,961 by way of consideration for the option.
The liquidator alleges that the directors authorised the execution of the put and call option agreement in breach of their duties under s 180 of the Act, because a reasonable person in their position would have known that Environinvest was the beneficial owner of Eurambeen. The pleading of the first and second claims in relation to Eurambeen are not only inconsistent, they are confusing. On one view, the option agreement may be no more than background to the later Sale of Assets Deed. But the real difficulty with the second Eurambeen claim is highlighted in paragraph 47, where the liquidator alleges that a reasonable director would have known that Environinvest was the beneficial owner of Eurambeen. The basis for that allegation is knowledge of the very same facts on which the liquidator relies to allege an inconsistent case flowing from implementation of the Sale of Assets Deed and related transaction pleaded as part of the first claim.
In paragraph 47 the liquidator alleges:
47.In authorising the execution of the Eurambeen Put and Call Option Deed by EL, each of Dossetor, Robertson and Pescott breached their duties, as set out at paragraphs 8 to 10 above, in that a reasonable person who was a director of EL in EL’s circumstances as at the time when the execution was authorised;
(a)would have known that EL was the beneficial owner of Eurambeen, and entitled to an immediate transfer of Eurambeen to it by Blackburne;
Particulars
EL refers to and repeats the particulars to paragraph 23 above.
(b)would have known, that by entering into the Eurambeen Put and Call Option Deed, EL would replace that entitlement with an option to purchase Eurambeen for $1, and on terms, including the terms set out at paragraph 44 above;
(c)Alternatively to (b), would have previously made inquiries so as to ascertain that by entering into the Eurambeen Put and Call Option Deed, EL would replace that entitlement with an option to purchase Eurambeen for $1, and on terms, including the terms set out at paragraph 44 above; and
(d)EL would receive no benefit from the execution of the Eurambeen Put and Call Option Deed; and
(e)Therefore, would not have authorised the execution of the Eurambeen Put and Call Option Deed by EL.
Paragraph 47 also suffers from the same defect as paragraphs 25 and 38 and should be struck out for the same reasons. Paragraph 56 suffers from the same defects as paragraph 37A, and should be struck out for the same reasons. Paragraph 57 suffers from the same defects as paragraphs 47, and should be struck out for the same reasons.
The pleading continues, by alleging a Variation Deed, dated 22 June 2007, under which STY Holdings and STY Afforestation became entitled to purchase Beenak and Myrtalia for $1. The pleading of this part of the claim against the directors is difficult, if not impossible, to follow. As far as I can discern, the liquidator alleges that the variation had the effect of enabling Environinvest to exercise an option, for which it paid $1, to acquire properties with a value of less than $3 million in substitution for its option to purchase Eurambeen for $1, which had a market value in excess of $9 million, thereby causing it a loss in excess of $6 million. The liquidator alleges that the directors breached their duties under s 180 of the Act, in that a reasonable person in their position would have known of that consequence, because they would have known the respective values of Beenak, Myrtalia and Eurambeen at the time.
The liquidator may be intending to allege that the transaction was a contrivance in which Environinvest swapped its entitlement to Eurambeen for an entitlement to Beenak and Myrtalia. If so, that is by no means clear. What is clear, however, is that the liquidator has not grappled with an important factual basis for the cause of action – proof of knowledge of what a reasonable director would have found if enquiries had been made, concerning the real value of the property at a relevant time.
The liquidators’ claims in 6004 reflect more than defective pleadings. As with 4438, they raise a very real concern as to the existence of a sufficient factual basis to make allegations against the directors of breaches of s 180 of the Act. In my view, the liquidator should not be permitted to replead unless and until he can satisfy the court that there is a sound basis to support the claims against the directors.
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