Hall v Middleton

[2006] SASC 6

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

HALL & ANOR v MIDDLETON

Reasons of Judge Lunn a Master of the Supreme Court

18 January 2006

PROCEDURE

Pleading under R 46A - allegations of solvency - need to plead with particularity - allegation of loss and damage - need to plead monetary amounts.

HALL & ANOR v MIDDLETON
[2006] SASC 6

Reasons on defendant’s application to strike out the Statement of Claim

1. JUDGE LUNN      In this action, the second plaintiff, and the first plaintiff as its liquidator, seek relief against the defendant, as a director of the second plaintiff prior to its liquidation, for alleged breaches by him of the Corporation Act 2001.  In essence, the plaintiffs allege that on 28 May 1999 a directors’ meeting of the second plaintiff passed resolutions that the company was insolvent, or was likely to become insolvent at some future time, and to appoint the first plaintiff as its administrator.  The plaintiffs plead that at this time the company was solvent and but for that resolution it was not likely to have become insolvent.  It is alleged that as a result of the appointment of the administrator two dealership agreements held by the company were terminated and other liabilities not previously due for payment became due which then caused the company to become insolvent.  Thus the plaintiffs’ claim results from the defendant’s alleged breaches of duty to the company. 

2. Initially the plaintiffs filed an affidavit in support of the action.  On 8 July 2005 a Master directed that the action proceed on pleadings.  The plaintiffs filed a Statement of Claim on 14 July and an amended Statement of Claim on 28 September 2005.  They have since put forward a further version of the Statement of Claim.  It was agreed that the application before me should be dealt with on the basis of this latest version of the Statement of Claim.  No Defence has yet been filed.

3. On 26 September 2005, the defendant took out an application for directions seeking to strike out the Statement of Claim or alternatively for further material facts to be pleaded under R 46A.09. The subsequent version of the Statement of Claim has refined some of the issues.

4. The application raises the extent of plaintiffs’ obligations to plead material facts under R 46A.03(a) and (b). Those rules apply to this action by virtue of R 1.3(2) of the Corporations Rules 2003 (South Australia).  I have dealt with this question at length in reasons published today in Coonawarra Wine Estates Pty Ltd v Nugan Group Pty Ltd, Judgment No. [2005] SASC 5. I do not repeat here what I have said there on the topic, but apply the law as I have expounded it there in ruling on this application. (There is no material difference between R46A.03(a) and (b) applying to plaintiffs and R 46.05(2)(b) and (c) which applies to Defences. R 46A.09 applies equally to plaintiffs and defendants).

   Paragraph 15

5. Paragraph 15 states :

   15.The defendant was in attendance at the directors meeting by telephone or, in the alternative, instructed Mr Allen to attend on his behalf and vote in favour of the resolution which was to be put at the directors meeting.

6. This is a sufficient plea under R 46A.03(a). The alternatives contained in it are not prejudicial or embarrassing. (However, the plaintiffs may be precluded from leading evidence at the trial on the topic other than in the alternative if they could have been more specific on the topic in their pleading : Norris v McNair (1992) 167 LSJS 389.) The defendant knows what involvement he had in the meeting. He has not shown that he would be significantly prejudiced under R 46A.09(1) unless further material facts are ordered. Accordingly, this paragraph will not be struck out and no further pleading of it will be required.

   Paragraph 16A

7. Paragraph 16A states :

   16A.At the time of the resolution the company was solvent and, but for the resolution, the company was not likely to become insolvent at some future time.

   16A.1At the time of the resolution the company was able to pay all of the company’s debts, as and when they became due and payable, and would be able to pay all of its debts when they became due and payable for the foreseeable future.

8. This is a difficult issue.  Mr Wilkinson for the defendant indicated he would accept an expert’s report on the subject of solvency in lieu of any pleading by the plaintiffs on the topic.  This is the usual practice under Division 2 of Part 5.7B  of the Corporation Act on unfair preference claims. However, as those actions usually proceed on affidavits and not on pleadings, R 46A does not apply to them.

9. Insolvency, here as defined by s 95A of the Corporations Act, is primarily a conclusion of law. It is to be based on facts concerning the company’s financial affairs at the relevant time. While the pleading satisfies R46A.03(a) there needs to be a proper pleading of the facts on which the conclusion of insolvency is to be drawn in order to give fair notice to the defendant under R 46A.03(b). It needs to be considerably more detailed than is contained in paragraph 16A.1 as set out above, which is really no more than an expanded definition of insolvency. It certainly requires some pleading at the relevant times about the company’s debts and their nature and about its ability to satisfy those debts. What further material facts the plaintiffs need to plead will depend in part upon how they intend to prove solvency at the trial. If having been given this opportunity to do so, they do not now plead more facts to give fair notice of the case they intend to make at trial it is likely that the trial Judge will confine their evidence to the particulars which they now give.

10. I acknowledge that it has not been the usual practice to require detailed pleadings of issues of solvency/insolvency and to leave the issue to be dealt with by exchange of experts’ reports. However, R 46A makes no exception for the pleading of solvency/insolvency and the general rules of pleading are to be applied to the issue. In view of the baldness of paragraphs 16A and 16A.1 I infer that the defendant will be significantly prejudiced in the conduct of its case if it does not have further particularity.

11. It must be borne in mind that if the defendant pleads in answer to paragraph 16A that the company was insolvent, he will have similar obligations under R46A.05(2)(b) and (c) to plead the facts which he contends would lead to a conclusion of insolvency at the relevant time.  What is sauce for the goose is also to be sauce for the gander!

12. Accordingly I will order the plaintiffs to amend their statement of claim to give further material facts of their plea of solvency.

13. (I acknowledge that there is considerable commonsense in the suggestion of Mr Wilkinson, counsel for the defendant, that disclosure of the respective cases of the parties on solvency/insolvency could be effected by an exchange of experts’ reports rather than by formal pleadings.  If the parties were to apply for such an order, I would be disposed to dispense with the need to plead the factual issues on insolvency and to direct that experts’ reports on the topic be exchanged in lieu of pleadings.)

    Paragraphs 17 and 18 of the Statement of Claim

14. These state :

    17    In or about June 1999 Nissan terminated the Nissan Dealer Agreement.

    18    On or about 28 June 1999 AGCO terminated the AGCO Dealer Agreement.

15. The defendant seeks an additional pleading under R 46A.03(b) about how the terminations were effected. The defendant has not shown how it would be significantly prejudiced by not having these further facts. No further facts are to be ordered.

    Paragraphs 24.2 and 24.3

16. The relevant parts of paragraph 24 state :

    24By reason of the matters referred to in paragraph 23 herein, the company has suffered the following loss and damage:

    …..

    24.2In the alternative to paragraph 24.1, the difference between the value of the company’s business as a going concern prior to the appointment of the Administrator and the actual realisation value of the company’s assets; or

    Particulars

    24.2.1 The actual realization value of the company’s assets was $2,224,356.38.

    24.3   In the alternative to paragraphs ….. 24.2, the value of the lost opportunity to sell the company’s business as a going concern; …

17. The defendant seeks the pleading of the value of the company’s business as a going concern as alleged in paragraph 24.2 and the value of the lost opportunity pleaded in paragraph 24.3. Paragraphs 24.2 and 24.3 are not claims for damages at large, but for quantifiable amounts. R 46A requires proper pleading on the issues of loss and damage in the same manner as on any other issue. The plaintiffs say they will need to obtain valuations from experts to put forward these values. R38.01 only sets the timetable for the delivery of the experts’ reports to the other party. It does not mean that a party does not have to obtain its expert evidence until that point in the action is reached. If there is to be a meaningful definition in the pleadings of the dispute between the parties on this issue, it requires that both the plaintiffs and the defendant plead their respective contentions about value. It may be that the defendant will admit the values pleaded by the plaintiffs, in which case the case can proceed expeditiously. If the values are not pleaded as monetary amounts, the Court cannot ascertain from the pleadings what is the issue between the parties on these topics. (It is for the parties to decide whether they will obtain their experts’ reports, or some preliminary indication from experts, for the purposes of pleading or base any pleaded values on other information at their disposal. If they base their pleading on less than experts’ reports, and have to subsequently amend when such reports are obtained, they may be at risk for costs and under R 46.22)

18. I consider that fair notice to the defendant requires the plaintiffs to plead the value of the company’s business as a going concern and the value of the lost opportunity.  In order to prove these matters the plaintiffs will have to adduce considerably more specific and detailed evidence on the topic at the trial.  On the present pleadings there would seem to be a considerable risk that the trial Judge would exclude such evidence as being outside the scope of the present pleadings.  I also infer from the baldness of the present pleadings on the topics that the defendant would be significantly prejudiced if he does not have such further material facts.  Accordingly, they will be ordered.

    I have today made the following orders :

    1      Leave to the plaintiffs to file the second amended Statement of Claim.

    2The defendant’s application to strike out the statement of claim or parts of it is refused.

    3The defendant’s application for pleading of further material facts of paragraphs 15, 17 and 18 of the Statement of Claim is refused.

    4Within 21 days the plaintiffs are to file a third amended statement of claim pleading further material facts of paragraph 16A, 16A.1, 24.2 and 24.3.

    5The defendant is to file his Defence within 28 days of service of the third Statement of Claim.

    6Question of costs reserved.

    7Matter adjourned to a Status Hearing on 29 March 2006 at 10.50 am.