Innerhadden Ltd v Capital Decisions Pty Ltd
[1999] WASC 18
•13 MAY 1999
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: INNERHADDEN LTD -v- CAPITAL DECISIONS PTY LTD [1999] WASC 18
CORAM: MASTER SANDERSON
HEARD: 3 MAY 1999
DELIVERED : 13 MAY 1999
FILE NO/S: COR 17 of 1999
MATTER :<Matter>Section 459G of the Corporations Law
</Matter>
BETWEEN: INNERHADDEN LTD (ACN 008 928 783)
Applicant
AND
CAPITAL DECISIONS PTY LTD (ACN 073 945 687)
Respondent
Catchwords:
Corporations law - Application to set aside statutory demand - Offsetting claim - Turns on its own facts
Legislation:
Corporations Law, s459G, s459H(1)(2) and (3) and s459F(2)(a)(ii)
Result:
Application dismissed
Representation:
Counsel:
Applicant: Mr M L Bennett
Respondent: Mr C L Zelestis QC & Mr M Garner
Solicitors:
Applicant: Bennett & Co
Respondent: Holding Redlich
Case(s) referred to in judgment(s):
Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACLC 1062
Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919
Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1994) 12 ACLC 111
State Bank of Victoria v Parry [1989] WAR 240
Case(s) also cited:
Blair v Currun (1939) 62 CLR 464
Chamberlain v Deputy Commissioner of Taxation (1987) 164 CLR 502
Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 12 ACLC 334
John Shearer Ltd v Gehl Company (1996) 14 ACLC 147
Marchioness of Huntley v Garkel [1905] 2 Ch 656
Queensland v The Commonwealth (1977) 139 CLR 585
MASTER SANDERSON: On 23 December 1998 Gillard J, sitting in the Victorian Supreme Court, entered judgment in favour of the respondent against the applicant in the sum of $216,600 plus interest and costs. His Honour's order was made on the respondent's application for summary judgment. Based on this judgment the respondent served on the applicant a statutory demand which was dated 11 January 1999. By application dated 2 February 1999 the applicant seeks to have the statutory demand set aside. The application is brought under s459G. It falls to be determined under s459H. It is not argued by the applicant that there is a genuine dispute in relation to the amount of the judgment. Rather, the applicant says it has an "offsetting claim" which is greater than the "admitted total" and therefore the "substantiated amount" is less than the statutory minimum, requiring the Court to set aside the statutory demand under s459H(3).
There were over 1,200 pages of affidavit material filed in relation to this application. However, the area of dispute between the parties was relatively narrow. Pursuant to a written agreement, the respondent was contracted to undertake certain investment services for and on behalf of the applicant. (In the agreement the present respondent is referred to as Talcom Pty Ltd. It subsequently changed its name to Capital Decisions Pty Ltd. Nothing turns on this point and I mention it just for the sake of clarity.) For the provision of the investment services the respondent was to be paid a fee. Over a period this fee was not paid and led to the respondent issuing the proceedings against the applicant in the Victorian Supreme Court. It applied for summary judgment and the matter came on before Gillard J on 18 December 1998. At the same time the summary judgment application was heard the applicant applied for leave to file and serve an amended defence and counterclaim. A minute of this amended defence and counterclaim is to be found as Annexure TK9 to the affidavit of Theo Kalyvas sworn 31 March 1999 and filed in opposition to this application. What is pleaded in this minute of proposed amended defence and counterclaim is essentially that the respondent was negligent in providing investment advice which led to the applicant participating in a renounceable rights issue by Matrix Telecommunications Ltd ("Matrix"). It is pleaded that two officers of the applicant, Dov Brener ("Brener") and Timothy Frederick Stuart James ("James") were also directors of Matrix. It is further pleaded that not only did the applicant participate in the rights issue by Matrix but that it also acted as underwriter to the issue. It is then pleaded that the business of Matrix was severely affected by what is known generally as the Asian financial crisis. It is pleaded that the respondent was under a contractual obligation to advise the applicants of
the consequences on the business of Matrix of the Asian financial crisis and that it did not do so. It is further alleged that the failure of the respondent to warn the applicant of the affects on the business of Matrix of the Asian financial crisis was negligent. In other words, the claim is made both in contract and tort.
In his decision, Gillard J concluded that there was, in effect, no positive obligation on the respondent to provide investment advice to the applicant. Rather, when a request for advice was made by the board of the applicant, advice had to be provided. As no advice was requested in relation to the decision to invest in Matrix it could not be said that there was a breach of contract by the respondent. His Honour did not deal with the applicant's claim in tort but it is apparent that his Honour concluded if there was no contractual obligation to give advice, failure to give that advice could not be negligent. His Honour's reasons do not deal with the defendant's summons seeking leave to amend the defence and counterclaim. However, the judgment given by his Honour dismisses the summons with costs. It was an issue in this application as to whether or not his Honour's judgment had shut the applicant out of making a counterclaim in line with that proposed in the amended defence and counterclaim. I will refer to this issue later in these reasons. However, before doing so I should set out precisely the case put by the applicant.
As I have said above, the applicant not only participated in the rights issue by taking up shares in Matrix but it participated as an underwriter of the issue. The issue closed under‑subscribed and Matrix has called upon the applicant to honour its obligations pursuant to the underwriting agreement. The applicant has challenged the validity of the underwriting agreement and Matrix has issued proceedings in the Federal Court seeking to enforce the agreement. Those proceedings have not yet reached a conclusion. However, if the proceedings by Matrix are successful and they obtain the relief they are presently seeking, the applicant will be required to subscribe for shares which were not taken up under the rights issue. The applicant says that it would not have entered into the underwriting agreement had the respondent advised it of the consequences of the Asian economic downturn on the business of Matrix. It says that failure on the part of the respondent to provide this advice was negligent, or, alternatively, was misleading and deceptive conduct under the Trade Practices Act. It is important to note that the applicant's case related to the underwriting agreement not the shares taken up by the applicant pursuant to the rights issue. It is also relevant to note that the claim is not grounded in contract because that cause of action is shut out by the decision of Gillard J.
The evidence in support of the applicant's position is to be found in the affidavit of Lawrence John Clark ("Clark"), sworn 1 February 1999. For present purposes, paras 15 – 19 of Clark's affidavit are relevant. They read as follows:
"15.During late August 1997 or early September 1997, the Applicant was considering whether to underwrite in part a proposed renounceable rights issue by Matrix Telecommunications Ltd (now known as Easycall Australia Ltd) and whether to participate in the proposed renounceable rights issue.
16.In accordance with the Respondent's obligations of the Management Agreement:
16.1in late August 1997, I discussed this matter with Mr Dov Brener, a director of the Plaintiff;
16.2I verily believe that during late August 1997 and early September 1997, I discussed the proposal with Mr James, a director of the Plaintiff.
17.I do not now recall the exact date of the conversations however:
17.1they dealt with the Applicant's consideration of the proposed underwriting and participation in the proposed renounceable rights issue;
17.2the Respondent recommended that the Applicant participate in the proposals, in particular, the recommendation that the Applicant invest in further shares of Matrix.
18.Correspondence that passed between Mr Brener on behalf of the Respondent and myself on behalf of the Applicant is annexed to Ms Hill's affidavit at annexure 'JMH5'.
19.On the basis of the recommendations made by the Respondent, the Applicant entered into an Underwriting Agreement with Matrix Telecommunications in respect of the proposed renounceable rights issue and by its wholly owned subsidiary, CP Ventures Limited took up rights in Matrix to subscribe for further shares."
This evidence was subject to trenchant criticism by senior counsel for the respondent. He pointed out that the evidence is vague and imprecise. Paragraph 16 refers to two conversations Clark says he held – one with Brener and one with James. In para 17 it is said that these conversations "dealt with the applicant's consideration of the proposed underwriting". It does not indicate with any precision what was discussed about the proposed underwriting, what, if any, questions were asked by Clark of Brener and James and what their response might have been. Further, in para 17.2 it is said that "the respondent" recommended participation in "the proposals". It is not clear whether either or both Brener or James recommended participation. It is also not clear whether "the proposals" includes the underwriting agreement. Given the importance of the underwriting agreement, it is surprising that Clark's evidence is not more direct and precise. What is more, it is at odds with what was said by Clark in an affidavit sworn 16 December 1998 and filed in opposition to the summary judgment application, (to be found as Annexure "TK8"). At para 25 of that affidavit Clark says:
"In late August 1997 or early September 1997 I discussed this matter with Messrs Brener and James of the Plaintiff. I do not now recall the exact date of the conversation or the substance of the conversation other than it dealt with the Defendant's consideration of the proposed underwriting."
At the very least Clark in his affidavit of 1 February 1999 should have dealt with the discrepancy between the evidence he gives in paragraph 17 of that affidavit as against paragraph 25 of his earlier affidavit. While not necessarily fatal to the evidence as a whole, it does call into question the accuracy of Clark's recollection as expressed in the later affidavit.
Perhaps more tellingly is the correspondence relating to this issue. On 27 October 1997 Clark wrote to Brener in the following terms (see Annexure "JMH5" to the affidavit of Jennifer Mary Hill sworn 1 February 1999):
"Further to your discussions with Alan Newman and myself we note that your advise [sic] as manager of Innerhadden's investment portfolio, has been consistently to invest in the Matrix Telecommunications Limited rights issue. Further, notwithstanding the recent turmoil in South East Asian equity and currency markets you have held the view that an investment in Matrix would still satisfy our investment criteria.
My call to you early last week was designed both to seek your advise [sic] and to send an informal message to Matrix that we had serious concerns regarding the events in South East Asia and we were somewhat surprised that we did not receive any response from the company.
We were even more surprised that our communications to Matrix on Thursday and Friday have still not elicited a response despite the suggestion, through you, for Mr Carnegie to speak to Alan Newman over the weekend.
We accept that you are in a slightly awkward position acting as both an advisor to Innerhadden and a director of Matrix. However, we are confident that you recognise your responsibilities in both of your capacities and will keep us informed of material developments."
This letter provoked an immediate response from the respondent. On 28 October 1997 Brener, on behalf of the respondent wrote to Clark on behalf of the applicant. This letter reads, in part, as follows (Annexure "JMH5"):
"I am in receipt of your letter dated 27 October, 1997. I would like to correct a number of assertions you make in your letter.
It is correct that our recommendation has been to participate in the Matrix Telecommunications Ltd Rights Issue and in fact we have suggested to you that it is our intention to personally participate in the Rights Issue as Matrix Telecommunications Ltd shareholders. We have since done so.
We are not aware of Innerhadden Ltd outlining its investment criteria to Capital Decisions and hence our recommendation was not made against any pre set criteria.
We did not advise Innerhadden Ltd to participate in the Underwriting of the Rights Issue, in fact Innerhadden Ltd itself requested to be a participant in the Underwriting on an equal basis with Publishing & Broadcasting Ltd and Hellman & Friedman Asia Ltd and Matrix Telecommunications Ltd responded by offering Innerhadden Ltd the Underwriting on a pro rata basis in accordance with its relevant shareholding.
In various conversations with yourself and Alan Newman during 22nd, 23rd and 24th October 1997 I have suggested that you deal with Matrix Telecommunications Ltd directly on the issue of the Underwriting Agreement, since it was recognised by both of us that I may have a conflict of interest due to my directorship of Matrix Telecommunications Ltd, Capital Decisions contract with Innerhadden Ltd and my shareholding of some one million shares in Innerhadden Ltd. I also advised you that I have passed the same opinion on to Mark Carnegie the Chairman of Matrix Telecommunications Ltd."
To this letter there was no response. What is more, both Brener and James have sworn affidavits denying that they offered any advice to the applicant to participate as underwriters of the rights issue. Both deny they had any conversations with Clark in which the Underwriting Agreement was discussed. Brener says that he spoke with Alan Newman a director of the applicant in late August or early September 1997. He says that Newman advised him that the applicant had already decided to participate as an underwriter of the issue and did not seek his advice. It is against this factual background that the applicant claims it has an offsetting claim against the respondent.
The law in relation to what is necessary to establish an offsetting claim is well settled. It will be sufficient if I refer to the decision of Beazley J in Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1994) 12 ACLC 111 where her Honour said (at 113):
"In my opinion the test to be applied for the purposes of s459H is whether a court is satisfied that there is a serious question to be tried that the applicant has an offsetting claim."
In the course of her decision her Honour referred to Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919 and Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993) 11 ACLC 1062. These and other decisions make it plain that it is not necessary for the applicant to establish a prima facie case but equally there must be something more than mere assertion on the part of the applicant. There must be some evidence to show that they have the bones of an argument.
In this case the applicant falls well short of that position. The evidence of Clark, such as it is, leaves room for doubt as to whether or not he was ever advised by the respondent to enter into the Underwriting Agreement. Against that there is the evidence of Brener and James to the effect that the applicant was not advised by the respondent to enter into the Underwriting Agreement. That is supported by documentary evidence. I can see no basis at all upon which a court could conclude that the applicant was given negligent advice by the respondent which caused it to enter into the Underwriting Agreement or that there were representations made by the respondent to the applicant which were misleading and deceptive. It was submitted by counsel for the applicant that the mere fact that a representation was made by the respondent that the applicant participate in the rights issue might amount to a representation which the applicant relied upon in entering into the Underwriting Agreement. There are at least two difficulties with that submission. First, there is no evidence at all that relying on the advice to participate in the rights issue the applicant entered into the Underwriting Agreement. Clark does not suggest that this was the case. Secondly, there is a world of difference between participating in a rights issue and entering into an Underwriting Agreement. A party who takes up share under a rights issue knows precisely their liability. An Underwriting Agreement is altogether different. For a fee, the underwriter agrees to take up any shortfall in subscriptions. There might be no shortfall, in which case the underwriter keeps the fee and has no liability to subscribe for shares. Or no shares may be taken up under the rights issue and the underwriter might be called upon to meet the full extent of its underwriting commitment. I find it very difficult to accept that a representation to participate in a rights issue could be seen as a representation that a party should underwrite the issue or part thereof. There is no obvious nexus between the two.
In my view, then, the applicant has failed to establish that it has an offsetting claim. I am not satisfied that it has established that there is a serious question to be tried. On that basis I really need take the matter no further. However there were two further submissions put by the respondents which, for the sake of completeness I should mention.
First, it was submitted that, given that summary judgment was entered against the applicant, it was no longer open to argue the applicant had an offsetting claim in relation to the Underwriting Agreement. It was said this issue was res judicata and had been determined as part of the summary judgment application. This submission gave rise to considerable debate about the effect of the order for summary judgment. Summary judgment may be granted in circumstances where the defendant is able to establish that it has an arguable counterclaim, but a stay is often ordered: see State Bank of Victoria v Parry [1989] WAR 240. In this case, after his Honour had given an extempore decision, there was a debate between his Honour and counsel as to how the matter should proceed. A stay was not mentioned. On my reading of the transcript, his Honour appears to have left open the prospect of a counterclaim being maintained in the proceedings despite the successful summary judgment application. This may be one of those cases where the transcript gives a misleading impression. It is difficult to reconcile what appears in the transcript with the fact that his Honour dismissed the application for leave to file an amended defence and counterclaim.
In the circumstances, I am unable to conclude that the applicant is shut out from raising a claim in relation to the Underwriting Agreement. I would not be prepared to hold that on this basis there was not a serious question to be tried as to whether there was an offsetting claim.
The second submission made by the respondent had to do with the calculation of the substantiated amount. As I have mentioned above, the substantiated amount is calculated by subtracting from the admitted total the offsetting total. The admitted total is not in doubt. That is the amount of the statutory demand. But it is not possible on the evidence as it stands at present to calculate what any offsetting total might be. Assuming at some stage the applicant is required to comply with the terms of the Underwriting Agreement, it will then take up a certain number of shares which will have a certain value. Those shares might possibly have a market value less than the subscription price. Assuming that the applicant would not have entered into the Underwriting Agreement if it were not for the alleged negligence or misleading and deceptive conduct, then the measure of its damage would be the difference between the market value of the securities and the price paid on subscription. But there is no evidence at all as to what that difference might be. I appreciate that because the Federal Court proceedings are pending it might not be possible to calculate with precision any loss. But some evidence should have been provided to establish what the offsetting total might be. At the moment it is simply not possible to make any calculation. That being so, there is nothing to subtract from the admitted total and there is no basis for setting aside or varying the statutory demand.
For these reasons I would dismiss the application. The time for compliance with the demand is automatically extended to seven days after the date of this decision, pursuant to s459F(2)(a)(ii). I will hear the parties in relation to any further extension and with respect to costs.
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