Kelly v Daymist Accommodation Services P/L
[2001] QCA 339
•24/08/2001
SUPREME COURT OF QUEENSLAND
CITATION: Kelly & Anor v Daymist Accommodation Services P/L & Ors
[2001] QCA 339PARTIES: YVETTE MICHELLE KELLY
(first plaintiff/first respondent)
YMK CORPORATION PTY LTD ACN 081 321 084
(second plaintiff/second respondent)
v
DAYMIST ACCOMMODATION SERVICES PTY LTD
ACN 082 104 265
(first defendant/first appellant)
RAY BRISTOW and YVONNE BRISTOW
(second defendants/second appellants)FILE NO/S: Appeal No 8592 of 2000
SC No 9441 of 1999DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING
COURT:Supreme Court at Brisbane DELIVERED ON: 24 August 2001 DELIVERED AT: Brisbane HEARING DATE: 7 August 2001 JUDGES: Davies and Williams JJA and Byrne J
Judgment of the CourtORDER: 1. Appeal allowed.
2. Set aside the judgment of the learned primary judge. 3.
That the respondents give security for the appellants' costs of and incidental to the claim fixed in the sum of $42,500.
4.
That the security be given in a form and in terms satisfactory to the Registrar within 28 days from today.
5.
That the respondents pay the appellants' costs of this appeal and of the application before the primary judge.
CATCHWORDS:
PROCEDURE – COSTS – SECURITY FOR COSTS – OTHER REASONS FOR SECURITY – appeal against refusal to order security for costs – whether trial judge erred in exercising discretion – where both respondents are insolvent – whether personal respondent was suing for the benefit of her creditors rather than for her own benefit – where guarantee by personal respondent of corporate respondent's obligations to pay the appellants' costs in the event that the appellants are successful and awarded costs – whether justice of the case required the making of an order for security – whether action was misconceived and had no real prospects of success – where allegations of partnership or joint venture were inconsistent with the executed documents – where unlikely personal respondent could have claim for lost profits of business carried on by corporate respondent
Corporations Law, s 1335
Uniform Civil Procedure Rules (Qld), Ch 17, r 671(b),r 671(h)
Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd
(1992) 8 ACSR 405, referred to
Harpur v Ariadne Australia Limited [1984] 2 QdR 523,
referred to
Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990)
8 ACLR 304, referred to
COUNSEL: P D McMurdo QC for appellants
M D Martin for respondentsSOLICITORS: Macrossans Lawyers for appellants
McCowans (Southport) for respondents
THE COURT: This is an appeal against the refusal of a judge in the Trial Division of this Court to order that the respondent plaintiffs, Yvette Michelle Kelly ("Kelly") and YMK Corporation Pty Ltd ("YMK") give security for costs of an action in an amount of $42,500. If security were to be ordered there was no dispute that that was an appropriate sum. The application by the appellants was brought against both respondents pursuant to Chapter 17 of the Uniform Civil Procedure Rules and against YMK pursuant to s 1335 of the Corporations Law.
The respondent Kelly entered into an arrangement with her creditors pursuant to a Deed of Arrangement dated 23 March 2000. It appears from the material that she had assets of $230,000, unsecured creditors of more than $310,000 and secured creditors of a value of $232,000. On any view, she is insolvent.
On 24 September 1999 the first appellant, Daymist Accommodation Services Pty Ltd ("Daymist"), appointed receivers and managers of YMK pursuant to cl 13.1 of a mortgage debenture granted by YMK on 21 April 1999. The receivers then proceeded to sell the assets of YMK leaving a shortfall under the mortgage debenture of about $50,000. There does not seem to be any dispute that, but for any interest which YMK may have in this action it, too, is insolvent.
After this application was filed the respondents' solicitors, for the first time, offered a guarantee by Kelly of YMK's obligations to pay the appellants' costs should the appellants be successful and be awarded costs. It was submitted on behalf of YMK and apparently accepted by the learned primary judge that, because of this guarantee, an order for security should not be made against YMK.[1]
[1] Relying on Harpur v Ariadne Australia Limited [1984] 2 QdR 523, Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 and Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405.
The Deed of Arrangement between Kelly and her creditors provided that to the extent that Kelly recovered any money or other assets in this action against the appellants she would pay to the trustee an amount equal to all or part of the nett recovery after deducting all legal and other out-of-pocket expenses. It seems to be common ground that at least $150,000 was required to satisfy provable claims accepted by the trustee under the Deed.
Before the learned primary judge the appellants contended that, as against Kelly, the court should be satisfied that either she was suing for the benefit of her creditors rather than for her own benefit (r 671(b) of the Uniform Civil Procedure Rules) and, as against both respondents, that the justice of the case required the making of an order for security (r 671(h)). The second of these involved contentions that the action was misconceived and had no real prospects of success. Her Honour rejected these contentions.
As against YMK the appellants also contended that, as the guarantee tendered by Kelly was worthless, the considerations which might otherwise be applicable where a shareholder, by guaranteeing the company, brought his or her assets into play, had no application. That submission was also rejected.
The first question before this Court is whether the learned primary judge erred in the exercise of her discretion in refusing to order security. If this Court concludes that her Honour erred then this Court would be obliged to exercise its discretion afresh on pleadings substantially amended since the decision appealed against was given.
The action as pleaded before the learned primary judge
The Statement of Claim of the respondents alleged a partnership between Kelly and the personal appellants Ray and Yvonne Bristow ("the Bristows") made orally in March 1999 by which the Bristows would be allocated 25 per cent of the shares in YMK for the sum of $60,000 payable $40,000 on commencement of the partnership with further yearly instalments of $10,000; that the Bristows would arrange for an advance of $160,000 "through" Daymist to YMK "for a sufficient period to enable" the manufacture and sale of an unspecified quantity of garments "in the 1999 spring fashion season"; that upon sale of the garments the profits generated would be divided between the parties in accordance with their shareholding; and that during the period of the partnership the partnership was entitled to use specified business names, label and logos. It was then alleged that in performance of the partnership agreement the Bristows paid Kelly $40,000, caused $160,000 to be advanced to both respondents by instalments and attended partnership meetings on a monthly basis. There was an alternative claim of unconscionable conduct based on s 51 of the Trade Practices Act which was not further particularized.
The primary allegations in the Statement of Claim were inconsistent with the documents executed by the respondents on 21 April 1999. Curiously these were not referred to in the Statement of Claim. They were:
1. a loan agreement in the form of a letter of offer pursuant to which Daymist agreed to lend up to $160,000 to YMK; 2. a Deed of Mortgage Debenture by YMK in favour of Daymist; 3. a guarantee in support thereof by Kelly; 4. a share placement agreement by YMK, Daymist and Kelly by which, with Kelly's consent, YMK allotted 25 per cent of the shareholding in it to Daymist for $60,000 payable as $40,000 within 14 days and two further instalments of $10,000 at yearly intervals; and 5. a further agreement between Daymist and Kelly the substance of which was that Kelly would provide her services to the business for which she would be remunerated by way of advance of her dividend entitlement. It is significant that the last of these documents recognized that the business of the manufacture and sale of clothing would, during the currency thereof, be carried on by YMK.[2] It is also significant that the Bristows were not parties to any of these documents.
[2] See cl 2.1.
What seems to have happened is not untypical of what occurs when lay people use corporate structures. They may think that they are acting "through" those corporations when in truth it is the corporations which are acting. It appears from the documents to which we have referred that what occurred was not a partnership between Kelly and the Bristows but an acquisition by Daymist of 25 per cent of the shares in YMK, the company which operated the business, and a secured loan of money by Daymist to YMK. Indeed the allegations of the terms of the partnership do not appear to be terms of a partnership agreement but of an agreement for acquisition of shares and provision of money.
That being the case, the action as pleaded in the Statement of Claim before the learned primary judge is entirely misconceived. Not only are the allegations of fact inconsistent with the contemporaneous documents but the relief sought is misconceived. Clauses (i) to (v) of the prayer for relief seek relief in respect of a partnership between Kelly and the Bristows which plainly never existed. And clauses (vi) to (viii) seek relief in respect of asserted ownership of business names, label and logos, an assertion which the appellants did not deny.[3] To that may be added the fact that, although YMK joins in those claims, no facts are pleaded which could entitle it to relief.
[3] See Defence par 10.
It should, perhaps, be added that the correspondence between the parties at the time default under the mortgage debenture was asserted by the appellants does not reveal any serious contest to this; nor was there any assertion that Daymist could not appoint receivers or that they could not sell the assets of the business.
That is not the only problem which faced the respondents. Given that the appellants did not assert any claim to the business names, label or logos, the only claim which the respondents could have had against the appellants was one for damages arising out of the calling up of the loan before YMK was in a position to derive its hoped for profit from the manufacture and sale of the garments. No basis was shown for the loss of profit estimate in the Statement of Claim of $1.2M. On the other hand it is clear that the first $150,000 recovered in any such action will go to the creditors pursuant to the provision in the Deed of Arrangement to which we referred earlier. So whilst it may not be correct to describe Kelly as suing entirely for the benefit of another person or persons rather than for her own benefit (r 671(b)) that is certainly correct up to $150,000. And if, as seems plain enough, the business was being carried on by YMK, and so the profits, if any, would have been derived by YMK, it is difficult to see what claim Kelly had to these. Whether, in that event, Kelly could have had any claim for damages other than that loss of profits, was not in issue.[4] It is not necessary to resolve these questions.
[4] See generally Gould v Vaggelas (1985) 157 CLR 215; Johnson v Gore Wood & Co (a firm) [2001] 2 WLR 72.
The result is that, on the action as pleaded before the learned primary judge, Kelly had no sustainable cause of action because her only claims were in respect of a partnership which never existed and in respect of ownership of business names, a label and logos, the ownership of which the appellants never disputed; and YMK had no sustainable cause of action because it asserted no facts on which it could make a claim. When one adds to that the obvious insolvency of both respondents and the fact that the only substantial basis asserted for declining to make an order against YMK was the offer of a worthless guarantee by Kelly[5] it is plain, in our opinion, that the learned primary judge's discretion miscarried, that the orders which she made should be set aside and that this Court should consider the application afresh. It is common ground that that should be done on the pleadings as amended since the decision of the learned primary judge.
The action as now pleaded
[5] The object of s 1335 is not satisfied where a company has no apparently sustainable cause of action and the only basis offered for an order refusing security is a guarantee which is plainly worthless.
In the action as pleaded by the Amended Statement of Claim the respondents abandoned their claim to a partnership between Kelly and the Bristows and now assert a joint venture between all of the respondents and all of the appellants. They assert that the joint venture was partly written and partly oral and, to the extent that it was in writing, was constituted by the loan agreement to which we have already referred. They assert that the terms were that:
(a) the Bristows would purchase from Kelly 25 per cent of the issued shares in YMK for $60,000;
(b) the Bristows would provide YMK with a loan facility of $160,000 to assist with working capital or specific orders or job lots;
(c) Kelly and YMK would expand their business into a worldwide market;
(d) where a drawdown was made on the loan facility the loan would be repayable no later than the day on which Kelly received payment of the order or job to which the drawdown related;
(e) the parties would act fairly and reasonably towards one another;
(f) Kelly would cause YMK to use the loan facility for the purposes of acquiring material, manufacturing garments and advertising.
It is then alleged that in performance of the joint venture Daymist paid Kelly $60,000 for 25 per cent of the issued shares in YMK and advanced $172,000 to YMK. This is curious for two reasons. The first is that it is difficult to see how, and the Statement of Claim does not allege how, an acquisition by Daymist of 25 per cent of the share capital of YMK could be performance of the agreement by the Bristows to purchase 25 per cent of the issued shares in YMK from Kelly. Secondly, as the documents plainly show, there was no purchase of shares but an allotment by YMK with Kelly's consent of that proportion of the shares in YMK.
More importantly the Amended Statement of Claim perpetuates the difficulty which Kelly has in seeking any relief at all. As already mentioned, at least one of the documents made it clear that the business of manufacture and sale of garments was being carried on not by Kelly but by YMK, although no doubt Kelly was the controlling mind of YMK. So it is difficult to see how Kelly, as opposed to YMK, would have any claim for lost profits and, during the course of argument, counsel for the respondents conceded that she would not. And the Statement of Claim as amended still fails to come to grips with the terms of the debenture and the actions of the appellants in reliance on those terms. Indeed what seems to be alleged as the joint venture agreement is inconsistent with the terms of documents subsequently executed by the parties. The Statement of Claim asserts that the issue of a notice, pursuant to the deed of charge giving YMK five days notice to repay the advance of $172,000 was inconsistent with the express terms of the joint venture but there is no express term pleaded with which it is said to be inconsistent and none was identified in argument.
The claim for breach of a fiduciary duty appears to be on the same basis. And the trade practices claim, said to be made pursuant to s 51AC (not 51AA as pleaded) appears to be dependant upon a promise or understanding reached which was inconsistent with agreement subsequently made in writing.
It follows in our opinion that the action on the Amended Statement of Claim has no more prospect of success than that on the original Statement of Claim. And as the other factors remain the same it is plain, in our opinion, that an order for security for costs should be made.
Orders
We would make the following orders:
1. allow the appeal; 2. set aside the judgment of the learned primary judge; 3. that the respondents give security for the appellants' costs of and incidental to the claim fixed in the sum of $42,500; 4. that the security be given in a form and in terms satisfactory to the Registrar within 28 days from today; 5. that the respondents pay the appellants' costs of this appeal and of the application before the primary judge.
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