Kitay v Brandsma - [2009] WASC 48

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: KITAY -v- BRANDSMA [2009] WASC 48

CORAM: MASTER SANDERSON

HEARD: 24 NOVEMBER 2008

DELIVERED : 4 MARCH 2009

FILE NO/S: CIV 1232 of 2007

BETWEEN: MERVYN JONATHAN KITAY
AUSTRALIAN PLANTATION TIMBER PTY LTD (ACN 054 653 057)
Plaintiffs
AND
RINZE ARJEN BRANDSMA
First Defendant
VERNON GREY EGERTON-WARBURTON
Second Defendant
DONALD PAUL CHURCH
Third Defendant
GRAHAM ROBERT McKENZIE-SMITH
Fourth Defendant
PAUL GEOFFREY BRAZENOR
Fifth Defendant
IAN DAVID BLACKBURNE
Sixth Defendant
BRIAN THOMAS RAY
Seventh Defendant

Catchwords:

Practice and procedure - Application to amend statement of claim - Turns on own facts

Legislation:

Nil

Result:

Amendment allowed

Category: B

Representation:

Counsel:

Plaintiffs:     Ms P E Cahill
First Defendant              :     No appearance
Second Defendant         :     Mr D H Solomon
Third Defendant            :     No appearance
Fourth Defendant           :     No appearance
Fifth Defendant              :     No appearance
Sixth Defendant             :     No appearance
Seventh Defendant         :     No appearance

Solicitors:

Plaintiffs:     Jackson McDonald
First Defendant              :     No appearance
Second Defendant         :     Solomon Brothers
Third Defendant            :     No appearance
Fourth Defendant           :     No appearance
Fifth Defendant              :     No appearance
Sixth Defendant             :     No appearance
Seventh Defendant         :     No appearance

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

Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43
Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd [2007] WASCA 179; (2007) 35 WAR 27

MASTER SANDERSON: This is the second defendant's application to strike out the plaintiffs' statement of claim. A document entitled 'Minute of re‑amended statement of claim' (the minute) was annexed to the plaintiffs' outline of submissions in opposition to the application. It was that minute to which argument was directed. In reality then, this was an application by the plaintiffs for leave to amend in terms of the minute.
The minute identifies the second‑named plaintiff as a company which at all material times was known as Australian Plantation Timber Pty Ltd and was listed on the Australian Stock Exchange. Paragraph 1(d) and 1(e) are then in the following terms:
(d)pursuant to the deed of company arrangement [the second‑named plaintiff] assigned to the first plaintiff as trustee of the 'Proposal A Creditors Trust' established by deed dated 6 August 2002 all claims, rights, debts, causes of action or other entitlements of whatsoever nature, howsoever arising against inter alia the defendants arising prior to 14 March 2002;
(e)pursuant to the deed of company arrangement and the deed establishing the 'Proposal A Creditors Trust', APT, [the second‑named plaintiff] to the extent that it had a right or entitlement to a compensation order under s 1317H of the Corporations Act 2001, declared that it held such right or entitlement on trust for the first plaintiff and authorised the first plaintiff to pursue that right or entitlement in the name of APT [the second‑named plaintiff].
By par 2 of the minute, it is pleaded that the first‑named plaintiff's claim is as trustee of the 'Proposal A Creditors Trust'.
The minute then goes on to plead that the second defendant was at all material times a director of the second‑named plaintiff. It is also pleaded that the third and fifth defendant were members of the Audit Committee of the second‑named plaintiff; this allegation is not made against the second defendant. The minute sets out the powers and duties of the members of the Audit Committee and the duties owed by the directors including the second defendant of the second‑named plaintiff. Paragraph 8 ‑ 24 of the minute plead certain matters in relation to the affairs of the second‑named plaintiff. Some of these allegations relate to the second defendant, some relate to the first defendant in his capacity as managing director of the second‑named plaintiff, and some relate to the third and fifth defendants as members of the Audit Committee. Objection is not taken to any of these paragraphs and are not presently of concern. It is enough to say that in par 25 it is pleaded that on 12 March 2001 the Audit Committee of the second‑named plaintiff recommended to the board of directors of the second‑named plaintiff that a four cent fully frank interim dividend be paid to the second‑named plaintiff's shareholders for the six months ended 31 December 2000.
Certain further matters are pleaded in par 26 ‑ 28. These matters relate to what might broadly be described (and what is pleaded as) a change of circumstance. By par 29 it is pleaded that on 13 March 2001 the defendants met as a board of directors of the second‑named plaintiff and resolved to declare the interim dividend. It is pleaded that this resolution was made without due regard to certain matters which have earlier been pleaded.
Paragraph 33 ‑ 43 detail what might broadly be described as the alleged deteriorating financial position of the second‑named plaintiff. By par 44 it is pleaded that on or after 31 May 2001 the second‑named plaintiff paid out the interim dividend. By par 48 it is pleaded that as at the date of payment of the interim dividend either the second‑named plaintiff was insolvent, or became insolvent by paying the interim dividend and each of the defendants was aware of that fact, or that a reasonable person in the position of the defendants would have known that the company was insolvent or would become insolvent upon payment of the dividend. By par 54 it is alleged that the second defendant breached duties owed by him to the second‑named plaintiff.
Standing back from the pleading then, it is clear what is alleged against the second defendant. Essentially, the plaintiffs say that the directors of the second‑named plaintiff authorised payment of an interim dividend when the company had insufficient funds to allow it to pay that dividend. As a consequence the plaintiffs say that the company suffered loss that was directly related to breach of their duties by the directors. It is further alleged that any cause of action which arose consequent upon this alleged breach of duty has now passed to the plaintiffs pursuant to a deed of company arrangement. That means that the issues raised by the plaintiffs claim are as follows:
1.Was the second‑named plaintiff insolvent at the time that the interim dividend was paid or did it become insolvent consequent upon payment of the dividend.
2.Did the defendants, including the second defendant, know or should they have known that the interim dividend was to be paid by an insolvent company or a company which would become insolvent upon payment of the dividend.
3.If the answer to question 2 is yes, was the decision to pay the interim dividend a breach of the duties owed by the second defendant to the company.
4.If question 3 is asked and answered in the affirmative, is it open to the present plaintiffs to bring this action relying as they do on s 1317H of the Corporations Act 2001 (Cth).
It is worthy of note that this application is brought only by the second defendant. Each of the other defendants were aware of the application and chose to take no part. It would seem to follow that, leaving to one side a question of principle which was raised by the second defendant, insofar as the complaints relate to a confusing pleading, the remaining defendants have no difficulty with the statement of claim. That is not to say it is not open to the second defendant to complain about the pleading. They have a perfect right to do so under the Rules of the Supreme Court 1971 (WA). But as a starting point, it is fair to say that six defendants can understand what is alleged against them, apparently without difficulty. That suggests this application should be treated with some caution.
The first ground of complaint might be summarised by saying that the second defendant says that his alleged breaches of duty are not pleaded with sufficient clarity. In par 6 of the minute the duties of all the directors are pleaded. There is then pleaded a common set of facts and an allegation that the second defendant breached the pleaded duties. The second defendant says that the minute fails to plead the material facts for each duty separately. It is said that facts relating to separate causes of action should be separately and distinctly pleaded to avoid embarrassment.
I am not satisfied that there is any substance in this complaint. In my view it is perfectly reasonable for the plaintiffs to plead against all of the defendants a set of directors' duties. In fact, although the plea sets out these duties in some detail, it would perhaps be forgivable in a case such as this if there was a bald plea that the directors owed duty, statutory and fiduciary and at common law, to the company. That is quite clearly so and could not be denied. What is put against the defendants is that they paid an interim dividend in circumstances were it ought not to have been paid. If the interim dividend was paid when the directors knew or ought to have known that the second‑named plaintiff was insolvent or would become insolvent on payment of the interim dividend would not be difficult to find that there was a breach of the directors' duties. The second defendant can have no complaint about the way the allegations against him are pleaded.
The second complaint by the second defendant is that the minute fails to plead material facts to establish the elements of a claim for breach of each of the duties with sufficient particularity. It is said that the elements of breach, loss and causation are not pleaded. Further it is said that the minute fails to plead which facts of those pleaded establish the second defendants alleged wrongs. The particular loss or damage to the second‑named plaintiff that resulted from those alleged wrongs and that but for those wrongs loss and damage would not have been caused to the company.
In my view there is no substance to this complaint. I have set out above the issues in this case and the allegations put against all the defendants including the second defendants. The pleaded case is straightforward. That is not to say that proving the material facts will be straightforward. That may require significant accounting evidence - both evidence as to the position of the second‑named plaintiff from time to time prior to and after the payment of the interim dividend and expert evidence as well. But insofar as the material facts and provided particulars are concerned the second defendant, in my view, has ample material to understand the case put against him.
The third point is a matter of real substance. As par 1(e) of the minute makes plain, the plaintiffs are seeking a compensation order under s 1317H of the Corporations Act. That section is in the following terms:
(1)A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:
(a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(b)the damage resulted from the contravention.
The order must specify the amount of the compensation.
(2)In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.
(3)In determining the damage suffered by the scheme for the purposes of making a compensation order, include any diminution in the value of the property of the scheme.
…
(5)A compensation order may be enforced as if it were a judgment of the Court.
Section 1317J then deals with who may apply for a declaration order. It is in the following terms:
(1)ASIC may apply for a declaration of contravention, a pecuniary penalty order or a compensation order.
(2)The corporation, or the responsible entity for the registered scheme, may apply for a compensation order.
(3)The corporation, or the responsible entity for the registered scheme, may intervene in an application for a declaration of contravention or a pecuniary penalty order in relation to the corporation or scheme. The corporation or responsible entity is entitled to be heard on all matters other than whether the declaration or order should be made.
…
(4)No person may apply for a declaration of contravention, a pecuniary penalty order or a compensation order unless permitted by this section.
(5)Subsection (4) does not exclude the operation of the Director of Public Prosecutions Act 1983.
On behalf of the second defendant it is said that the present plaintiffs in these proceedings are not authorised by s 1317J to make an application for a compensation order under s 1317H. Essentially, the argument runs that the right provided by s 1317J is a right held by the corporation which is not capable of assignment. It matters not whether there is in place a deed of company arrangement which as part of the restructure of a corporation purports to transfer the right to seek a compensation order to a third party, even one in the position of the first‑named plaintiff. On that basis then the plaintiffs' claim must fail.
It can be seen immediately that if the second defendant's argument on this point is successful, it provides a knock‑out blow to the plaintiffs' claim. While this is a pleading summons it could well be a summary judgment application. The question then is whether or not I ought deal with this issue at this stage of the proceedings. It was the plaintiff's submission that it was inappropriate in the context of a pleading summons to make a file determination on such an important question.
In making that submission the plaintiffs relied upon the decision of Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43. In that decision, which was an application for leave to appeal by the defendants against a decision of a master dismissing an application to strike out parts of a statement of claim, Buss JA said:
Finally, I note that, contrary to the appellants' submission, it is not appropriate for this Court, in the context of a strike‑out application, to purport to make a final determination upon the merits of the respondent's claim. It may be, however, that if all of the material facts are able to be agreed between the parties, the issues which the appellants have sought to agitate before the learned Master and this Court could properly be finally determined as a preliminary issue in the proceedings [28].
In a number of decisions over the past few years, the Court of Appeal has made it plain that where there are complex or serious points of law raised on a strike out application or on a summary judgment application a judge or master in chambers should not decide them but ought to give the parties the opportunity to argue the matter at trial. In Brogue TableauPty Ltd v Binningup Nominees Pty Ltd [2007] WASCA 179; (2007) 35 WAR 27 [31], Pullin JA made just that point. At the very least, it would appear that there is a discretion as to whether or not deal with a question which may possibly terminate proceedings at an interlocutory stage.
On balance I have determined that I should not strike out the pleading but should allow the matter to proceed to trial where the issue can be determined by the trial judge. I have reached that decision for two reasons. First, this is a point of principle which is of some importance. There appears to be no authority directly on the point. A final determination on the issue will be of some importance to insolvency practitioners. Secondly, not all of the defendants are before the court. It was only the second defendant who took this point. Were the issue to be determined one way or the other and were an appeal to be lodged - something that is inevitable - the other defendants would be drawn into the proceedings. They clearly take the view that any issue with respect to s 1317J can best be determined in the context of a trial. They should be permitted to put their arguments at that time.
The second defendant's fourth complaint is the par 6(d) pleads a prescriptive fiduciary duty, something that is at odds with equitable principles. In fact, par 6(d) in an amended form and as it appears in the minute is in the following terms:
a general law, equitable or fiduciary duty to exercise the powers and discharge the duties conferred upon him in good faith and for the benefit of [the second‑named plaintiff] as a whole.
It is undoubtedly the case that there is no scope to argue that equitable duties are prescriptive. But this plea is not so mischievous as to require any part of it to be struck out. The second defendant and the plaintiffs are all well aware of the nature of fiduciary duties and a plea in the form of par 6(d) is not likely to confuse anyone.
The final complaint is as to par C of the prayer for relief. This paragraph is simply a claim for damages for breach of duty. The second defendant's complaint is that is it is not tied specifically to particular breaches of duty and it is unquantified.
In my view there must be limited circumstances in which it is appropriate to strike out a prayer for relief. In any event, in this case the second defendant knows the arguments put against him and there is no warrant for striking out the paragraph of the prayer for relief.
In all the circumstances then I propose to allow the minute to stand as the plaintiffs' statement of claim. I will hear the parties as to the precise form of orders and as to costs.