MFX Research Pty Limited v Southern Equity Holdings Limited

[1999] NSWSC 987

CITATION:	MFX Research Pty Limited v Southern Equity Holdings Limited & Anor [1999] NSWSC 987
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	2919/99
HEARING DATE(S):	22 September 1999
JUDGMENT DATE:	28 September 1999
PARTIES :	MFX Research Pty Limited (P) Southern Equity Holdings (D) Southern Equity Holdings (Cr-cl 1) MFX Research Pty Limited (Cr-D 1) Ian Douglas Ferrier (Cr-D 2) Michael William Carr (Cr-D 3) Scott Maurice Freidman (Cr-D 4)
JUDGMENT OF:	Acting Master Berecry

COUNSEL :	Mr. S. T. White (P) Mr. J. C. Kelly S.C. (D)
SOLICITORS:	Freidman Reeves (P) Piper Alderman (D)
CATCHWORDS:	Summons; Dismissal; Tests to be applied; Strike out; Fiduciary relationship - directors; Material facts.
ACTS CITED:	Trade Practices Act 1974
CASES CITED:	Uniting Church in Australia Property Trust (New South Wales) v Momsen [1978] 1 NSWLR 575 Peter Kemp Development v Australia and New Zealand Banking Group Limited (Unreported, 16 May 1980, Hunt J) General Steel Industries Inc v Commissioner for Railways of New South Wales (1964-1965) 112 CLR 125 Wentworth v Rogers (No. 5) [1986] 6 NSWLR 534 Hospital Products Limited v United States Surgical Corporation (1985) 156 CLR 441 Breen v Williams (1996) 186 CLR 71 Xiang Du Pty Limited & Ors v Adelaide Investment Corp (Australia) Pty Limited (Federal Court, Adelaide, 31 May 1999) Commercial Bank of Australia v Amadio (1983) 151 CLR 447 Multigroup Distribution Services Pty Limited & Ors v TNT Australia Pty Limited [1996] ATPR 41-522
DECISION:	See paragraph 34

SUPREME COURT OF
NEW SOUTH WALES
EQUITY DIVISION

ACTING MASTER BERECRY

Tuesday, 28 September 1999

2919/99 MFX RESEARCH PTY LIMITED -v- SOUTHERN EQUITY HOLDINGS LIMITED & ANOR

JUDGMENT

1    ACTING MASTER: The second and third cross-claimants have filed a notice of motion seeking the following orders:

1. At paragraphs 30, 59 to 62, 67 and 69 to 72 of the amended cross-claim be struck out as against the second and/or third cross-defendants pursuant to Part 15 rule 26 of the Supreme Court Rules.
2. Alternatively, an order that the amended cross-claim be stayed or dismissed as against the second and/or third cross-defendants.

2    The fourth cross-defendant has also filed a notice of motion seeking the following orders:

1. An order that the fourth cross-defendant cease to be a party to the proceedings pursuant to Part 8 rule 9 of the Supreme Court Rules.

2. Alternatively, an order that the cross-claim as against the fourth cross-defendant be struck out pursuant to Part 15 rule 26 of the Supreme Court Rules.

3. Alternatively, an order that the cross-claim as against the fourth cross-defendant be dismissed pursuant to Part 13 rule 5 of the Supreme Court Rules.

3    In each notice of motion the applicants seek their costs of the application. 4    The cross-claimant carried on business as an investment company. The first cross-defendant carried on business relating to commercial software development and licensing. The second cross-defendant (Ferrier) has, since 29 May 1998, been chairman of directors of the first cross-defendant and was appointed as a director of the cross-claimant on 12 February 1999. Subsequently on 13 April 1999 he ceased to be the director of the cross-claimant. The third cross-defendant (Carr) was appointed as a director of the first cross-defendant on 22 September 1997 and has acted as its managing director. The fourth cross-defendant (Freeman) was appointed as a director of the first cross-defendant on 29 May 1998. On 12 February 1999 he was appointed as a director of the cross-claimant and held that position until 13 April 1999. 5    It is alleged in the amended cross-claim that on or about 12 January1999 Ferrier, on behalf of the first cross-defendant, made certain representations to the directors of the cross-claimant concerning a software package called “The MFX 2000 Software”. It is alleged in the amended cross-claim that the representations were made at various times during the relationship namely (using the titles in the cross-claim):

Initial Approach
1. By Ferrier on behalf of the first cross-defendant;
2. By Carr on behalf of the first cross-defendant.
The Co-operation Agreement
By Ferrier on behalf of the first cross-defendant (co-operation and support)
Retainer of Hatton and initial advice
By Carr on behalf of the first cross-defendant.

6 Subsequently, as a result of the representations made on behalf of the first cross-defendant the cross-claimant entered into heads of agreement and, as a result of the due diligence reports, entered into an agreement with the first cross-claimant entitled “Subscription and Funding Agreement”. This agreement, in essence, appears to provide for certain funding to be provided by the cross-claimant to the first cross-defendant and for the cross-claimant to receive shares in the first cross-defendant. The cross-claimant advanced moneys to the first cross-defendant. 7 In the first half of March the due diligence exercise was commenced. During this period Carr, on behalf of the first cross-defendant, appointed Leigh Coleman as a consultant of the first cross-defendant for the purpose of sales of MFX 2000. Coleman advised Carr that there was the potential for substantial sales in China. Whilst Ferrier and Freeman responded to questionnaires from the cross-claimant, Carr declined to respond. During the second half of March, problems started to arise in relation to MFX 2000. It is alleged that there was a withdrawal of co-operation by the first cross-defendant. 8 It is alleged that on 11 April 1999 Coleman, as agent for the first cross-defendant, executed a contract with Taiyuan of China in relation to MFX 2000. On 13 April 1999 Ferrier and Freeman were advised that the cross-claimant would not advance $1 million and were not prepared to negotiate the $2 million already invested. The cross-claimant was not aware of the Taiyuan contract. On 13 April 1999 the first defendant issued a notice of default pursuant to the subscription and funding agreement. 9 Part 8 rule 9 of the Supreme Court Rules provides as follows:

9. Where a party

(a) has been improperly or unnecessarily joined; or

(b) ceased to be a proper or necessary party,
the Court, on application of any party or of its own motion, may order that he cease to be a party and make order for the further conduct of proceedings.

10    A party may be removed from proceedings where there is evidence that the party should not have been joined in the proceedings. If the question of joinder is related to substantive issues of law that are fairly arguable then the proceedings should not be dismissed or stayed on the ground of misjoinder or non-joinder of parties: Uniting Church in Australia Property Trust (New South Wales) v Momsen [1978] 1 NSWLR 575, at 585. 11 Part 13 rule 5 provides as follows:

(1) Where in any proceedings it appears to the Court that in relations to the proceedings generally or in relation to any claim for relief in the proceedings
(a) no reasonable cause of action is disclosed;
(b) the proceedings are frivolous or vexatious; or
(c) the proceedings are an abuse of process of the Court,
the Court may order that the proceedings be stayed or dismissed generally or in relation to any claim for relief in the proceedings.
(2) The Court may receive evidence on the hearing of an application on the hearing of an application for an order under subrule (1).

12    This rule gives a discretionary power where a plaintiff’s case is so weak that to commit the proceedings to go trial would be futile: Peter Kemp Development v Australia and New Zealand Banking Group Limited (Unreported, 16 May 1980, Hunt J). 13    In General Steel Industries Inc v Commissioner for Railways of New South Wales (1964-1965) 112 CLR 125, at 129 Barwick CJ, stated as follows:

“It is sufficient for me to say that these cases uniformly adhere to the view that a plaintiff ought not be denied access to the customary tribunal which deals with actions of the kind he brings unless his lack of cause of action - if that be the ground if the court is invited, as in this case, to exercise its powers of summary dismissal - is clearly demonstrated. The test to be applied has variously expressed; “so obviously untenable that it cannot possibly succeed”, “manifestly groundless”, “so manifestly faulty that it does not admit an argument”, “discloses a case which the Court is satisfied cannot succeed”; under no possibility can it be a good cause of action”; “be manifest that to allow them” (the pleadings) “to stand would involve useless expense”.”

14 Part 15 rule 26 of the Supreme Court Rules provides as follows

(1) Where a pleading
(a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading;
(b) has a tendency to cause prejudice, embarrassment or delay in the proceedings, or
(c) is otherwise an abuse of the process of the Court,
the Court may, at any stage of the proceedings, on terms, order that the whole or any part of the pleadings be struck out.
(2) The Court may receive evidence on the hearing of an application for an order under subrule (1).

15    Ordinarily the power to strike out pleadings as disclosing no reasonable cause of action should only be exercised in plain and obvious cases: General Steels (supra). If the defect in the pleading can be cured by amendment, then leave to amend ought to be given: Wentworth v Rogers (No. 5) [1986] 6 NSWLR 534 at 536. 16 Paragraphs 1 to 29 of the amended cross-claim deal with the relationship of the cross-claimant and the cross-defendant up to 12 February 1999. It is alleged in paragraphs 9, 11 and 14 that certain representations were made on behalf of the first cross-defendant. Those representations, it is alleged, were made by Ferrier (paragraphs 9 and 14) and Carr (paragraph 11). Nowhere in the pleadings is there an allegation that Friedman made representations either on his own behalf or on behalf of the first cross-defendant. By reason of those matters pleaded in paragraphs 1 to 29, paragraph 30 alleges that Friedman owed fiduciary obligations to the cross-claimant. Similarly, with Carr and Ferrier it is said that they both owed the cross-claimant a fiduciary obligation. The obligation was characterised in paragraph 30 of the amended statement of claim. 17 A fiduciary obligation will arise where a person is placed in a position where he must first and foremost have bound himself in some way to protect or advance the interests of another. It is submitted on behalf of the cross-defendants that no such relationship existed between the cross-claimant and the second an third cross-defendants. That, at best, if there was any fiduciary relationship it was between the cross-claimant and the first cross-defendant. The amended cross-claim, as pleaded, alleges that Carr and Ferrier on behalf of the first cross-claimant made representations; not that they made representations in their own right. 18 The cross-claimant relies on a number of authorities to support the submission that a fiduciary duty was owed by the second to fourth cross-defendants to the cross-claimant. Whilst the readily identifiable relationships which have been established as being fiduciary in nature, in Hospital Products Limited v United States Surgical Corporation (1985) 156 CLR 441, at 468 per the Chief Justice and Mason J at 496 - 497 explained that the category of fiduciary relationships is not closed. In Breen v Williams (1996) 186 CLR 71, Gaudron and McHugh JJ said,

“Australian courts have consciously refrained from attempting to provide a general test for determining one person’s or classes persons’ standard of fiduciary relationship with another. This is because…a term “fiduciary relationship” defies definition.”

19    The cross-claimant relies on an unreported decision of O’Loughlin J in Xang Du Pty Limited & Ors v Adelaide Investment Corp (Australia) Pty Limited & Ors (Federal Court, Adelaide, 31 May 1999) where those principles were applied so as to find a fiduciary relationship arose between each of the applicants as intending investors of a development project on the one hand and each of the respondents being the company and each of its directors on the other. 20    However, as the pleadings in paragraphs 1 to 29 stand at the moment it is difficult to establish that a fiduciary relationship had been created between the cross-claimant and Friedman. It is not pleaded that Friedman made any representations, was a party to any of the representations that were made or had any knowledge of the representations that were made. 21    In relation to Ferrier and Carr whilst it is pleaded that certain representations were made by them, it is pleaded that the representations were made on behalf of the first cross-claimant. In any event at this stage in the relationship it could be regarded as being no more than the preliminary stage of that relationship. What was happening at this point in time were preliminary negotiations about the software and the cross-claimant’s possible involvement in the first cross-defendant. 22    However, having regard to General Steels and Xiang Du Pty Ltd I am of the opinion that the cross-defendants have not been able to reach the benchmark in that decision which would enable me to summarily dismiss that part of the amended cross-claim. 23    Whilst as against Friedman it would appear as the matter is pleaded, at the moment there is no basis for making the allegation that there was a fiduciary relationship with the cross-claimant, that does not seem to be the same position as with Ferrier and Carr. However, having regard to the open nature of fiduciary relationships it seems to me that it is not appropriate to summarily dismiss that part of the statement of claim pleaded in paragraphs 1 to 29. The cross-claimant should be given the opportunity to amend those parts of the amended cross-claim which do not, at this stage, disclose a reasonable cause of action. 24    Therefore, as against Ferrier, Carr and Friedman, I strike out paragraph 29 and paragraph 30 of the amended statement of claim. Leave is granted, however, to the cross-claimant to amend those two paragraphs together with paragraphs 7c, 9 and 11. 25    In relation to paragraphs 59 to 62 (misleading and deceptive conduct allegations) the cross-claimant is prepared to make amendments to paragraphs 59 and 61. The proposed amendments are set out in paragraphs 4 and 5 of supplementary submissions of the cross-claim. The pleadings should also be amended to assert that both Friedman and Ferrier knew what Carr was doing and were aware of the Taiyuan contract. 26    A concession was made in relation to paragraph 61 by the cross-claimant that there should be an amendment to that paragraph to make a clear distinction between the claim as against the first cross-defendant under section 52 of the Trade Practices Act and the claim against the second to fourth cross-defendants under section 42 of the Fair Trading Act. It was also conceded that the reference to section 51AB of the Trade Practices Act such reference should be deleted and any paragraph be amended. 27    In my view having regard to the fact that both Ferrier and Friedman were directors of the cross-claimant at this stage and that Carr on the existing pleadings has refused to complete the due diligence questionnaire and had entered into discussions with Coleman on the Taiyuan contract. It can be asserted that each of those cross-defendants must or ought to have known of the existence of the disabling circumstance that is, the withdrawal of co-operation, non-disclosure of the true state of development and the existence of the Taiyuan contract had and its effect on the affected party: Commercial Bank of Australia v Amadio (1983) 151 CLR 447 and 462. 28 The amendments should comply with Part 15 rule 7 and should be supplemented with particulars. 29 In relation to paragraph 67 of the amended cross-claim (the fiduciary duty) that paragraph relates to non-disclosure and the existence of the Taiyuan contract by all of the cross-defendants. This is a period of time after 12 February 1999 when both Ferrier and Friedman were directors of the cross-claimant. In adopting the approach in Xang Du Pty Limited (supra) I am of the view that it is arguable that having regard to the matrix of facts that there may have been a fiduciary relationship between the cross-claimant and Carr and of course there certainly was a fiduciary relationship between Ferrier and Friedman, both of whom were directors of the cross-claimant at this time. 30    However, the difficulty here is that in paragraph 67 the representations are the representations as defined in paragraph 11. It seems to me that paragraphs 67 needs to be repleaded certainly so far as Friedman is concerned and probably in relation to Ferrier. Once again in relation to both of those cross-defendants, there is no allegation that any of the representations were made in their capacity as directors or concerning their knowledge of either the development program or the Taiyuan contract. 31    Similarly in paragraph 70 the material facts should be pleaded and particulars supplied. 32    The cross-defendants rely in part on the decision of Multigroup Distribution Services Pty Limited & ors v TNT Australia Pty Limited [1996] ATPR 41-522. In that matter Burchett J set out what is required in a statement of claim. He said the primary function “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”. His Honour continued “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”. 33 In my view, applying his Honour’s comments to the amended cross-claim in these proceedings, it can be seen that there are some deficiencies which may not be able to assist the cross-defendants in formulating a defence. Therefore, the amended cross-claim should be subject to further amendments. I do not think that it is appropriate that the amended cross-claim be summarily dismissed as against Ferrier, Carr and Friedman. In that regard paragraphs 30, 59 to 62, 67 and 69 to 71, should be struck out and the cross-claimant should have the opportunity to replead them. 34 The orders that I make are as follows

1. In relation to the notice of motion by the fourth cross-claimant: paragraph 1 dismissed; paragraph 2 strike out the following paragraphs of the amended cross-claim: 29, 30, 59 to 62, 67, 70 and 71; paragraph 3 dismissed.

2. Liberty granted to the cross-claimant to file and serve a further amended cross-claim within 14 days from the date hereof.

3. Cross-claimant to pay the fourth cross-defendant’s costs of the motion.

4. In relation to the motion brought by the second and third cross-claimants make order in accordance with paragraph 1 in the notice of motion except in relation to paragraphs 59 to 62 so far as they apply to Carr.

5. The cross claimant have leave to file and serve a further amended cross-claim within 14 days from the date hereof.

6. The cross-claimant to pay the second and third cross-defendants’ costs of the motion.

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Last Modified: 09/28/1999