Ninatoca Pty Ltd & Anor v Kovari Professional Pty Ltd & Ors (No.2)
[2008] FMCA 947
•11 July 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NINATOCA PTY LTD & ANOR v KOVARI PROFESSIONAL PTY LTD & ORS (No.2) | [2008] FMCA 947 |
| TRADE PRACTICES – Whether conduct in trade or commence. TRADE PRACTICES – Whether conduct capable of being misleading or deceptive. TRADE PRACTICES – Unconscionable conduct – whether minority shareholding is a special disadvantage. PRACTICE & PROCEDURE – Application for summary disposal pursuant to s.17A Federal Magistrates Court Act 1999 – principles to be applied. PRACTICE & PROCEDURE – Costs – circumstances where order for indemnity costs appropriate. |
| Federal Magistrates Court Act 1999, s.17A Federal Court of Australia Act 1976, s.31A Trade Practices Act 1974, ss.51AA, 52, 75B, 82, 87 Federal Magistrates Court Rules2001, Rule 13.10 |
| White Industries Aust Ltd v Commissioner of Taxation [2007] FCA 511 Dey v Victorian Railways Commissioners (1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Vivid Entertainment LLC & Ors v Digital Sinema Australia Pty Ltd & Ors [2007] FMCA 157 Vans, Inc v offprice.com.au Pty Ltd [2006] FCA 137 Boston Commercial Services Pty Ltd v GE Capital Finance Australasia [2006] FCA 1352 Jewiss v Deputy Commissioner of Taxation [2006] FCA 1688 Commonwealth Bank of Australia v CAN 000 247 601 Pty Ltd (in liq) (formerly Stanley Thompson Valuers Pty Ltd) [2006] FCA 1416 Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 Hicks v Ruddock [2007] FCA 299 Jefferson Ford Pty Ltd v Ford Motor Co of Australia Ltd [2008] FCAFC 60 Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389 Hearn & Anor v O’Rourke & Anor [2002] FCA 1179 Orison Pty Ltd v Startegic Minerals Corporation NL & Ors (1987) 77 ALR 141 Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors (1987) 71 ALR 615 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 Blomley v Ryan (1956) 99 CLR 362 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 457 Duncan v Lipscombe Child Care Services Inc [2006] FCA 458 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367 Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 |
| Applicant: | NINATOCA PROPRIETORY LIMITED ATF THE FAGENCE INVESTMENT TRUST & ANOR |
| Respondent: | KOVARI PROFESSIONAL PROPRIETORY LIMITED ATF THE KOVARI PROFESSIONAL TRUST & ORS |
| File Number: | BRG 374 of 2008 |
| Judgment of: | Wilson FM |
| Hearing date: | 27 June 2008 |
| Date of Last Submission: | 27 June 2008 |
| Delivered at: | Brisbane |
| Delivered on: | 11 July 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Clark |
| Solicitors for the Applicant: | Provest Law |
| Counsel for the Respondent: | Mr A Morris Q.C. |
| Solicitors for the Respondent: | Small Myers Hughes Lawyers |
ORDERS
Pursuant to s.17A(2) Federal Magistrates Court Act 1999 judgment is entered for the respondents against the applicant on the application filed 10 June 2008.
The applicants pay the respondents’ costs of and incidental to the proceedings, including the claim for injunctive relief, to be taxed:
(a)On the party and party basis up to and including 20 June 2008;
(b)Thereafter on the indemnity basis.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 374 of 2008
| NINATOCA PROPRIETORY LIMITED ATF THE FAGENCE INVESTMENT TRUST & ANOR |
Applicant
And
| KOVARI PROFESSIONAL PROPRIETORY LIMITED ATF THE KOVARI PROFESSIONAL TRUST & ORS |
Respondent
REASONS FOR JUDGMENT
The respondents apply to summarily terminate the principal application, pursuant to s.17A(2) Federal Magistrates Court Act 1999 (“the FMC Act”) and Rule 13.10 Federal Magistrates Court Rules2001, which (together with s.17A(3) and (4)) respectively provide:
“ (2) The Federal Magistrates Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:
(a) the first party is defending the proceeding or that part of the proceeding; and
(b) the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.
(3) For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:
(a) hopeless; or
(b) bound to fail;
for it to have no reasonable prospect of success.
(4) This section does not limit any powers that the Federal Magistrates Court has apart from this section.
Rule 13.10 Disposal by summary dismissal
The Court may order that a proceeding be stayed, or dismissed generally or in relation to any claim for relief in the proceeding, if it appears to the Court that:
(a) no reasonable cause of action is disclosed in relation to the proceeding or claim for relief; or
(b) the proceeding or claim for relief is frivolous or vexatious; or
(c) the proceeding or claim for relief is an abuse of the process of the Court.”
Before turning to the facts of this particular case, the nature of the application and the test to be applied by the court in determining it need to be understood. There has, in recent time, been much debate as to the extent to which the court should examine the merits of a case in determining whether to summarily dismiss it. Although s.17A of the FMC Act (and the cognate s.31A Federal Court of Australia Act 1976) were introduced to allow the courts more flexibility in dealing with what were perceived to be unmeritorious migration appeals (for the history of which see White Industries Aust Ltd v Commissioner of Taxation [2007] FCA 511 at [55] ff) the legislation now embraces a test that allows a court considerably more scope in all proceedings than the ‘traditional test’ in cases such as Dey v Victorian Railways Commissioners (1949) 78 CLR 62 and General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. That is, in my view, made abundantly clear by the language of s.17A(3) of the FMC Act.
A comprehensive review of the relevant authorities was undertaken by Driver FM in Vivid Entertainment LLC & Ors v Digital Sinema Australia Pty Ltd & Ors [2007] FMCA 157. After reviewing relevant authorities including Vans, Inc v offprice.com.au Pty Ltd [2006] FCA 137; Boston Commercial Services Pty Ltd v GE Capital Finance Australasia [2006] FCA 1352; Jewiss v Deputy Commissioner of Taxation [2006] FCA 1688; Commonwealth Bank of Australia v CAN 000 247 601 Pty Ltd (in liq) (formerly Stanley Thompson Valuers Pty Ltd) [2006] FCA 1416; Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 and Hicks v Ruddock [2007] FCA 299 Driver FM at [30] preferred the approach of Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia.
The Full Federal Court had the opportunity to restate the applicable test with clarity in Jefferson Ford Pty Ltd v Ford Motor Co of Australia Ltd [2008] FCAFC 60, but was unable to do so. At [20] – [23] Finkelstein J said:
“[20] Nonetheless, it is by no means easy to work out what Parliament had in mind by providing for summary judgment where a claim or defence has no “reasonable prospect” of success. For one thing, it is difficult to see how one can assess prospects of success without some attempt at predicting the outcome of the dispute. If the dispute is about factual issues, the task of prediction is fraught with all kinds of difficulties. First of all, in may cases the court will not have before it all the material evidence. Second, if credit is involved it may be impossible to predict how that issue will be resolved. Many of the problems involved in predicting the outcome of an action were referred to by the High Court in Agar v Hyde (2000) 201 CLR 552 at 576. Even if the dispute only concerns a question of law, that issue may be difficult to resolve, or to predict its resolution in the absence of detailed argument such as only occurs at a trial.
[21] In Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146 Rares J attempted to describe the requisite standard under s 31 A. After reviewing many cases, most from different and not necessarily analogous areas, he came down to the view (expressed at 157) that if there was “a real issue of fact to be decided” or “possibly, where there is a real issue of law” to be resolved the matter should go to trial. This, with respect, does not seem to be very far removed from the old O 14 test. So the standard must be found elsewhere.
[22] Perhaps one should look further at what Parliament intended to achieve. In O 14 cases, to show cause against an application for summary judgment, a defendant is required to go into some detail and state clearly and concisely the facts to be relied upon: Country Estates Pty Ltd v Leighton Contractors Pty Ltd (1975) 49 ALJR 173 at 173-174. This requires only the material facts to be stated as distinct from the evidence that would establish those facts: Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304. If the test under s 31 A raises the hurdle for the opposing party, it may be necessary for that party at a minimum to provide an outline of the evidence that will be relied upon. The outline must be sufficient to show that there is a genuine dispute about facts that are material to the outcome of the case. That will enable the judge to make some assessment of the merits. It would not, of course, be necessary, in most cases, to require the party to do more than provide an outline, because that would turn the summary judgment application into a trial.
[23] In other words, the section requires the judge to conduct what might loosely be described as a preliminary trail and look more closely than he would under an O 14 application to a party’s assertion that there is a real question of law or fact to be decided. Such an assertion is to be examined with a critical eye. The judge is to decide whether the opposing party has evidence of sufficient quality and weight to be able to succeed at trial. There will be others where the opposing party has not been able to show that the asserted facts are likely to be established at a trial. On questions of law, the judge should conduct an inquiry into their merit, not for the purpose of resolving them (though this can be done – see Rosser v Austral Wine and Spirit Co Pty Ltd [1980] VR 313 at 320) and also not simply to determine whether the argument is hopeless, but in order to decide whether it is sufficiently strong to warrant a trial. If the judge is satisfied that he (or she) is able to resolve any contested legal issue at a summary hearing and without undue delay, it may be better all around if that be done. If not, then at least the merits must be tested. That will then give s 31 A a substantial operation, which is what, it seems to me, was intended.”
At [45] Rares J said:
“[45] The character of a judgment under s 31 A is identified by the test which the section prescribes. The judgment is a determination that the proceeding or part of the proceeding “… has no reasonable prospect of success”. Thus, when the Court gives judgment for a party under s 31A(1) or (2) it is exercising a jurisdiction similar to the implied or inherent power of the Court to protect its own processes from proceedings which are an abuse of those processes. By enacting s 31A, the Parliament broadened the categories of case in which the power summarily to determine proceedings could be exercised. It is inherent in the power conferred by s 31A that the Court need not, and does not ordinarily determine the proceedings on their merits after a full trial. A decision under s 31A is that the claim or defence has “no reasonable prospect of success”. It is not that the claim or defence has been proved so that the right to cause of action or defence merges into judgment and loses its independent existence: Blair v Curran (1939) 62 CLR 464 at 531-532 per Dixon J. Rather, the power conferred by the section authorises the Court to make a decision summarily that there is no reasonable prospect that if a trial were to take place the claim or defence would succeed. The section requires a prediction of the outcome of a trial on the merits but is not an actual adjudication of those merits.”
At [73] – [74] his Honour said:
“[73] The parties accepted both before the primary judge and before us that the test to be applied under s 31A of the Federal Court of Australia Act was that which I stated in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 236 ALR 720 esp at 731 [45]. Because neither party challenged that test, it is neither necessary nor appropriate to examine it in this appeal for the reasons given in Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vic) (2001) 207 CLR 72 at 82-83 [23] per Gaudron, Gummow, Hayne and Callinan JJ; In the Matter of an Application by the Chief Commissioner of Police (Vic) (2005) 79 ALJR 881 at 886 [29] per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ. If the Court were to consider departing from that formulation of the test, the parties are entitled to be heard on the question. The Court’s function is to decide the litigation on the issues fought by the parties. It is not entitled, without either party raising an issue, let alone addressing it, to embark after reserving judgment on a determination of an important question of statutory construction which is not an issue in the litigation.
[74] Accordingly, if Jefferson Ford is able to establish that there was a real issue of fact or a real issue of law capable of being decided in its favour then, subject to the Court’s discretion to determine the question of law, the matter ought to be allowed to go to trial in the ordinary way.”
At [124] – [132] Gordon J said:
“[124] First, the express words of s 31A impose a different and less stringent test to that described in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129-30. As was explained in the second reading speech of the Migration Litigation Reform Bill 2005 which introduced s 31A of the Federal Court Act, the legislative purpose of s 31A was to strengthen “… the power of the court to deal with unmeritorious matters by broadening the grounds on which federal courts can summarily dispose of unsustainable cases”: Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146 at [45]; Paramasivam v University of New South Wales [2007] FCAFC 176 at [41] and PZ Cussons (International) Ltd v Rosa Dora Imports Pty Ltd [2007] FCA 1642 at [13].
[125] That such a provision should exist is not surprising. In modern litigation, cost and delay are two prominent features of the legal landscape: Gleeson CJ (1998) Commentary on Paper by Lord Browne-Wilkinson (Supreme Court of New South Wales Judges’ Conference) (viewed 26 November 2007) (stating that “civil litigation is far too expensive” and “there should be an increased emphasis on summary disposal of proceedings which are amenable to such treatment”). Section 31A is a provision which permits, and assists, the Court to manage proceedings and therefore assists in controlling the cost of, and delays in, resolving proceedings by summarily dismissing claims which have no reasonable prospect of success. At the same time, it is a provision that ensures that no injustice is done to a party. The mechanism adopted to achieve these objective is that before judgment is entered, the claim or part of the claim must have “no reasonable prospect of success.”
[126] Secondly, assessment of whether a proceeding or part of a proceeding has no reasonable prospects of success will necessarily require:
1. identification of the cause of action pleaded;
2.identification of the pleaded facts said to give rise to that cause of action;
3.a review of the evidence (if any) tendered in support of the claim for judgment;
4. identification of the defence pleaded;
5.identification of any facts pleaded which are said to give rise to the defence; and
6.a review of the evidence (if any) tendered in defence of the claim.
The method by which such a claim or part of a claim will be assessed will vary depending on the nature of the cause of action, the identity of the parties, the pleaded facts and the evidence, if any, tendered.
[127] Thirdly, each case must be considered separately. No particular hard and fast rules can be set down, only general principles. One principle is that the moving party bears the onus of persuading the court that the opponent has no reasonable prospect of success (see Crayford Freight Services Ltd v Coral Seatel Navigation Co (1998) 82 FCR 328 at 333). As noted earlier, however, s 31A has lessened the standard that must be met. In that regard, it must be emphasised that once a moving party has established a prima facie case that the opponent has no reasonable prospect of success, the opposing party must respond by pointing to specific factual or evidentiary disputes that make a trial necessary; general or non-particularized denials will be insufficient to defeat the motion: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [22]. In other words, it is inappropriate in defence of a claim for judgment under s 31A of the Federal Court Act to seek to defend by merely putting a claimant to formal proof: Vans, Inc v Offprice.Com.Au Pty Ltd [2006] FCA 137 at [12]. This is not a new concept. It finds earlier reflection in ss 190(4) and 191of the Evidence Act 1995 (Cth) and O 33, O 34 and O 34B of the Federal Court Rules.
[128] Another, fourth principle, is that the trial court’s decision to grant summary judgment is to be made as a question of law and reviewed as such by the appellate court. Although ss 31A(1)-(2) state that the court “may” give summary judgment, the word “may” is used here in its empowering sense, not in a discretionary sense: Leach v R (2007) 230 CLR 1 at [38]; Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106 at 134-35 and Automotive, Food, Metals Engineering, Printing and Kindred Industries Union v Mechanical Engineering Services Pty Ltd [2007] FCA 1736 at [21] (collecting cases where the use of “may” in a statute was “to confer a power and not a discretion”).
…
[129] As in the cases cited, s 31A must be read as conferring a power while indicating the circumstances in which it is to be used, ie, when there is “no reasonable prospect of success”. To construe the statute otherwise would give judges discretion to allow even hopeless cases to proceed, which could not have been within the contemplation of a legislature that intended to make summary judgment easier to obtain. Therefore, to the extent that previous decisions of the Federal Court may be understood as suggesting that s 31A confers a general discretion (eg Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146 at [45]), such a construction of the statutory language is rejected.
[130] A fifth principle is that where there is a real issue of fact relevant to a pleaded cause of action, it is unlikely that that part of the proceeding has no prospect of success: see Boston Commercial Services at [44]. So, for example, if the pleadings, affidavits, and other materials considered in connection with the summary judgment motion, reveal a factual dispute and that factual dispute must be resolved to determine whether or not the claim succeeds, it cannot be said that the claim has “no reasonable prospect of success”: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [20] (stating that summary judgment should be made by reference to the pleadings, affidavits, and other evidence as appropriate under the circumstances) and Commonwealth Bank of Australia v ACN 000 247 601 Pty Ltd (in liq) [2006] FCA 1416 at [32]. On the other hand, if the factual contest is unnecessary to the resolution of the cause of action pleaded, then in the absence of other relevant material, there is nothing to prevent the court entering judgment on that claim.
[131] By contrast, the existence of a real issue of law does not necessarily preclude summary judgment. This is so because, assuming that there is no relevant factual dispute (or if the relevance of the factual dispute depends, as in the instant case, on the resolution of the legal dispute), the court can generally hear and decide a disputed point of law without the need for a trial or evidentiary hearing. In such cases, the proper course for the court would be to accept submissions and hear argument from the parties in connection with the notice of motion hearing. Even under the earlier, different and more stringent test, “argument, perhaps even of an extensive kind” was permitted “to demonstrate that the case of [a party] is so clearly untenable that it cannot possible succeed”: General Steel Industries at 130. Once the court resolves the issue or issues of law, it will then be clear whether the opposing party has reasonable prospects of success and summary judgment can be granted or refused accordingly.
[132] I now come to a final, sixth principle, which is that in determining whether a real issue of fact exists such as to preclude summary judgment, the court must draw all reasonable inferences – but only reasonable inferences - in favour of the non-moving party: Commonwealth Bank of Australia v ACN 000 247 601 Pty Ltd (in liq) [2006] FCA 1416 at [30]; Boston Commercial Services at [45]. I emphasize “reasonable” because it is on this point that the lowering of the bar effected by s 31A becomes clear. By distinguishing between “hopeless” cases and those without reasonable prospects for success, the statute makes clear that the court need not (indeed, must not) refuse summary judgment on the basis of a factual dispute said to arise only from a plausible, as opposed to a reasonable, inference.”
In Bond v Barry [2008] a differently constituted Full Court concluded that it was not necessary, for the purposes of that case, to decide which of the competing views expressed in Jefferson Ford Pty Ltd v Ford Motor Co of Australia Ltd is correct.
In my view, it is inappropriate on an application pursuant to s.17A of the FMC Act to embark upon a determination of any genuinely disputed questions of fact. A genuine dispute requires more than a bare denial of the opposing party’s facts. The court is permitted to resolve questions of law, where there is no dispute as to the facts, but may in the exercise of its discretion decline to do so if the resolution of the legal issue would be better informed by a trial of the facts. The court is permitted to resolve issues of fact in one party’s favour where the other party, despite having been given the opportunity to do so, has not offered any evidence to support its version of events. To do so invites a resolution on the undisputed evidence as it exists at the time of the application.
The present case does not require me to resolve the tensions reflected in the above authorities. Senior Counsel for the respondents has focussed his submissions on what are said to be fundamental deficiencies in the applicant’s case so that whichever test is applied, it is said that the proceedings should be dismissed.
I agree with Senior Counsel for the respondents that there are a number of deficiencies in both the Statement of Claim and Amended Statement of Claim that have been delivered but as the authorities make clear an application pursuant to s.17A of the FMC Act is more than an exercise in pleadings. Both counsel were content for me to determine the application on a broader footing than is presently pleaded. Counsel for the applicants conceded that if the case was allowed to go forward substantial revision of the amended Statement of Claim would be necessary.
There are a number of uncontroversial facts that should be briefly stated. The first respondent operates the professional practice of a firm of accountants at the Gold Coast. That practice is operated out of commercial premises owned as tenants in common in equal shares by the first applicant, and the second, fourth, sixth and eighth respondents.
The third, fifth, seventh, ninth, eleventh and thirteenth respondents are the current directors of the first respondent. The first and second applicants, and the second, third, fourth, fifth, sixth seventh, eighth, ninth and eleventh respondents are listed on an ASIC search as the shareholders of the first respondent, together with Salbenda Pty Ltd a company with the same address given by the thirteenth respondent. Both parties proceeded on the basis that the individual respondents were the accountants, or manager, working in the practice; and the corporate respondents were respectively associated with an individual respondent, and held that individual’s shares in the practice trust.
A shareholders’ agreement was executed and is dated 1 January 2007. Each of the parties to the litigation is a party to the agreement. It is recorded in the agreement that the second, fourth, sixth, eighth, tenth and twelfth respondents, together with the first applicant are the shareholders in the first applicant (Recital A). To the extent that there is inconsistency between this recital and the ASIC search, it is of no moment.
Some of the relevant terms of the agreement are:
a)Clause 2.3 which obliges each party to the agreement to:
(b) co-operate and use the party’s best endeavours to ensure that the Company, as trustee of the Trust, successfully conducts the Business;
(f) devote substantially all of its time to the Business;
(g) not Engage in an Enterprise except through its Shareholding in the Company or with the prior written consent of the other Shareholders; and
(h) be just and faithful in the party’s activities and dealings with the other parties.
b)Clause 2.4 which provides:
Unless specifically authorized by this Agreement, no party shall, without the unanimous approval of the Shareholders:
(b) give any security or promise for the payment of money on account of the Business (other than cheques drawn on the Company account in the ordinary and regular course of Business);
(c) enter into any bond or become bail or surety for any person or knowingly cause or suffer to be done anything whereby the property of the Company or Trust may be endangered;
c)Clause 12.3 which provides:
A Shareholder is in default under this Agreement if it, or its Director:
(a) transfers all or any of its Shares except in accordance with the Constitution and this Agreement;
(b) breaches any obligation under this Agreement which is not capable of remedy;
(c) continues to breach any obligation under this Agreement (other than an Irremediable Breach) for 7 days after receiving notice from another party of that breach;
(d) repeats a breach after having received written notice from another party warning that repetition of the breach will, or is likely to, result in the Shareholders regarding that party as being in default of its obligation under this Agreement;
(e) has an order made for the winding up or dissolution of the party;
(f) has a receiver and manager, administrator, trustee, provisional liquidator or similar officer appointed for all of the assets or undertaking of the party;
(g) enters into, or resolves to enter into, an arrangement, composition or compromise with, or assignment for the benefit of its creditors generally, or any class of creditors or proceedings are commenced to sanction such an arrangement, composition or compromise;
(h) stops payment of or is unable to pay its debts within the meaning of section 529 of the Corporation Law, or is subject to a warrant of execution for an amount in excess of $50,000 upon any property of that party which is not stayed or satisfied within 60 days;
(i) being a Shareholder, becomes a party to proceedings brought pursuant to the provisions of the Family Law Act 1975 or the Property Law Act 1974 (Qld) in respect of a matter that affects the rights of that Share Trust in relation to its Shares;
(j) becomes bankrupt or unable to pay its debts or suspends payment of its debts within the meaning of the Bankruptcy Act 1966; or
(k) being a Director, becomes physically or mentally unfit to attend to the Business, such that they have not, or will be unable to render their services to the Business for a continuous period of 4 calendar months (in the event of dispute the written evidence of an independent medical expert of not less than 10 years standing shall be binding).
d)Clauses 12.4 to 12.15 which provide:
12.4 If a party is in default of its obligations under this Agreement as described in the previous clause (‘Defaulting Party’) then the other parties may give:
(a) a notice in writing setting out the default (‘Default Notice’) to the Defaulting Party; and
(b) a copy of the Default Notice to the Auditor together with an instruction to determine within 30 days of the Auditor’s receipt of a copy of the Default Notice, at the cost of the Defaulting Party:
(i) the value of the Defaulting Party’s Respective Proportion of the Trust as at the end of the last preceding Financial Tear (‘Fair Value’); and
(ii) the damages sustained by the other parties (‘Non-Defaulting Parties’) resulting from the default by the Defaulting Party (‘Damages’).
12.5 In determining the Fair Value, the Auditor is:
(a) not to include any amount for goodwill of the Trust or the Business; and
(b) to act as an expert and not as an arbitrator.
12.6 On serving a Default Notice on the Defaulting Party, the Non-Defaulting Parties have, in addition and without prejudice to the Non-Defaulting Parties’ other rights at law or in equity, an option to acquire the Defaulting Party’s Shares using the procedure set out in clauses 12.7 to 12.12 (inclusive).
12.7 The determination of the Auditor under clause 12.4(b) are final and binding.
12.8 The Auditor is to serve a copy of the valuations on the Defaulting Party and the Non-Defaulting Parties.
12.9 The Non-Defaulting Parties may acquire the Defaulting Party’s Shares:
(a) within 30 days after receipt of the Auditor’s valuation; and
(b) by serving written notice of exercise of the option on the Defaulting Parties.
12.10 If the Non-Defaulting Parties determine to acquire the Defaulting Party’s Shares under clause 12.9 the Trust must distribute an amount equal to 90% of the Fair Value to the Defaulting Party within 4 months of the date of default, less the following amounts (without duplication);
(a) any payments incurred by the Non-Defaulting Parties on behalf of the Defaulting Party;
(b) damages as assessed by the Auditor; and
(c) the costs of the Auditor incurred in making the valuations referred to in this clause.
12.11 A meeting of the Non-Defaulting Parties must be held within 14 days after the receipt of the Auditor’s valuations to decide unanimously whether the Non-Defaulting parties will exercise the option to acquire the Defaulting Party’s Shares.
12.12 If the Non-Defaulting Parties exercise the option under this clause, then the Defaulting Party must immediately deliver to the Non-Defaulting Parties the Share certificates for the Defaulting Party’s Shares together with an executed transfer of those Shares in favour of each of the Non-Defaulting Parties in accordance with the Respective Proportions acquired by each of them.
12.13 The Payment made to the Defaulting Party under this clause shall be in full and final settlement of the Defaulting Party’s claim against the interest in the Company and Trust.
12.14 Upon ceasing to be a Shareholder for any reason whatsoever, the Shareholder and its Director must:
(a) forthwith vacate the Premises;
(b) not take with it any property of the Company or Trust and not destroy any books, files, papers or records belonging to the Company or Trust or relating to the Business but forthwith return any such property to the Company; and
(c) maintain the secrecy of any Confidential Information relating to the affairs of the Shareholders, the Company, Trust, Business and of customers of the Business.
12.15 The Outgoing Shareholder and its Director must render all assistance which may be necessary or required by the Company or Trust for the continuation of the Business and the Outgoing Shareholder and Director must sign all such documents which may be necessary or required by the Company or Trust in connection with the Outgoing Shareholder disposing of its Shares.
A dispute arose between the second applicant and others particularly the seventh and ninth respondents. It was contended by the latter that the second applicant was in breach of the shareholder’s agreement. The second applicant denies any such breach, and asserts that the respondents are using the default processes under the shareholders’ agreement as a ruse to secure the applicants’ business interests at a considerable undervalue. That dispute is of a factual nature, and it is not possible for me to express any concluded view as to the merits of any party’s position on the present application.
Whoever may be correct, it is common ground that a default notice was served on 25 January 2008. (exhibit SPF-13 to the first affidavit of the second applicant). The default notice was headed with the name of the first respondent. The text of the first substantive paragraph of the notice states:
“Kovari Professional Pty Ltd as Trustee for Kovari Professional Trust of Level 3, PKF Southport, 1 Lawson Street, Southport in the State of Queensland hereby gives Notice to Fagence and Ninatoca in accordance with clause 12.4 of the Shareholders Agreement dated (to be inserted) (‘the Agreement’) on the basis that Fagence and Ninatoca have breached obligations (set out below) of the Agreement which breaches are incapable of remedy . . .”
The notice is signed by the third, fifth, seventh, ninth, eleventh and thirteenth respondents who are, as I have said, the current directors of the first respondent.
The second applicant accepts that he did nothing to address the notice of default.
A Notice of Exercise of Option dated 19 May 2008 and a Notice of Final Payment on Default were served (being exhibits SPF-14 and SPF-15 respectively to the first affidavit of the second applicant). The Notice of Exercise of Option is purported to have been given on behalf of the “non-defaulting shareholders of the first respondent”. It specifies an incorrect date of service of the default notice but that could hardly have misled the first and second applicants.
By the notice dated 19 May 2008 entitled “Notice of Final Payment on Default” the first respondent stated to the applicants:
“In accordance with clause 12.4 of the Shareholder Agreements for the Companies dated on or about January 2007 (Shareholders Agreement) and following the service of the Notice of Exercise of Option dated 19 May 2007 by the Non-Defaulting Shareholders of the Companies, we confirm that an amount of $3,070.27 has been transferred to the account of [the first applicant] in full and final settlement the payment for your shares in the Companies and of your claims against and interest in the Companies, the Kovari Professional Trust and the Kovari Services Trust.”
Against the above factual background, the Statement of Claim, as originally drafted, seeks to plead causes of action based on the Trade Practices Act 1974 (“the TPA”). The salient features of the Statement of Claim are:
a)Reliance on the shareholders agreement (incorrectly dated 1 July 2007), and certain pleaded provisions thereof;
b)At paragraph 5, an assertion that a number of issues have arisen giving rise to a shareholder’s dispute;
c)At paragraph 6, a recitation that the first respondent alleges that the applicants are in default of the shareholders agreement;
d)At paragraph 7 a recitation of the service of the various documents to which I have referred;
e)At paragraph 9 an allegation that the first respondent is engaged in trade or commerce, within the meaning of the TPA;
f)At paragraph 11 the allegation that reliance on the disputed issues by the first respondent was misleading and deceptive, or likely to mislead or deceive, within the meaning of s.52 TPA. Particulars are then given that assert each of the grounds relied on are untrue;
g)At paragraph 12 it is alleged that the reason for the action taken by the service of the documents “is to secure the First Applicant’s shares in the First respondent and the beneficial interest in the Kovari Professional Trust at a gross undervalue”. This is referred to as the “contravening conduct”;
h)At paragraph 13 it is alleged that the third, fifth, seventh, ninth, eleventh and thirteenth respondents were knowingly concerned with the contravening conduct within the meaning of s.75B TPA;
i)At paragraph 14 it is pleaded in the alternative that the contravening conduct is unconscionable within the meaning of s.51AA TPA, and “particulars” are given which allege;
i)The applicants are at a special disadvantage in dealing with the respondents by reason of being a minority shareholder;
ii)By reason of being a minority shareholder there was no equality in the bargaining position of the parties;
iii)The respondents have taken unconscientious advantage of the second applicant’s marital problems;
j)At paragraph 15 it is alleged that by reason of the contravening or unconscionable conduct the applicants that the applicants have suffered or are likely to suffer loss and damage, being the loss of value of the shares.
An amended Statement of Claim has been filed and served. It makes only two changes to the existing pleading:
a)In paragraph 14.4 to allege that the reliance by the respondents on the default, the option and the final payment is the use of a legal right for an unreasonable, harsh or oppressive purpose;
b)In paragraph 4 of the relief sought to seek an order that the default, the option and the final payment be set aside pursuant to s.87 TPA for either deceptive or misleading conduct or unconscionable conduct.
Neither of these amendments addresses the attacks made on the applicants’ claim by the respondents.
The respondents submit that in determining whether the applicants have a sustainable cause of action, one must first identify the conduct of the respondents that is complained of, and identify which of the respondents engaged in that conduct, as a primary contravener, and by way of accessorial liability under s.75B TPA.
The respondents submit that the only conduct currently relied on as giving rise to the alleged contraventions of the TPA is that of the first respondent. That is a fair reading of the pleadings delivered to date. It is submitted that on no view of the case is it open to conclude that the relevant conduct was that of the first respondent.
The default notice was purportedly given by the first respondent, as its terms make clear. However, clause 12.4 of the shareholders’ agreement requires the “other parties” to give any default notice. Whilst the first respondent is a party to the shareholders’ agreement, the purpose of the service of a default notice is to enliven rights in the non-defaulting parties to acquire the defaulting party’s shares (see subclauses 12.6, 12.9, 12.11, 12.12 and 12.13 of the shareholder’s agreement). The first respondent could not be regarded as a non-defaulting party. It is the vehicle in which the respective shares are held by the other relevant respondents. The first respondent cannot issue a default notice and then acquire shares in itself. A share buy-back may well have implications under the Corporations Act 2001.
It may well be strict compliance with the terms of the shareholders’ agreement for the notice of default to be given by the first respondent, and for the subsequent notices to be given by the non-defaulting shareholders. There seems no reason in principle why the first respondent could not particularise the defaults alleged against the applicants.
However, there is merit in the submission of the respondents that the conduct that is really sought to be attacked is that of the respondents, other than the first respondent, in seeking to divest the applicants of their interests in the business and in the first respondent.
If that is the applicants’ real case, then appropriate amendments to the pleading may be able to frame a case that it was the conduct of the shareholders in the first respondent that contravened the TPA.
That allows me to segue to the next point raised by the respondents. It is that to be entitled to relief under the TPA for contraventions of either s.52 or 51AA the applicants must establish offending conduct occurred “in trade or commerce”. That is not a term of art. In Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134 at 167 Deane J said:
“The terms “trade” and “commerce” are not terms of art. They are expressions of fact and terms of common knowledge. While the particular instances that may fall within them will depend upon the varying phases of development of trade, commerce and commercial communication, the terms are clearly of the widest import . . . they are not restricted to dealings or communications which can properly be described as being at arm’s length in the sense that they are within open markets or between strangers or have a dominant object of profit making. They are apt to include commercial or business dealings in finance between a company and its members which are not within the main stream of ordinary commercial activities and which, while being commercial in character, are marked by a degree of altruism which is not compatible with a dominant objective of profit making.”
In Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at [7] the majority justices favoured a construction of s.52 TPA that restricted its operation to conduct which is in itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character; as opposed to conduct that is incidental to trade or commerce. At [8] the majority justices said:
“. . . it is plain that s. 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business . . . What the section is concerned with is conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character.”
Both counsel sought to draw analogies from employment cases that are not entirely apposite.
In Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389 Wilcox J was not prepared to strike out a Statement of Claim in which it was alleged that conduct of a corporate employer in negotiations with an employee regarding the contract of employment was conduct in trade or commerce. That case is distinguishable from the present because there Wilcox J was heavily influenced by the fact that the negotiation was commercial in character, and more importantly at [24] that it was undertaken for the purpose of the company’s overall trading activities.
Barto was not followed by Kiefel J in Hearn & Anor v O’Rourke & Anor [2002] FCA 1179. There, her Honour accepted the importance of the distinction drawn in Concrete Constructions between conduct “in” trade or commerce and conduct incidental to trade or commerce. It follows that it is important to identify what is the trading or commercial context in which the allegedly offending corporation operates.
The conduct complained of by the applicants (as I understand it) is the giving of and reliance upon a default notice specifying breaches of the shareholders’ agreement that were not true, and giving such a notice as a device for securing the applicant’s interests at less than their fair value. It is not alleged that any representations were made, or other conduct sought to be impugned other than the serving of and reliance upon the notice.
If the conduct is that of the first respondent, the conduct complained of cannot have been in trade or commerce so far as that respondent is concerned. The business of the first respondent is operating a service trust for an accountancy practice. The giving of default notices is hardly done in the course of that business. If the conduct is alleged to be that of the other corporate respondents (acknowledging that amendments to the existing pleading would be necessary to even make that case), the position is worse. There is no evidence that any of the corporate respondents undertake any commercial activities inter se. Presumably they each receive income, and pay expenses, necessary to enable the ongoing business of the service trust. However it is difficult to see how the giving of a default notice seeking to activate a buy-out entitlement in a shareholders’ agreement could be conduct by any of the corporate respondents in each corporation’s trade or commerce.
It does not matter that the conduct complained of was internal to the accountancy practice. However, what the applicants must demonstrate is that the giving of a default notice is conduct in trade or commerce. The applicants rely on the judgment of French J in Orison Pty Ltd v Startegic Minerals Corporation NL & Ors (1987) 77 ALR 141. There a public company resolved to acquire a private company. A shareholder in the public company sought relief under the TPA based on the allegedly misleading and deceptive contents of documents sent by the public company to its shareholders explaining the transaction.
Two matters can immediately be noted. First, the decision predates Concrete Constructions. Secondly, the application concerned was for a strike out rather than one for summary dismissal.
With those caveats in mind, I accept the judgment of French J supports an argument that:
a)A communication from the directors of a public company to its shareholders can constitute conduct of the corporation for the purposes of s.52 TPA;
b)The fact that such communication was for internal purposes did not prevent it from being caught by the TPA;
c)The acquisition of shares in the private company, not being a one-off or isolated transaction, was in trade or commerce;
d)The communication to shareholders was a step that had to be taken before the public company could acquire the shares;
e)Therefore the antecedent communication “so closely related and necessary to the acquisition was also within the scope of trade or commerce for the purposes of s.52”.
In my view the majority judgment in Concrete Constructions casts sufficient doubt over the last step in the reasoning. If the conduct was merely incidental to other conduct in trade or commerce, that would not be sufficient to be caught by the TPA. However, the present case is one step further removed. Here, the acquisition of shares held by the first applicant in the first respondent would not, in my view, be conduct in trade or commerce by any of the respondents. It is a one-off isolated transaction.
Counsel for the applicant submits that the provision of professional services is conduct in trade or commerce, relying on Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors (1987) 71 ALR 615. So much may be accepted, but the delivery of the default and other notices, and the reliance on them could hardly be said to be the provision of professional services.
It follows that I accept the respondents’ submission that, however pleaded, the allegation that the service of the default notice, and then seeking to rely on it, could not constitute conduct in trade or commerce, as required by ss.51AA and 52 TPA. That being so, the claims must be dismissed.
I should also deal with three other fundamental difficulties with the case sought to be advanced by the applicants. I do not propose to consider the falsity or otherwise of the grounds of default relied upon by the applicants. In my view such matters are more properly considered at a trial, when all of the evidence regarding the various complaints can be properly presented, and tested, on both sides. Sometimes it is only when the evidence is considered as a whole that complaints of falsity that be judged in their correct light. It is somewhat artificial to selectively refer to pieces of correspondence, and construct an argument that a specific allegation could not be made out at trial. It may turn out that the piece of evidence would be viewed differently when part of a larger picture.
In order to be susceptible to relief under ss.82 or 87 of the TPA, the conduct of any of the corporate respondents must have been misleading or deceptive or likely to mislead or deceive. The submission for the applicants, when pressed, was that the issue of a default notice for an improper purpose is misleading and deceptive or potentially so. That cannot be right. Conduct will only be misleading or deceptive if it induces or is capable of inducing error: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198. The difficulty in the present case is that the applicants knew (so far as they were concerned) that the matters alleged in the notice of default were untrue. How then can they say that the notice was misleading or deceptive? So much is not pleaded and it seems could not be.
There are also fundamental problems with the claim in so far as it seeks to rely on unconscionable conduct pursuant to s.51AA TPA. The claim as presently pleaded is succinct, to say the least. Unconscionable in s.51AA TPA does not mean unfair or reprehensible in a colloquial sense. Rather, as explained in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 it refers to the equitable doctrine, the meaning of which has been expounded in High Court cases such as Blomley v Ryan (1956) 99 CLR 362 and Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 457: as explained by Heerey J in Duncan v Lipscombe Child Care Services Inc [2006] FCA 458 at [37].
The doctrine of unconscionable conduct was succinctly stated by Deane J in Amadio at 474:
“Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse consequences which may constitute a special disability for the purpose of the principles relating to relief against unconscionable dealing may take a wife variety of forms and are not susceptible to being comprehensively catalogues”.
Earlier, at 462 Mason J had said:
“I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgement as to his own best interests . . .”
The applicants rely on the fact that the first applicant was a minority shareholder as constituting a special disadvantage. In my view, the mere fact of being a minority shareholder, without more, is not sufficient to constitute special disadvantage. If it were, one would think there would be no need for the expansive provisions in the Corporations Act dealing with rights of minority shareholders.
Similarly, being in the midst of matrimonial difficulties does not, in my opinion, constitute special disadvantage, as that term is properly understood.
By the most recent amendment to the Statement of Claim, the applicants allege that the respondents acted unconscionably because the strict application of their legal rights was exercised harshly, oppressively or capriciously. No particulars of any facts supporting such a conclusion are pleaded. It is important to appreciate that the present case does not involve any bargaining or negotiation, therefore the strength and weakness of each party’s position is to that extent irrelevant.
I do not think that the doctrine of unconscionability reaches so far as to impugn the sort of conduct complained of by the applicants in this case. In that regard, I refer to the extract from Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 referred to by Senior Counsel for the respondents, particularly at [23] – [24]; and in Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367 at [24] – [26] as accurately stating the current law.
The final matter that needs to be addressed is the relief sought. As was pointed out in argument, no attack is made on the efficacy of the notices. In the amended Statement of Claim an order is sought setting the notices aside, but that is not for any want of form, or compliance with the shareholders’ agreement. It is difficult to see how, in the way the case is presented, there is any causal connection between the conduct complained of and any loss suffered by the applicants (details of which have not as yet been particularised).
In my view, no arguable case can be pleaded in reliance on the provision of the TPA which are sought to be engaged. The application must therefore be dismissed.
Two issues of costs were sought to be agitated.
By application filed 10 June 2008 the applicants sought an interlocutory injunction seeking to restrain the respondents from acting on the notices that had been delivered. I declined to make such an order, primarily on the grounds that documents had not been served and damages were an adequate remedy.
After the documents were served on the respondents the matter came before me on 20 June 2008, at which time the applicants abandoned their claim for injunctive relief. The question of costs was reserved. The respondents seek their costs of responding to the application for the injunction.
The applicants’ documents were served on the respondents on 11 June 2008. It was not until 4:12 pm on 19 June (the day before the matter was next in court) that the solicitors for the applicants advised the solicitors for the respondents that the application for an injunction would not be pressed. By that time, I accept that the respondents had incurred cost associated with taking instructions and preparing to respond to the application for injunctive relief, including the costs of preparing the affidavit of the ninth respondent and briefing counsel.
In my view, no good reason has been shown why costs should not follow the event. The applicants chose not to pursue a particular form of relief very late. They had claimed such relief and the respondents were entitled to presume that it would be pursued in court the next day. The applicants should pay the respondents’ costs of and incidental to the application for injunctive relief.
There remain the costs of the proceedings generally. The application will be dismissed. The respondents seek an order for costs on the indemnity basis, arguing that the claim was hopeless and bound to fail.
The authority most often referred to in that regard is the decision of Sheppard J in Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, particularly at 232-4.
In the present case, nothing has been put forward to show why the ordinary order as to costs should be displaced up to and including 20 June 2008. However, when the matter was in court that day, Senior Counsel for the respondents tendered his outline of argument, so as to make it clear to the applicants the bases on which it was said the application was liable to be struck out. It is correct to observe that the submissions more recently relied on by the respondents were more expansive than those tendered on 20 June. However, the three arguments that I have accepted as justifying summary termination of these proceedings were all articulated in the earlier submissions.
That being so, the applicants have chosen to attempt to justify the continuation of the proceedings in full knowledge of those arguments waged against them. That circumstance is the one that, in my opinion, justifies an award of indemnity costs from 21 June 2008.
I certify that the preceding sixty-three (63) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 11 July 2008
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