Noun v Pavey

[2012] NSWSC 1644

Supreme Court

New South Wales

Medium Neutral Citation:	Noun v Pavey [2012] NSWSC 1644
Hearing dates:	9 October 2012
Decision date:	12 December 2012
Jurisdiction:	Equity Division
Before:	Gzell J
Decision:	Appeal allowed; decision of Macready AsJ on 7 August 2012 set aside; cross-claim dismissed with costs below and of appeal.
Catchwords:	PROCEDURE - Summary Termination - appeal from Associate Justice - cross-claim against former director by sole director of company that owned intellectual property in a breast cancer test - misrepresentation that a doctor - cross-claimant paid costs of investigation into former director's qualifications, US attorney fees to advise cross-claimant and company to correct misrepresentation that a doctor in presentations to US Food and Drug Administration and a potential collaborator, to draft a shareholder agreement and to negotiate a purchase of shares in the company - advices on behalf of company - leave required under the Corporations Act 2001 (Cth), s 236 - no reasonable cause of action - no leave to replead - company could sue - s 237(2)(a) could not be established - no principle that loss sustained after discovery of falsity of conduct irrecoverable under Australian Consumer Law, s 18
Legislation Cited:	Competition and Consumer Act 2010 (Cth) Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005
Cases Cited:	Agius v State of New South Wales [2001] NSWCA 371 Dey v Victorian Railways Commissioners (1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Gould v Vaggelas (1985) 157 CLR 215 La Trobe Asset Management Australia Pty Ltd v Hajar [2009] NSWSC 1413 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388 Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628 Penthouse Publications Ltd v McWilliam (Court of Appeal, 14 March 1991, unreported) Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Category:	Procedural and other rulings
Parties:	Tony Hassan Noun (First plaintiff/ Cross-defendant) THN Pty Ltd (Second plaintiff) Margaret Anne Pavey (First defendant) Alexander McIntyre Steward Kennedy (Second defendant/ Cross-claimant) Mark Melbourne (Third defendant)
Representation:	Counsel: CJ Bevan (Appellant/ Cross-defendant) S Lawrance (Respondent/ Cross-claimant) Solicitors: Turner Freeman (Appellant/ Cross-defendant) Banki Haddock Fiora (Respondent/ Cross-claimant)
File Number(s):	SC 2012/93374

Judgment

1. This is an appeal from the judgment of Macready AsJ in which he declined summarily to terminate the cross-claim.

1. Between October 2006 and April 2011, Alexander McIntyre Stewart Kennedy, the cross-claimant, and Tony Hassan Noun, the cross-defendant, were the directors of MS Cognosis Pty Ltd.

1. In October or November 2006 MS Cognosis purchased part of the intellectual property rights to a screening test for breast cancer and thereafter took steps to commercialise that test.

1. Over that period, Mr Noun represented to Mr Kennedy that he was a doctor when in fact he was not.

1. On or about 17 March 2011, Mr Kennedy and Mr Noun made a presentation to the US Food and Drug Administration during which Mr Noun was described to the FDA as a qualified doctor. Mr Kennedy participated in the meeting at which the FDA was misled in reliance on Mr Noun's past misrepresentations to him to the effect that he, Mr Noun, was a doctor.

1. On or about 18 March 2011, Mr Kennedy and Mr Noun made a presentation in San Francisco to a potential collaborator, Agilent Technologies Corp, during which Mr Noun was again described as a qualified doctor. Mr Kennedy participated in that meeting in which Agilent was misled in reliance on Mr Noun's past misrepresentations to the effect that he was a doctor.

1. Dr Peter Malycha, a breast cancer surgeon from Adelaide, attended both presentations. In late March 2011, he questioned Mr Noun's status as a doctor. Before Macready AsJ, Mr Kennedy said he discovered the falsity of Mr Noun's representations when Dr Malycha questioned Mr Noun's credentials.

1. On appeal, Mr Kennedy asserts that he became aware that Mr Noun was not a doctor following an investigation, the costs of which were personally borne by Mr Kennedy and not by MS Cognosis. I doubt that anything of substance turns on this change.

1. The investigation that Mr Kennedy instigated was to instruct Margaret Anne Pavey, the first defendant and solicitor for MS Cognosis, to investigate Mr Noun's medical qualifications.

1. After Mr Kennedy became aware that Mr Noun was not a doctor he and MS Cognosis retained US lawyers to advise them whether they had any potential legal exposure as a result of Mr Noun's false representations to the FDA and Agilent. Mr Kennedy was one of the clients under the retainer and he personally bore the costs of engaging the US lawyers.

1. Mr Kennedy said he personally incurred further solicitors' fees in Australia as a result of matters arising from Mr Noun's misrepresentations.

1. Mr Noun resigned as a director of MS Cognosis on terms and conditions contained in a resignation agreement. In terms of that agreement, Mr Kennedy retained solicitors to prepare a draft shareholder agreement between himself and REN Nominees Pty Ltd, a company controlled by Mr Noun, which was an equal shareholder in MS Cognosis with Mr Kennedy.

1. Mr Kennedy decided, in furtherance of the interests of MS Cognosis, that he should make an offer to acquire REN's shareholding. Having made that determination, he engaged solicitors to represent him in negotiations.

1. Thereafter, Mr Kennedy on behalf of MS Cognosis, instructed Ms Pavey to lodge a complaint with the Health Care Complaints Commission in relation to Mr Noun's misrepresentations.

1. Like the old proceedings on demurrer, an application for summary termination is decided on the pleading. The applicant must accept the truth of all allegations in the opposing pleading and the ranges of meaning that the assertions of fact in the pleading are reasonably capable of bearing (Agius v State of New South Wales [2001] NSWCA 371 at [24]; La Trobe Asset Management Australia Pty Ltd v Hajar [2009] NSWSC 1413).

1. An applicant for summary termination has a high onus. The case must be very clear to justify the prevention of a plaintiff submitting a case for determination in the usual way (Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91).

1. The court's powers of summary dismissal should not be exercised to deny a plaintiff access to the courts unless the lack of a cause of action is clearly demonstrated (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129).

1. It is for the applicant to demonstrate that the cross-claim is beyond saving by legitimate amendment (Penthouse Publications Ltd v McWilliam (Court of Appeal, 14 March 1991, unreported) citing Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628 at 631).

1. There are two issues of substance in this application: whether the claim is that of Mr Kennedy or that of MS Cognosis; and whether the fact that the loss claimed, being the legal fees, were incurred after Mr Kennedy discovered the falsity of Mr Noun's representations implies that the loss was not caused by the misrepresentations.

First Issue

1. The first issue raises the question whether Mr Kennedy had standing to commence the cross-claim or whether MS Cognosis could be the only cross-claimant.

1. The Corporations Act 2001 (Cth), s 236(1)(a)(i) is in the following terms:

"A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:

(a) the person is:

(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate."

Section 237(1) provides that a person referred to in s 236(1)(a) may apply to the court for leave to bring or to intervene in proceedings.

1. The Corporations Act (Cth), s 237(2) sets out five criteria, which must be satisfied in order that the court may grant leave. It is in the following terms:

"The Court must grant the application if it satisfied that:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii) it is appropriate to grant leave even though sub-paragraph (i) is not satisfied."

1. If all five criteria are satisfied, the court must grant leave. Correspondingly, if all of the five criteria are not satisfied, the court must refuse leave (Maher v Honeysett & Maher Electrical Contractors [2005] NSWSC 859 at [12].)

1. Macready AsJ found that s 236 and s 237 of the Corporations Act (Cth) did not apply. His Honour said:

"The first is the question of standing. It is suggested that the claim is brought by the sole director of a company against his former co-director in respect of the business affairs of the company. If that were simply what it was, that would require leave of the Court under s 236 and 237. In the circumstance where the second defendant is in control of the company, that leave would not be given because the company plainly could sue.

However, if one looks at the matter a little more carefully in the cross-claim, although that allegation is there in para 1 that the cross-claimant is the sole director, the substance of the claim relates to recovery of costs and legal fees which were paid ultimately by the cross-claimant. This is plainly alleged in para 44 and it is not suggested that the fees were incurred by Mr Kennedy on behalf of the company, as has been suggested in submissions. On that basis, it seems to me that it is an individual claim and questions of standing do not arise."

1. Paragraph 44 of the cross-claim to which his Honour referred was in the following terms:

"The cross-claimant personally bore the costs and expenses associated with:

(a) the investigation referred to in paragraph 28 above;

(b) the engagement of the US lawyers referred to in paragraphs 30 to 32 above;

(c) the engagement of solicitors as referred to in paragraphs 38, 42 and 43 above."

1. Paragraph 28 of the cross-claim alleges that as a result of the doubts expressed by Dr Malycha, Mr Kennedy instructed MS Cognosis's solicitor, Ms Pavey, to arrange for the investigation to which reference has already been made.

1. As par 44(b) states, Mr Kennedy bore the costs of the engagement of the US lawyers. But it was not only Mr Kennedy who retained the US lawyers. Paragraph 30 of the cross-claim is in the following terms:

"In or about late March 2011, as a result of having participated in the presentations to the FDA and Agilent at which the cross-defendant had falsely represented that he was a qualified doctor, the cross-claimant and MS Cognosis retained US lawyers to advise them as to whether they had any potential legal exposure as a result of the cross-defendant's false representations."

1. Paragraph 31 of the cross-claim sets out the advice of the US lawyers retained by the cross-claimant and MS Cognosis and par 32 alleges that the cross-claimant instructed the US lawyers to correct the misrepresentation that had been made to the FDA. Reference has already been made pars 38, 42 and 43 of the pleading.

1. Paragraph 43 of the cross-claim makes it clear that in retaining Ms Pavey, Mr Kennedy was acting on behalf of MS Cognosis. The paragraph is in the following terms:

"In or about October 2011, on behalf of MS Cognosis the cross-claimant instructed Ms Pavey to lodge a complaint with the Health Care Complaints Commission (HCCC) in relation to the cross-defendant having falsely represented himself to be a qualified medical practitioner and oncologist, which complaint was duly lodged on or about 18 October 2011."

1. When a detailed examination of the cross-claim is made it is apparent that in incurring the legal costs, Mr Kennedy was acting on behalf of MS Cognosis. It was MS Cognosis that owned the breast cancer test intellectual property. Paragraph 13 of the cross-claim says the FDA presentation was "on behalf of MS Cognosis". In paragraph 23 it is said that the presentation to Agilent was "as part of ongoing negotiations between MS Cognosis and Agilent".

1. Since the presentations to the FDA and Agilent were on behalf of MS Cognosis, the legal fees relating to the correction of the misrepresentations made at those presentations were incurred on behalf of the company.

1. And the legal fees incurred by Ms Pavey in conducting the investigation were incurred on behalf of MS Cognosis as Mr Kennedy instructed Ms Pavey as MS Cognosis's solicitor.

1. It was submitted that the claim was not that of MS Cognosis because Mr Kennedy incurred the legal fees. But it is not a question of who paid the fees. The question is whose claim was it, and since the exclusive rights to the breast cancer test were owned by MS Cognosis and it was in its interests that the legal fees were incurred, his Honour, with respect, was too hasty in arriving at his conclusion.

1. In my view the cross-claim is a derivative proceeding on behalf of MS Cognosis which required the leave of the court under the Corporations Act (Cth), s 236(1)(a)(i) and s 237.

1. The appeal should be allowed and the cross-claim should be dismissed under the Uniform Civil Procedure Rules 2005, Pt 13, r 13.4.

1. It is inappropriate, in my view, to give leave to replead. As his Honour correctly observed the criterion in s 237(2)(a) of the Corporations Act (Cth) could not be established as Mr Kennedy was in control of the company and it could sue.

Second Issue

1. As to the second issue, there is no principle that a party cannot recover damages under s 18 of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth), Sch 2) if the damages are sustained after the discovery of the falsity of the representations. In each case the question is simply whether, as a matter of fact, the misleading or deceptive conduct was a cause of the loss.

1. There are authorities in which damages have been recovered although incurred after the discovery of the falsity of the conduct in question (Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; Thompson v Ice Creameries of Australia Pty Ltd (1998) 20 ATPR 41-611; Gould v Vaggelas (1985) 157 CLR 215; Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281).

1. The appeal is allowed.

1. The decision of Macready AsJ given on 7 August 2012 is set aside.

1. The cross-claim is dismissed.

1. Mr Kennedy is to pay Mr Noun's costs of the notice of motion filed on 25 June 2012 and the costs of the appeal.

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Decision last updated: 21 February 2013