Propel Accountants and Advisors Pty Ltd as trustee for W P Tax Unit Trust v Kazzag Pty Ltd as trustee for the Kazzag Trust - [2021] WASC 401

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   PROPEL ACCOUNTANTS & ADVISORS PTY LTD as trustee for W P TAX UNIT TRUST -v- KAZZAG PTY LTD as trustee for THE KAZZAG TRUST [2021] WASC 401
CORAM:   MASTER SANDERSON
HEARD:   4 NOVEMBER 2021
DELIVERED          :   15 NOVEMBER 2021
FILE NO/S:   CIV 1580 of 2021
BETWEEN:   PROPEL ACCOUNTANTS & ADVISORS PTY LTD as trustee for W P TAX UNIT TRUST
Plaintiff
AND
KAZZAG PTY LTD as trustee for THE KAZZAG TRUST
First Defendant
GARY RUTTER
Second Defendant

Catchwords:

Practice and procedure - Application to strike out statement of claim - Application for security for costs - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)

Result:

Statement of claim struck out
Leave given to replead
Security ordered

Category: B

Representation:

Counsel:

Plaintiff	:	C Slater
First Defendant	:	C S Williams
Second Defendant	:	C S Williams

Solicitors:

Plaintiff	:	Morgan Alteruthemeyer Legal Group
First Defendant	:	Solomon Brothers
Second Defendant	:	Solomon Brothers

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

Sugarloaf Hill Nominees Pty Ltd As Trustee For The Richard And Anna Trust v Rewards Projects Ltd [2011] WASC 19

MASTER SANDERSON:

This is the defendants' application to strike out the plaintiff's re‑amended statement of claim. The defendants also seek security for costs in the amount of $120,281. The application is supported by an affidavit of Giuseppe Zagari sworn 19 March 2021. That affidavit deals with the plaintiff's financial capacity and annexes a draft bill of costs. The plaintiff relies on an affidavit of Russell James Woollett sworn 29 April 2021. Mr Woollett is a director of the plaintiff. His affidavit deals with the question of whether the plaintiff would be in a position to meet any costs order made against it.
Dealing first with the strike out application there was no dispute between the parties as to the applicable principles. When dealing with an application under O 20 r 19 of the Rules of the Supreme Court 1971 (WA) the following principles are applicable:
1.The rule is intended to apply only to cases which are really not arguable and not cases where under the previous practice demurrer would have been the proper course;
2.On the application, not only must all the facts alleged in the statement of claim be accepted as true, but it must be taken for granted that on all other points the pleading is unassailable;
3.Great care must be exercised to ensure that a plaintiff is not improperly deprived of his opportunity for trial of his case by the appointed tribunal;
4.The rule should not be reserved for those cases where argument is unnecessary to show the futility of the plaintiff's claim;
5.As a general rule, the plaintiff is entitled to have his case heard and to have the facts found. It is only cases in which it can be seen from the outset that, however the facts be found, there is no basis for the legal conclusion contended for by the plaintiff; and
6.A court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie.
This is one of those cases where the statement of claim is manifestly defective. Viewed in the overall, the claim relates to a breakdown of an employment relationship between the plaintiff and the second defendant. The plaintiff, as a trustee of a unit trust, conducts an accounting business. The second defendant worked for the plaintiff for many years. When the parties agreed to go separate ways they entered into a number of documents. In broad terms, the plaintiff alleges the second defendant, in conjunction with the first defendant, breached certain fiduciary duties which arose as a consequence of the employment relationship and certain contractual obligations which arose after the parties agreed to end their relationship.
Before moving to the detailed complaints the defendants have about the statement of claim, I should make two general comments. First, a number of the complaints the defendants make, while valid, would not in themselves be sufficient to warrant striking out the statement of claim. The problem with the pleading is that it contains fundamental defects. These defects are so significant that it cannot stand in its present form. The plaintiff will have leave to replead. That being so, it is appropriate to detail what might be seen as minor deficiencies in the pleading so that the final version is an altogether coherent document.
The second point has to do with fiduciary duties of an employee. There is no doubt that an employment relationship can give rise to fiduciary duties owed by an employee to an employer. The scope of the duty owed will depend on the nature of the employment. But it is settled law that once the employment arrangement terminates, the fiduciary duties come to an end. There does remain a duty on an employee of confidentiality - he or she must not use confidential information gained during their employment for their benefit and to the detriment of the employer. That is the end of the matter. The plaintiff appears not to have appreciated that limitation on the fiduciary relationship of employer and employee. That failure is at the heart of the difficulties which infect the amended statement of claim.
Paragraph 1 of the re-amended statement of claim identifies the parties. Paragraph 1.2.3 says the first defendant 'held units in the plaintiff's unit trust'. Really what is meant is that the first defendant held units in the WP Tax Unit Trust, the plaintiff being the trustee of that trust. This is a minor point which should be corrected in any amended pleading.
Paragraph 1.3.1 pleads an employment agreement between the plaintiff and the second defendant. The agreement commenced in 2010 and seems to have been varied by a 'job description' in November of 2016. It is not clear why the plaintiff included as a material fact the apparent change in the second defendant's employment terms and conditions in November of 2016. There is no identification of terms before as against terms after. Moreover, there are nine subclauses pleaded which do not seem to bear any relationship to the overall claim. Once again this is a relatively minor point but it should be corrected in an amended pleading.
Paragraph 3 repeats the trust pleaded in par 1.2.3 which I have dealt with above. Again, it is a minor point but it ought be remedied.
Paragraphs 2 and 3 detail a breakdown in the relationship between the plaintiff and the second defendant. Essentially the first defendant agreed to sell the units it held in the unit trust to a third party. This agreement is defined as the 'Unit Trust Sale Agreement'. Paragraphs 2, 3 and 4 are unobjectionable.
By pars 5 and 6 of the pleading it is said the plaintiff sold some of its client portfolio to the defendants under a 'portfolio sale agreement'. The defendants complain that pars 5 and 8(h) to (k) are clearly inconsistent. With respect, that complaint is without substance. It is true that on the one hand the plaintiff sold part of its business to the defendants and on the other hand the defendants entered into a restraint of trade agreement. Although the pleading could express the position more clearly, it is apparent how the contractual arrangement was to operate. In any event, the relevant contractual documents are identified and will speak for themselves. It is true that the particulars to par 5 are material facts and while it would be best if the position was rectified it is not a matter of great importance.
Paragraph 9 pleads that the first and second defendants owed the plaintiff 'ongoing equitable or fiduciary duties that survive the termination or cessation of employment by the second defendant'. Three duties are pleaded. The first (found in par 9.1) is a duty to respect confidential information. That pleading is unobjectionable. But the other two pleas cannot stand. By way of example the first duty is pleaded in this way:
9.2Unless they had obtained the informed consent of the Plaintiff, with the exception of the clients specified in the Asset Portfolio, not to pursue any gain or benefit for themselves or any other person in circumstances where there was a conflict or substantial possibility of a conflict of interest between the interests of themselves or another person and those of the Plaintiff;

As I indicated above, on termination of the employment arrangement between the plaintiff and the second defendant, the fiduciary relationship was severed. No fiduciary obligations are owed by the second defendant to the plaintiff. During the course of his submissions, counsel for the plaintiff maintained that the fiduciary duties remained in existence because of the contractual relationship between the plaintiff and the defendants. With respect, that cannot be right. Fiduciary obligations arise based upon a relationship between individuals. They are not a creature of contract. Counsel for the defendants used as an example a contract for the sale of land. There is no fiduciary duty which arises between the contracting parties. It is different when there is a contract between principal and agent or solicitor and client. But the fiduciary relationship arises as a consequence of the nature of the relationship. Here there is simply no basis upon which it can be said post termination of the contract of employment fiduciary duties continue. That being so, par 9.2 and par 9.3 should be struck out.
Paragraph 10 pleads that as a former employee of the plaintiff the second defendant owed the plaintiff a duty pursuant to s 183(1) of the Corporations Act 2001 (Cth). That section reads as follows:
183Use of information - civil obligations
Use of information - directors, other officers and employees
(1)A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note 1:This duty continues after the person stops being an officer or employee of the corporation.
Note 2:This subsection is a civil penalty provision (see section 1317E).
(2)A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2:This subsection is a civil penalty provision (see section 1317E).
As counsel for the defendants rightly pointed out, the prohibition in s 183 is against the information being used 'improperly'. That does not mean the plea in par 10 is defective. But this requirement that the use of the information gained be improper feeds into paragraphs found later in the pleading.
Paragraphs 11 to 16 plead the second defendant was in possession of confidential information of the plaintiff that he disclosed to the first defendant. The second defendant is the sole director and shareholder of the first defendant. So a plea that the second defendant disclosed information to the first defendant is illogical nonsense. Given this disclosure is the sole basis for the claim of breach of a duty of confidentiality, no reasonable cause of action is disclosed. Paragraphs 11 through to 16 cannot stand.
Paragraph 21 pleads an allegation of breach of the duty of confidentiality and breach of fiduciary duty. The second of these two alleged breaches cannot stand - the fiduciary duties to which reference is made have not been made out. That leaves an alleged breach of the duty of confidentiality. Particulars are provided. Those particulars are a list of clients to which it is said the first and second defendants provided services. That does not properly particularise any alleged breach of confidentiality. It would be necessary for the plaintiff to plead as a material fact what confidential information the defendants had about particular clients and how that information was used. Given the extensive list of clients, it may not be possible for the plaintiff to provide material facts relating to each and every one of those clients. But at the very least the plaintiff needs to plead the nature of the confidential information held and how it is alleged that confidential information was used in breach of the defendants' duty to the plaintiff. This is a matter of repleading.
By par 22 the plaintiff pleads the defendants did not respond to a document entitled 'Notice of Breach'. The plea leads nowhere and is superfluous.
As the plaintiff says par 23 really is a classic rolled up plea. Reference is made to pars 11 through to 22 and then it is said the conduct of each of the defendants was in breach of expressed terms of the portfolio sale agreement, in breach of fiduciary duty and in breach of equitable duty of confidence, as well as a breach of s 183(1) of the Corporations Act. Properly pleaded, these allegations would refer to particular facts even if those facts were referenced by paragraph numbers. But in its present form the pleading is bad and the paragraph cannot stand.
Paragraph 24 pleads accessorial liability on the part of the first defendant. The plea is replete with problems. It does not establish by pleading material facts any breaches of fiduciary duty by the second defendant or any breaches by the second defendant of his obligations under s 183. Further, as was submitted by the defendants, being 'knowingly involved in' a breach of fiduciary duty is not the test for imposition of accessorial liability. A similar problem arises with respect to the plea relating to s 79 of the Corporations Act. In its present form that plea is a conclusion and no material facts are provided to make good the claim of accessorial liability.
Paragraph 25 pleads the plaintiff suffered loss and damage. Particulars are provided. With respect there are no material facts pleaded which could lead to any conclusion the plaintiff had suffered loss and damage. Once again it is not to be expected that the plaintiff will provide detailed particulars relating to each and every client. But material facts must be pleaded which demonstrate that loss and damage has been suffered. At present that has not been done.
Complaint is made about par 26. By that paragraph the plaintiff says that as an alternative to damages for breach of contract it will seek an account in equity. On the claim, as pleaded, an account will not lie. That said, the paragraph is not offensive to the point where it should be struck out. But in redrafting the pleading, counsel will need to consider whether the remedy of account is open and whether that claim should remain in the pleading.
Paragraphs 27 through to 33 appear under the heading 'Further claim against Second Defendant'. It is difficult to see the point of this plea. If it is a purely contractual plea then there is no plea of damage. It may well be the second defendant lodged tax returns under his tax agent number rather than under the plaintiff's tax agent number. But no loss is said to flow from that breach of contract - if indeed it was a breach of contract. Insofar as the plea is an allegation of breach of fiduciary duty, the alleged duties are positive - in par 29.1 for instance it is said the second defendant owed a fiduciary to the plaintiff 'to act in the plaintiff's best interests'. No such positive duty is recognised in Australian law. It may be a duty could be pleaded in a prescriptive way. But at present the relevant paragraphs are embarrassing and ought be struck out.
The present pleading requires substantial amendment and a complete rethink of the way in which the claim is framed. In relation to the contractual provisions and the alleged breach of the restraint of trade, there clearly is sufficient in the present pleading to warrant the plaintiff having the opportunity to replead. In the circumstances, I will give the plaintiff general leave to replead and file a substituted statement of claim. The fresh pleading (it need not be marked up) should be filed within 28 days of the date of publication of these reasons.
Turning then to the security for costs application, the defendants made the point the plaintiff is a trustee company. A trustee company can only meet a costs order by having recourse to its right of indemnity against trust property. That means the jurisdictional requirement of s 1335 of the Corporations Act is satisfied. This approach has a long history and in this court finds its clearest expression in the decision of Corboy J in Sugarloaf Hill Nominees Pty Ltd As Trustee For The Richard And Anna Trust v Rewards Projects Ltd [2011] WASC 19.
Counsel for the plaintiff was not prepared to concede the jurisdiction was enlivened. He referred to the affidavit of Mr Woollett. Attached to that affidavit is a set of accounts for the WP Tax Unit Trust which show the unit trust is in a healthy financial position. Furthermore, Mr Woollett says the plaintiff, as trustee of the unit trust, has met all of its obligations in the past and will do so in the future. But that misses the point. If the plaintiff is called upon to meet a costs order it must have recourse to the trust assets to do so - it does not have assets of its own. It is that situation which enlivens jurisdiction.
Once jurisdiction is enlivened there is no discretionary factor which would preclude against ordering security. Counsel for the plaintiff submitted the fact the unit trust was in a healthy financial position was a reason not to order security. Counsel was unable to point to any authority where the strong financial position of a trust of which the plaintiff was trustee was sufficient to exercise discretion against the ordering of security. Really that argument is at odds with the whole security for costs regime.
Counsel for the plaintiff did attempt to argue the plaintiff's case was so strong that security ought not be ordered. With respect, that argument cannot be accepted. At present there is in existence a defective statement of claim. It is by no means clear the plaintiff has a claim, let alone a strong claim. The fact Mr Woollett believes the plaintiff's claim has merit is neither here nor there.
At this early stage of proceedings it would be inappropriate to order security for the full amount sought by the defendants. There will be an order that the plaintiff provide security for costs in an amount of $50,000. Leave will be given to the defendants to apply for top-up security at a later date. Security should be provided by way of a payment into court or in such other form as agreed between the parties. The action will be stayed pending the provision of security.
The costs of this application ought be paid by the plaintiff. If the plaintiff objects to that costs order it should file submissions on the question within 7 days. If and when those submissions are filed the defendants will only need to file responding submissions if I call upon them to do so.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
MM
Court Officer
15 NOVEMBER 2021