Skalkos v Smiles

[2006] NSWSC 192

CITATION:	Skalkos v Smiles and Ors [2006] NSWSC 192
HEARING DATE(S):	16 March 2006
JUDGMENT DATE :	27 March 2006
JUDGMENT OF:	Johnson J at 1
DECISION:	The First Defendant’s Notice of Motion is dismissed with costs.
CATCHWORDS:	PRACTICE AND PROCEDURE - application by First Defendant for summary dismissal of proceedings - First Defendant entered into composition under Part X of the Bankruptcy Act 1966 (Cth) - whether claims by Plaintiff against First Defendant are provable debts under s.82 of the Act - whether claims fall within fraud exception in s.153(2)(b) of the Act - meaning of "fraud" in s.153(2)(b) - held that triable issues exist on these questions - application for summary dismissal refused
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth) Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth) Civil Procedure Act 2005 Uniform Civil Procedure Rules
CASES CITED:	Dey v Victorian Railway Commissioners (1949) 78 CLR 62 General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125 Webster v Lampard (1993) 177 CLR 598 Brimson v Rocla Concrete Pipes Limited (1982) 2 NSWLR 937 Agar v Hyde (2000) 201 CLR 552 Wickstead v Browne (1992) 30 NSWLR 1 Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1995-1997) 188 CLR 241 Preston v Star City Pty Limited [1999] NSWSC 1273 Banque Commerciale SA In Liquidation v Ahkil Holdings Limited (1990) 169 CLR 279 Jingellic Minerals NL v Abigroup Limited (1992) 7 WAR 566 Co-Ownership Land Development Pty Limited v Queensland Estates Pty Limited (1973) 47 ALJR 519 Coventry v Charter Pacific Corporation Limited [2005] HCA 67; (2005) 80 ALJR 132 Aliferis v Kyriacou (2000) 1 VR 447 Handberg v Smarter Way (Aust) Pty Limited (2002) 190 ALR 130 Chittick v Maxwell (1993) 118 ALR 728 Maxwell v Chittick (Court of Appeal (NSW), 23 August 1994, unreported, BC9402909) Re Bosun Pty Limited (In Liquidation) (2000) 34 ACSR 597; [2000] SASC 180 Reid v Interarch Australia Pty Limited [2000] FCA 1328 Australian Competition and Consumer Commission v Kritharas (2000) 105 FCR 444 SGB v The Queen (2005) HCA 80
PARTIES:	John Skalkos (Plaintiff) James John Smiles (First Defendant) Archibald George Poulos (Second Defendant) Smiles Poulos Services Pty Limited (Third Defendant) Taxcare Pty Limited (Fourth Defendant) Svelte Corporations Pty Limited (Fifth Defendant) Geoff Kotsakis (Sixth Defendant)
FILE NUMBER(S):	SC 21033/95
COUNSEL:	Mr S Wells (Plaintiff) Mr M Aldridge SC (First Defendant) Second to Sixth Defendants (no appearances)
SOLICITORS:	Rosier Partners (Plaintiff) Abreu Legal (First Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
CIVIL LIST

Johnson J

27 March 2006

21033/95 Skalkos v Smiles and Ors

JUDGMENT

1 JOHNSON J: The Plaintiff, John Skalkos, has brought proceedings for damages against the First Defendant, James John Smiles, and five other Defendants. The proceedings have been on foot for more than a decade. On 4 February 2005, the Plaintiff filed a Fourth Amended Statement of Claim (“FASC”) pursuant to leave granted by Burchett AJ on 17 November 2004.

Issues on the Present Application

2 By Notice of Motion, the First Defendant seeks that the FASC be struck out and that the proceedings against him be dismissed under Part 13.4 Uniform Civil Procedure Rules (“UCPR”). In the event that the Court declines to grant such relief, the First Defendant seeks alternatively that the Statement of Claim be struck out pursuant to Part 14.28 UCPR on pleading grounds.

3 The proceedings were commenced in 1995. The First Defendant entered into a composition with his creditors pursuant to Part X of the Bankruptcy Act 1966 (“the Act”) on 1 May 1996.

4 The First Defendant submits that, by reason of ss.238(2)(c) and 240(1) of the Act, it is not competent for the Plaintiff to bring or maintain the claims set out in the FASC against the First Defendant as the claims are in respect of a provable debt within the meaning of s.82 of the Act.

Relevant Legal Principles

5 I approach the application upon the basis that a very clear case is required before summary dismissal is granted and that the power to make such an order should be sparingly employed: Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125 at 129; Webster v Lampard (1993) 177 CLR 598 at 602-3. The test is not whether the Plaintiff would probably fail in his action against the First Defendant, it is whether the material before the Court demonstrates that the action should not be permitted to go to trial in the ordinary way because it is apparent that it must fail: Webster v Lampard at 602. Where the Court is asked to summarily dismiss a plaintiff’s case, the fundamental principle is that prima facie a plaintiff is entitled to have his case come to trial and that an application to deprive him of that right will succeed only in the clearest of cases: Brimson v Rocla Concrete Pipes Limited (1982) 2 NSWLR 937 at 944. Usually, a party is not to be denied the opportunity to place his case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. For a summary dismissal application to succeed, a high degree of certainty is required about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way: Agar v Hyde (2000) 201 CLR 552 at 575-6.

6 By bringing an application for summary dismissal, the First Defendant undertakes the burden of establishing that there is no triable issue: Wickstead v Browne (1992) 30 NSWLR 1 at 11. The General Steel test remains the primary touchstone for such an application. The mere fact (if it be the case) that a plaintiff’s prospects of success might be characterised as slim would not be enough to strike out a pleading: Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1995-1997) 188 CLR 241 at 271; Preston v Star City Pty Limited [1999] NSWSC 1273 at paragraph 31. The question for determination is whether a reasonable cause of action is disclosed, that is a cause of action which has some chance of success, or which could conceivably give the Plaintiff a right to relief, or which, although weak, is properly debatable, and has some apparent legitimate basis, if the facts upon which it is alleged to be based are made good: Preston v Star City Pty Limited at paragraph 37.

7 So far as the First Defendant’s application goes to matters of form in relation to the clarity or particularity with which the Plaintiff’s claim is pleaded, the essential test is one of intelligibility - a test that turns upon the question whether the nature of the case that the Plaintiff wishes to make has been stated with sufficient clarity so as to allow the First Defendant to know what it is that he must meet: Banque Commerciale SA In Liquidation v Ahkil Holdings Limited (1990) 169 CLR 279 at 286. So far as any deficiency might arise in relation to the particularisation of the matters alleged, that is a matter appropriately left for subsequent amendment rather than a strike out of the pleading, so long as what is alleged sufficiently identifies a reasonable cause of action: Jingellic Minerals NL v Abigroup Limited (1992) 7 WAR 566; Co-Ownership Land Development Pty Limited v Queensland Estates Pty Limited (1973) 47 ALJR 519 at 521; Preston v Star City Pty Limited at paragraph 41.

The Broad Positions of the Parties

8 Mr Aldridge SC, for the First Defendant, submits that the claims made by the Plaintiff are provable debts for the purposes of s.82 of the Act so that the claims cannot be maintained. His argument focuses upon a recent decision of the High Court of Australia in Coventry v Charter Pacific Corporation Limited [2005] HCA 67; (2005) 80 ALJR 132 which, in a number of respects, has altered the law of bankruptcy in this area. Mr Aldridge SC submits further that the Plaintiff’s claim is not caught by s.153(2)(b) of the Act. He submits that the Plaintiff is doomed to failure at a final hearing and that, in these circumstances, relief ought be granted to the First Defendant by way of an order for summary dismissal of the proceedings.

9 Mr Wells, for the Plaintiff, submits that the claims made by the Plaintiff are not provable debts within s.82 of the Act or, alternatively, if it was found that the claims made are provable debts, that the First Defendant is not released under s.240(1) from the debt by reason of the exception to release set out in s.153(2)(b) of the Act. He submits, in any event, that there are, at the least, triable issues on these questions which ought be left to the final hearing of the matter, to be determined at that time in the light of the evidence to be adduced at trial.

Nature of the Plaintiff’s Case

10 It is necessary to place the present application in a factual context. No evidence was adduced at the hearing of the application. The argument proceeded by reference to the contents of the FASC and the agreed fact that the First Defendant had entered into a Part X composition with his creditors on 1 May 1996, which was completed on 17 November 1998.

11 The FASC alleges that the First Defendant conducted an accounting practice under the name “JJ Smiles & Co” between 1978 and 1988 (paragraph 1, FASC). The First Defendant and the Second Defendant, Archibald George Poulos, are alleged to have conducted an accountancy practice in partnership under the name “Smiles Poulos and Associates” between 1988 and 1995 (paragraph 2, FASC). It is alleged that from 17 July 1991, the First and Second Defendants conducted tax agency services using the Fourth Defendant, Taxcare Pty Limited, as a service company and that, at all material times, the Plaintiff was a client of the Fourth Defendant (paragraph 6, FASC). It is alleged that from 21 September 1993, the First and Second Defendants conducted an accountancy practice using the Third Defendant, Smiles Poulos Pty Limited, as a service company and that, at all material times, the Plaintiff was a client of the Third Defendant (paragraph 7, FASC). It is alleged that, at all material times, the First and Second Defendants were directors of the Third and Fourth Defendants and were controllers of those corporations (paragraph 8, FASC).

12 The Plaintiff’s written submissions summarised the factual matters alleged in the FASC in the following way. The Plaintiff retained the First Defendant as his accountant and financial advisor in 1978 (paragraph 9, FASC). During the period 1978 to 1990, the First Defendant, in his capacity as the Plaintiff’s accountant, prepared the Plaintiff’s taxation returns, gave general taxation advice and assisted the Plaintiff with his financial affairs generally (paragraph 9, FASC). In early August 1987, the Plaintiff requested the First Defendant to provide him with financial advice in relation to the investment of the sum of $113,000.00 (paragraph 14, FASC). The First Defendant agreed to give financial investment advice to the Plaintiff (paragraph 15, FASC).

13 In the course of giving investment advice to the Plaintiff, it is alleged that the First Defendant represented to the Plaintiff that advancing the sum of $113,000.00 to a joint venture in which the First Defendant held an interest was, inter alia, a “prudent investment”, “astute and sound” and that the Plaintiff’s “moneys were safe” (paragraph 16, FASC). In reliance upon these and other representations, the Plaintiff alleges that he entered into a loan agreement and advanced the sum of $113,000.00 to the First Defendant and the First Defendant’s joint venturer, Geoff Kotsakis, the Sixth Defendant.

14 On 1 November 1989, the Plaintiff agreed to extend the term of the loan (paragraph 33, FASC). During a period following execution of the agreement on 1 November 1989 to the end of 1994, it is alleged that the First Defendant gave further financial advice to the Plaintiff and made further representations to the Plaintiff in connection with the loan of $113,000.00 (paragraphs 36, 44 FASC).

15 In about August 1990, it is alleged that the First Defendant suggested to the Plaintiff that the Plaintiff advance a further sum of $85,000.00 (paragraph 36, FASC). It is alleged that the First Defendant represented to the Plaintiff that a further advance of $85,000.00 would guarantee and secure repayment of the sum of $113,000.00 which had been advanced in 1987 (paragraph 36(d), FASC). In reliance upon these representations, it is alleged that the Plaintiff advanced a further sum of $85,000.00 to the First Defendant (paragraph 41, FASC).

16 It is alleged that, in May 1992, the First Defendant made further representations to the Plaintiff regarding the First and Sixth Defendants’ ability to repay the Plaintiff’s advances. It is alleged that the First Defendant represented that neither he nor the Sixth Defendant were able to repay the loan and that the loan had to be restructured to accommodate the First and Sixth Defendants (paragraph 44, FASC). In reliance upon these representations, it is alleged that the Plaintiff entered into further agreements on 21 May 1992 and 21 May 1993 (paragraphs 49, 61, FASC).

17 It is alleged, that in late 1992 or early 1993, the Plaintiff requested the First Defendant to provide further financial investment advice in relation to the investment of the sum of $170,000.00 (paragraph 54, FASC). It is alleged that the First Defendant advised the Plaintiff that he should invest the sum of $170,000.00 in a Vodafone outlet as mobile phones were “big business” and the Plaintiff would “make a lot of money” (paragraph 54, FASC). It is alleged that the First Defendant advised the Plaintiff that the sum of $170,000.00 could be advanced through the First and Second Defendants’ accountancy practice. It is alleged that the First Defendant made further representations to the Plaintiff that he (the Plaintiff) should make the further advance of $170,000.00 to an incorporated body in which the First Defendant held an interest, that the other advances of $113,000.00 and $85,000.00 would be repaid by the end of 1994, that advancing the sum of $170,000.00 was “prudent” and that the further advance of $170,000.00 would be secured by a charge upon the assets and undertaking of the First and Second Defendants’ accounting practice (paragraph 54, FASC). It is alleged that, on 27 January 1993, in reliance upon these representations, the Plaintiff advanced the sum of $170,000.00 to the Fifth Defendant, Svelte Corporation Pty Limited (paragraph 54, FASC). The Fifth Defendant is now in liquidation and the Plaintiff does not press his claim against that party.

18 The advances made by the Plaintiff have not been repaid.

The Plaintiff’s Claims in the FASC

19 It is appropriate to refer to the Plaintiff’s claims as pleaded in the FASC.

20 The FASC is 60 pages in length and comprises some 138 paragraphs, concluding with a claim for orders and relief in 19 paragraphs. For present purposes, it is necessary to refer only to certain parts of the FASC.

21 Some of the factual allegations relied upon by the Plaintiff as pleaded in the FASC have been summarised in paragraphs 11 to 18 of this judgment. The FASC pleads seven sets of representations said to have been made by the First Defendant (and sometimes other Defendants as well) between August 1987 and July 1995. With respect to each of the seven sets of representations, the FASC alleges:

(a) the terms of the representations allegedly made to the Plaintiff: paragraphs 16, 28, 36, 44, 54, 61 and 69, FASC;

(b) that, at the time the representations were made, the First Defendant knew or ought reasonably to have known that the Plaintiff had limited financial investment experience, had limited comprehension of English, that the Plaintiff was relying upon the First Defendant and that if the Plaintiff acted on the representations and they proved to be untrue, the Plaintiff might suffer loss and damage: paragraphs 17, 29, 37, 45, 55, 62 and 70, FASC;

(c) that the Plaintiff relied upon the First Defendant as to the correctness of advice and the truth of representations and that the Plaintiff reposed trust and confidence in the First Defendant in connection with the provision of the financial advice: paragraphs 18-19, 30-31, 38-39, 46-47, 56, 63-64 and 71-72, FASC;

(d) that the advice given was inaccurate and the representations were false, untrue and misleading or, alternatively, were made with reckless indifference as to their truth or falsity: paragraphs 20, 32, 40, 48, 57, 65 and 73, FASC.

22 After the recital of the seven sets of representations, the following claims are made:

(a) a claim in negligence is made against the First Defendant with respect to the first set of representations: paragraphs 83-89, FASC;

(b) a claim in negligence is made against the First, Second, Third and Fourth Defendants with respect to the second to seventh sets of representations: paragraphs 90-96, FASC;

(c) a claim for breach of fiduciary duty is made against the First Defendant with respect to the matters surrounding the first set of representations and the 1987 advance: paragraphs 97-100, FASC;

(d) a claim for breach of fiduciary duty is made against the First, Second, Third and Fourth Defendants with respect to the matters surrounding the second to seventh sets of representations and the extension of the 1987 advance and further advances made by the Plaintiff in 1990 and 1993: paragraphs 101-104, FASC;

(e) a claim is made against the First Defendant alleging misleading and deceptive conduct in contravention of s.42 Fair Trading Act 1987 (NSW) with respect to the first set of representations and the 1987 advance: paragraphs 105-108, FASC;

(f) a claim is made against the First and Second Defendants alleging misleading and deceptive conduct in contravention of s.42 Fair Trading Act 1987 (NSW) arising from the matters alleged concerning the second to seventh sets of representations and the extension of the 1987 advance and further advances made by the Plaintiff in 1990 and 1993: paragraphs 109-113, FASC;

(g) a claim is made against the Third and Fourth Defendants alleging misleading and deceptive conduct in contravention of s.52 Trade Practices Act 1974 (Cth) arising from the matters alleged concerning the fourth to seventh sets of representations and the extension of the 1987 advance and the further advances made by the Plaintiff in 1990 and 1993: paragraphs 114-119, FASC;

(h) a claim is made against the First and Second Defendants by reason of their office as directors of the Third and Fourth Defendants alleging that they aided, abetted, counselled or procured and/or induced and/or were directly and/or indirectly knowingly concerned in or party to the conduct of the Third and Fourth Defendants towards the Plaintiff which rendered them involved in a contravention of the provisions of Part V of the Trade Practices Act 1974 (Cth) , as pleaded in paragraph 116, within the meaning of s.75B of that Act: paragraphs 120-121, FASC;

(i) an allegation of undue influence is made against the First Defendant arising from the matters alleged concerning the seven sets of representations: paragraphs 122-123, FASC;

(j) a claim is made against the Sixth Defendant seeking recovery of the sums paid by the Plaintiff pursuant to the advances in 1987, 1990 and 1993 pursuant to agreements with the First Defendant, both in his personal capacity and as an agent for the Sixth Defendant: paragraphs 124-138, FASC.

23 At the conclusion of the FASC (pages 58-60), the Plaintiff claims the following relief, orders and declarations:

“AND the plaintiff claims:

1. A Declaration that there existed between the plaintiff and the first to fourth defendants a relationship of trust and confidence.

2. A Declaration that the first defendant is in breach of the 1978 Retainer and of the fiduciary duty owed by him to the plaintiff.

3. A Declaration that the first to fourth defendants are in breach of the 1988 Retainer and of the fiduciary duty owed by them to the plaintiff.

4. A Declaration that the First to Seventh Representations were false and untrue or made with reckless indifference as to whether they were false and untrue.

5. A Declaration that the transactions constituted by the 1987, 1990 and 1993 Advances were manifestly disadvantageous to the plaintiff.

6. A Declaration that the transactions constituted by the 1987, 1990 and 1993 Advances were procured by the undue influence of the first defendant.

7. An order that the agreements which were constituted by the 1987, 1990 and 1993 Advances be set aside as void ab initio, or alternatively voidable, and that the sums advanced thereunder be repaid to the plaintiff by the second, third, fourth and sixth defendants together with interest thereon.

8. Further and in the alternative, a Declaration that the first and second defendants, acting for themselves and as directors of the third and fourth defendants are joint tortfeasors.

9. Further and in the alternative, a Declaration that by reason of their office as directors, and in point of fact, each of the first and second defendants:


aided abetted counsel or procured and/or

induced and/or

was directly and/or indirectly knowingly concerned in or a party to

the conduct of the third defendant and the fourth defendant towards the plaintiff which rendered them thereby involved in a contravention of the provisions of Part V of the [Trade Practices Act 1974 (Cth)] , within the meaning of s.75B thereto.

10. A Declaration that the assets and undertaking of:


the firm known by the style and title of ‘Smiles Poulos & Associates’ to the extent of the first defendant’s and the second defendant’s unencumbered interest therein;

the third defendant;

the fourth defendant,

stand charged with the sum due upon the 1987, 1990 and 1993 Advances.


11. Damages against the second, third and fourth defendants for breach of the 1998 Retainer with the plaintiff;

12. Damages against the first to fourth defendants for breach of the duty of care owed by each of the plaintiff.

13. Damages against the first to fourth defendants for breach of the fiduciary duty which each owed to the plaintiff.

14. Damages against the first to fourth defendants for breaches of the Fair Trading Act (NSW) and the Trade Practices Act (Cth).

15. Damages against the sixth defendant for breach of the loan agreements pleaded herein.

16. Further and in the alternative, orders pursuant to s.82 of the [Trade Practices Act 1974 (Cth)] and s.68 of the [Fair Trading Act 1987 (NSW)] for damages.

17. Equitable Compensation.

18. Interest.

19. Costs.”

Procedural History of the Matter

24 The proceedings were commenced by Statement of Claim filed on 3 October 1995.

25 The First Defendant filed a Defence in the proceedings on 1 May 1996, the same day that he entered into a composition with his creditors pursuant to Part X of the Act.

26 Since that time, the proceedings have moved through a protracted course of interlocutory applications which it is not necessary to recount for the purposes of this judgment. The FASC was filed by the Plaintiff on 4 February 2005 pursuant to a grant of leave by Burchett AJ on 17 November 2004.

27 The matter came before the Court on 25 February 2005 at which time the Plaintiff and First Defendant agreed that the First Defendant’s Notice of Motion seeking to strike out the FASC ought not be heard until the High Court of Australia had handed down its decision in Coventry.

28 On 17 June 2005, the First Defendant filed a Defence to the FASC. Paragraphs 42-46 of that Defence provided as follows:

“42. Further, and in answer to the whole of the Fourth Amended Claim, on 1 May 1996, at a meeting of the creditors of the First Defendant held pursuant to the provisions of Part X of the Bankruptcy Act, the creditors of the First Defendant accepted a composition of his debts.

43. Each of the claims set out in the Fourth Amended Claim is a claim provable in the said composition.

44. Further and alternatively, the claims set out in the Fourth Amended Claim arise out of the same facts as the claims by the Plaintiff that are provable and are in substance, in respect of the same liability.

45. By reason of Section 240(1) of the Bankruptcy Act, the said composition operates to release the First Defendant from the claims which are set out in the Fourth Amended Claim.

46. By reason of the foregoing, the Plaintiff is not entitled to pursue the claims against the First Defendant set out in the Fourth Amended Claim.”

These paragraphs in the First Defendant’s Defence to the FASC are identical to paragraphs 49-53 of the First Defendant’s Defence filed on 25 November 1999 with respect to an earlier version of the Plaintiff’s Statement of Claim.

29 On 15 November 2005, the High Court gave judgment in Coventry. As anticipated by the parties, the High Court’s decision affected the law of bankruptcy in ways which are relevant to the present proceedings.

30 In substance, the First Defendant argues that paragraphs 42-46 of his Defence to the FASC constitute a clear and complete answer to the FASC so that the proceedings against him ought be summarily dismissed.

Relevant Provisions of the Bankruptcy Act 1966 (Cth)

31 Sections 82, 153, 238 and 240 of the Act are of importance to this application. Section 82(1) and (2) provides:

“Debts Provable In Bankruptcy

82(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

…

82(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

…”

32 Section 153 provides relevantly:

“Effect of Discharge

153(1) Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally.

153(2) The discharge of a bankrupt from a bankruptcy does not:

…
(b) release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt of which he has obtained forbearance by fraud; or
…”

33 At times relevant to the present case, s.238 provided:

“238(1) A composition that has been accepted by a special resolution of a meeting of a debtor’s creditors called in pursuance of an authority under section 188 (in this Division referred to as a composition under this Part) is binding on all the creditors of the debtor.

238(2) Subject to subsections (3) and (4), it is not competent for a creditor, so long as a composition under this Part remains valid:


…

(c) to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

238(3) Nothing in this section:


(a) affects the right of a secured creditor to realize or otherwise deal with his or her security; or

(b) prevents a creditor, after the final payment has been made under a composition, from taking any proceeding or enforcing any remedy in respect of a provable debt from which the debtor is not released by the operation of the composition.

238(4) Nothing in this section shall be taken to prevent a creditor from enforcing any remedy against a debtor who has made a composition under this Part, or against any property of such a debtor that is not vested in the trustee of the composition, in respect of any liability of the debtor under a maintenance agreement or maintenance order (whether entered into or made, as the case may be, before or after the commencement of this section).”

34 At the relevant time, s.240(1) provided as follows:

“240(1) Subject to this section, a composition under this Part operates, unless set aside, declared void or terminated under this Part, to release the debtor from all provable debts, other than those (if any) that would not be released by his or her discharge from bankruptcy if he or she had become a bankrupt on the day on which the composition was accepted.

…”

Submissions of the First Defendant

35 The First Defendant relies on the composition with his creditors as a complete defence to the FASC (paragraphs 42-46, Defence to FASC).

36 Mr Aldridge SC submits that all claims in the FASC against the First Defendant are provable debts. He submits that they arise “by reason of a contract, promise or breach of trust” for the purposes of s.82(2) of the Act, in the form of, inter alia, the 1978 retainer agreement (paragraph 9, FASC) and the 1988 retainer agreement (paragraph 24, FASC). In this way, Mr Aldridge SC submits that these demands arise by reason of a contract, promise or breach of trust so as to constitute provable debts within s.82 of the Act.

37 Mr Aldridge SC relies upon passages in Coventry in support of this proposition. Insofar as the Plaintiff may have derived previously some comfort from the decision of the Victorian Court of Appeal in Aliferis v Kyriacou (2000) 1 VR 447, Mr Aldridge SC submits that that decision has been relevantly overruled by the High Court in Coventry at paragraphs 70-71.

38 The First Defendant points to the following passage in Coventry where Gleeson CJ, Gummow, Hayne and Callinan JJ said at paragraph 50:

“First, the text of s 82, like its legislative ancestors, shows that not all claims are provable in bankruptcy. Some content must therefore be given to s 82(2) and its reference to demands ‘arising otherwise than by reason of a contract, promise or breach of trust’. Secondly, any amplification or extension of the content to be given to s 82(2), beyond the immediate operation conveyed by reference to demands arising by reason of a contract or promise, is to be fixed by reference to the operation of other provisions of the statute, and particularly the set-off provisions of s 86. A claim which may be made in answer to a claim which the bankrupt estate makes for damages for breach of a contract between bankrupt and claimant may be provable. That answering claim may be provable because it arises out of the mutual dealing or bilateral relationship of contract between bankrupt and claimant. By contrast, a claim which comes from a tripartite transaction, in which the bankrupt's misrepresentation induced the claimant to make a contract with a third party, does not arise from a mutual dealing and it arises otherwise than by reason of a contract or promise.”

In this context, Mr Aldridge SC referred me to Derham, Set Off , 2nd edn, 1996 at page 349 and Handberg v Smarter Way (Aust) Pty Limited (2002) 190 ALR 130 at 138.

39 The First Defendant submits that the reasoning in Coventry extends to each of the Plaintiff’s causes of action including the claim in negligence against the First Defendant. The joint judgment in Coventry at paragraphs 65-69 said the following with respect to the application of s.82(2) to a claim in negligence:

“The Court of Appeal of Victoria [in Aliferis] held that the claim [in negligence] was one arising otherwise than by reason of a contract and thus not a claim provable in the solicitor's bankruptcy. The Court held [(2000) 1 VR 447 at 452 [14] per Brooking JA, 453 [16] per Phillips JA, 463 [46] per Charles JA] that a claim arises by reason of a contract or promise only if a contract or promise is an ‘element’ or ‘essential element’ of the cause of action. Charles JA, with whose reasons the other members of the Court agreed, held [(2000) 1 VR 447 at 463 [46]] that the pleading of the contract of retainer was not an essential element of the cause of action in negligence.

Two points must be made about this conclusion and the reasoning underpinning it. First, the decision appears to proceed from an assumption that, despite the way the case was pleaded, the claim actually pursued was framed only as a claim in tort [(2000) 1 VR 447 at 453 [19] per Phillips JA] . It is not necessary to examine whether, in the particular circumstances of that case, the assumption was well founded. Even if the assumption was well founded, Jack v Kipping [(1882) 9 QBD 113] reveals that framing a claim as a claim in tort does not conclude the question whether the demand arises by reason of a contract or promise.

The second and more important point is that the test stated in Aliferis , and applied by the Court of Appeal in the present matter, to decide whether a demand arises by reason of a contract or promise does not satisfactorily reflect the meaning to be given to s 82(2). It should not be adopted or applied.

The test stated in Aliferis does not give any weight to the need to read s 82(2) in the light provided by the set-off provisions of s 86. It is a test which does not distinguish between bilateral and tripartite cases. It treats as the critical question whether the claimant must plead the existence of a contract, any contract. It treats as irrelevant whether the bankrupt was a party to the contract.

Further, to express the relevant test in the way it was in Aliferis places heavy emphasis upon the way in which the particular claim is or could be pleaded. That may serve only to mask what is to be understood by the reference to ‘element’ or ‘essential element’.”

The First Defendant submits that the claim for negligence in this case arises by reason of a contract or contracts between the Plaintiff and the First Defendant and that, as a result, the negligence claims are provable debts for the purpose of s.82 of the Act.

40 Mr Aldridge SC points to the conclusions in the joint judgment in Coventry at paragraphs 70-71:

“What is revealed by the analysis of decided cases recorded in the preceding pages of these reasons is that s 82(2) and its legislative predecessors stopped short of providing that ‘the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind (emphasis added) [ Ex parte Llynvi Coal and Iron Co; In re Hide (1871) LR 7 Ch App 28 at 32] . Some claims stand outside the reach of the statute. Although consideration of the application of the set-off provision required the inclusion, within the class of debts provable in bankruptcy, of those claims for unliquidated damages for fraudulent misrepresentation which had induced the making of a contract between the bankrupt and the claimant, the words of the section were not and are not to be stretched to encompass every other kind of claim which a person may have against the bankrupt.

The claim in the present matter was a statutory claim. The relevant question is whether that claim is a demand arising ‘otherwise than by reason of a contract [or] promise. What the fraudulent misrepresentation cases of Jack v Kipping and Re Giles show is that claims of the kind made in this case (for unliquidated damages for misleading or deceptive conduct which induced the party misled to make a contract with a party other than the bankrupt) are claims arising otherwise than by reason of a contract. They are claims of a kind which s 82(2) provides are not provable. By contrast, however, claims for unliquidated damages for misleading or deceptive conduct inducing the making of a contract with the bankrupt are claims arising by reason of a contract. They are provable. To the extent to which Aliferis held to the contrary, it should be overruled.”

Applying these principles, Mr Aldridge SC submits that the Plaintiff’s claims against the First Defendant are all claims arising by reason of a contract, promise or breach of trust so that each claim is a provable debt within s.82 of the Act.

41 Mr Aldridge SC submits that the Plaintiff’s claims in the FASC are not caught by s.153(2)(b) of the Act. He submits that the claims are brought in negligence, for breach of fiduciary duty and for statutory compensation under the Fair Trading Act 1987 (NSW) and the Trade Practices Act 1974 (Cth). He contends that there is no claim with respect to a debt incurred by means of fraud or fraudulent breach of trust.

42 Mr Aldridge SC acknowledges that there are decisions which accord a broad interpretation to the meaning of “fraud” in s.153(2)(b) of the Act: Chittick v Maxwell (1993) 118 ALR 728; Maxwell v Chittick (Court of Appeal (NSW), 23 August 1994, unreported, BC9402909 at 13); Re Bosun Pty Limited (In Liquidation) (2000) 34 ACSR 597; [2000] SASC 180 at paragraph 18. Mr Aldridge SC made a formal submission that those cases had been wrongly decided and that fraud in s.153(2)(b) was confined to actual fraud. He submitted that those parts of the FASC which alleged that the First Defendant made false representations or made representations with reckless indifference as to their truth could not constitute fraud within the meaning of s.153(2)(b) of the Act.

43 In the event that his primary arguments were accepted, Mr Aldridge SC submitted that the FASC as against the First Defendant ought be struck out and that the proceedings against his client ought be dismissed. He submitted that the General Steel test had been satisfied in this case and that these orders ought be made.

44 Mr Aldridge SC submitted that if the Plaintiff proposed to allege actual fraud against the First Defendant, the FASC did not presently contain such an allegation. The appropriate course, it was submitted, was that the FASC as against the First Defendant ought be struck out. He acknowledged that he could not reasonably oppose a grant of leave to the Plaintiff to replead his claim against the First Defendant if a claim in actual fraud was to be advanced. He acknowledged that the recent decision of the High Court in Coventry had altered the law in this area so that the Plaintiff ought not be shut out from a further opportunity to replead his case against the First Defendant. He emphasised, however, that the proceedings have been on foot for many years and had reached a fourth attempt by the Plaintiff to plead his case. In effect, he submitted that the Plaintiff ought be given a final opportunity to plead his case in proper form.

Submissions of the Plaintiff

45 Mr Wells submitted that the claims made by the Plaintiff against the First Defendant are not provable debts but that, even if they were, the First Defendant is not released under s.240(1) from the debt by reason of the fraud exception to release in s.153(2)(b) of the Act.

46 He submitted that the decision of the High Court in Coventry was not destructive of the Plaintiff’s claim. He pointed to the fact that the issue to be decided in Coventry was whether a claim for unliquidated damages for contravention of a statutory prohibition is a debt provable in the bankruptcy of the person who contravened the prohibition and, by that conduct, induced the claimant to make a contract with a third party: Coventry at paragraph 1.

47 The High Court resolved that question in the negative. The High Court held that a statutory claim for unliquidated damages for misleading or deceptive conduct by the bankrupt which induced the claimant to make a contract with the bankrupt (a bilateral claim), would be a debt provable in bankruptcy (Coventry at paragraphs 6, 71). On the other hand, a statutory claim for unliquidated damages for misleading or deceptive conduct by the bankrupt which induced the claimant to make a contract not with the bankrupt, but with a third party (a tripartite claim), is not a debt provable in bankruptcy (Coventry at paragraph 6, 71).

48 The Plaintiff alleges in this case that the conduct of the First Defendant induced the Plaintiff to, in the first instance, make a contract with the First and Sixth Defendants and, in the second instance, to advance funds to the Fifth Defendant. Mr Wells submits that the construction accorded to s.82(2) of the Act in Coventry does not stand in the way of such claims.

49 Mr Wells submits that Coventry is not authority for the proposition that claims in negligence or for breach of fiduciary duty are provable debts. The Plaintiff makes such claims in this case. Mr Wells emphasises that Aliferis was overruled to the extent that it held that claims for unliquidated damages for misleading and deceptive conduct inducing the making of a contract with the bankrupt were not provable (Coventry at paragraphs 68, 71). He submits that, in Aliferis, the Court held that whilst the claim based on contract would fail, a claim against a solicitor in negligence was not provable in a Part X arrangement. He submits that that part of the decision in Aliferis has been followed in other cases: Reid v Interarch Australia Pty Limited [2000] FCA 1328 at paragraph 15-22; Australian Competition and Consumer Commission v Kritharas (2000) 105 FCR 444 at 449-451. Mr Wells submits that this part of the decision in Aliferis is untouched by the High Court in Coventry. Accordingly, he contends that Aliferis remains good law on this point and constitutes authority in support of these parts of the Plaintiff’s claim against the First Defendant.

50 The Plaintiff submits that the claims made against the First Defendant in the FASC are not provable debts within s.82 of the Act. However, if there are tenable arguments to the contrary arising from Coventry, the Plaintiff submits that the appropriate time to determine the First Defendant’s contention that all of the claims are provable debts is at the trial and not through the exceptional remedy of summary dismissal. Evidence to be adduced at the trial may bear upon the resolution of these questions. The Court would only grant the exceptional remedy of summary dismissal if the First Defendant discharged the onus of establishing that it was plain that the claims were provable debts. Mr Wells submits that the First Defendant has not discharged that onus and that the summary dismissal application should be dismissed.

51 Even if, however, the First Defendant had demonstrated clearly on this application that any or all of the claims were provable debts within s.82 of the Act, the Plaintiff submits that a further impediment lies in the path of the First Defendant’s summary dismissal application in the form of s.153(2)(b) of the Act.

52 The Plaintiff emphasises the broad interpretation to be given to the meaning of “fraud” in that provision in Chittick v Maxwell, Maxwell v Chittick and Re Bosun. The Plaintiff submits that the allegations in the FASC that the First Defendant made false representations, or made representations with reckless indifference as to their truth, constitute allegations of fraud within s.153(2)(b) of the Act as construed in these authorities.

53 The Plaintiff emphasises that it was noted in Coventry (paragraph 18) that none of the exceptions from release provided by s.153(2) of the Act were said to have been engaged in that case. In the present case, the Plaintiff submits that s.153(2) does have application.

54 It is submitted that s.153(2)(b) applies to compositions under Part X of the Act: Chittick v Maxwell.

55 The Plaintiff submits further that matters are likely to arise from the evidence at the trial which will bear upon the claims of fraud made in the FASC. In these circumstances, the Plaintiff submits that this live issue ought be left to determination at trial in the light of the evidence to be adduced.

Resolution of Competing Submissions

56 To succeed on the application for summary dismissal, the First Defendant must satisfy the stringent requirements of the General Steel test (see paragraphs 5 to 6 above).

57 Where a defendant seeks summary dismissal of a claim against him relying upon a form of statutory protection from suit, it is necessary that the defendant demonstrate clearly that he falls within the protection provided by the statute before the Plaintiff’s proceedings are to be peremptorily terminated. The First Defendant has assumed the burden, on this application, of demonstrating that this is so by reference to the contents of the FASC and the fact that he entered into a composition with his creditors pursuant to Part X of the Act on 1 May 1996 which was completed in 17 November 1998. The First Defendant submits that the General Steel test is satisfied in the light of this material and the application of s.82 of the Act as construed by the High Court in Coventry.

58 The decision in Coventry provides arguments upon which the First Defendant may seek to rely to avoid findings and verdicts against him on the Plaintiff’s claim. Section 82(1) identifies the debts and liabilities that are provable in bankruptcy in terms that are very wide. Section 82(2) constitutes an exception to an otherwise broadly drawn definition of debts provable in bankruptcy: Coventry at paragraph 20.

59 I accept that each of the Plaintiff’s claims against the First Defendant appears to have some relationship back to the retainer agreements between the Plaintiff and the First Defendant referred to in the FASC. However, the various causes of action brought against the First Defendant appear to be intertwined with related claims of various types against other Defendants. These are not simple claims by a plaintiff brought against a single defendant who is or was bankrupt or subject to a Part X arrangement. The decision in Coventry provides considerable support to the First Defendant if the Plaintiff’s claims against the First Defendant can be characterised clearly as bilateral claims only. However, it appears to me that there is a triable issue as to whether the Plaintiff’s claims against the First Defendant may be characterised fairly as tripartite claims. If they are characterised as tripartite claims, then the claims may not be provable debts and the First Defendant will not attract the protection of ss.82 and 240 of the Act.

60 In these circumstances, I do not accept that the First Defendant has demonstrated, to the level required by the General Steel test that the claims of the Plaintiff against the First Defendant are provable debts. I do not consider that Coventry provides a clear and complete answer to these claims at this time. Whether, on the evidence to be adduced at the trial, the First Defendant is able to defeat these claims by the Plaintiff upon the basis of s.82 and the decision in Coventry remains, in my view, an open question. There are debatable questions of fact and law involved in such a process which may be affected by evidence to be adduced at the trial. I am not satisfied that the First Defendant has discharged the onus upon him on this issue on the present application.

61 Even if the First Defendant was able to demonstrate, to the rigorous standard required on a summary dismissal application, that the Plaintiff’s claims were provable debts for the purpose of s.82 of the Act, a further impediment lies in the path of this application.

62 The term “fraud” in s.153(2)(b) of the Act has been given a broad meaning. In Chittick v Maxwell, Young J (as his Honour then was) held that s.153(2)(b) of the Act was applicable in circumstances where equitable fraud had been established. On appeal, Mahoney JA (Priestley and Powell JJA agreeing) upheld this finding: Maxwell v Chittick. Mahoney JA said at 13:

“It was submitted for Mr Maxwell that the result of the composition with creditors which was effected in 1991 was that he was released from the claims made by the plaintiffs. Section 153(2)(b) of the Bankruptcy Act 1966 provided that no discharge should be effected so as to ‘release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he was a party or a debt of which he has obtained forbearance by fraud’. The learned judge concluded, and I agree, that the ‘debt’ owed to the plaintiffs was incurred by means of fraud or a fraudulent breach of trust. As the learned judge has pointed out, the term ‘fraud’ in the bankruptcy provisions in this regard has been given a broad interpretation. It is not necessary to pursue the authorities which were referred to by the judge and in argument before this Court. So much is accepted. The obligations incurred by Mr Maxwell, however they arose and whatever point in time they arose, involved fraud of the relevant kind. The obligations which arose under and by virtue of the original proposal to build were of an equitable nature and, as I have indicated, there was deceit in the nature of fraud at that time. That deceit was repeated at the time the deed was executed. There were, when the various mortgages were entered into, breaches of equitable obligations arising from deceit in the nature of fraud. In my opinion, on each of the relevant occasions, there was fraud within the meaning of the statute. I agree with the judge’s conclusions in this regard.”

63 The decision of the Court of Appeal in Maxwell v Chittick was followed by Debelle J in Re Bosun, where his Honour said at paragraph 18:

“The liquidator has identified a cause of action which, if proved, would entitle the liquidator to recover damages from Makris, notwithstanding that he has been released from bankruptcy. It cannot be said that the liquidator cannot in any respect bring himself within s 153(2)(b). Fraud has a wide denotation in equity, reflecting the fact that Courts of Chancery are courts of conscience acting in personam. Cases such as Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223; Nocton v Lord Ashburton [1914] AC 932; and Boardman v Phipps [1967] 2 AC 46 are examples of what might be regarded as ‘technical’ frauds: see the discussion in Meagher, Gummow and Lehane (3rd edition) paras 1201 - 1210. The pursuit of interest in conflict with a duty arising from a fiduciary relationship may give rise to a ‘technical’ fraud. Fraud in this context must be given a broad interpretation by recognising that, in equity, that which is unconscionable might constitute fraud. As was observed by Mahoney JA in Maxwell v Chittick (unreported, NSW Court of Appeal, 23 August 1994):

‘The term 'fraud' in the bankruptcy provisions in this regard has been given a broad interpretation’.”

64 The FASC contains express allegations that the seven sets of representations allegedly made by the First Defendant were false or were made with reckless indifference as to their truth.

65 In SGB v The Queen (2005) HCA 80, Gummow, Hayne and Heydon JJ said at paragraph 2:

“When ‘reckless’ is used in applying the principles of the tort of negligence, the yardstick is objective rather than subjective. On the other hand, to sustain an action in deceit, fraud is proved when it is shown ‘that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false’ [the formulation is that of Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 374] . But (3) is but an instance of (2) because, as Lord Herschell put it in Derry v Peek [at 374] :

[O] ne who makes a statement under such circumstances can have no real belief in the truth of what he states.

This reasoning is akin to that which supports the evidentiary inference explained by Lord Esher MR as being that one who wilfully shuts his eyes to what would result from further inquiry may be found to know of that result [ English and Scottish Mercantile Investment Co v Brunton [1892] 2 QB 700 at 707–708] .”

Applying Maxwell v Chittick and Re Bosun , I consider that “fraud” in s.153(2)(b) of the Act extends to fraud of the type described in SGB v The Queen . The FASC alleges fraud of this type against the First Defendant.

66 The allegations of fraud contained in the FASC extend to the seven sets of representations. The Plaintiff alleges a course of conduct against the First Defendant and others over a period of time giving rise to intertwined and related causes of action against the various Defendants. The First Defendant has not demonstrated, to the rigorous standard which is required, that the claims against him in the FASC fall outside the terms of s.153(2)(b) of the Act.

67 Accordingly, I am not satisfied that the Plaintiff’s claims, or any of them, should be summarily dismissed. Nor am I satisfied, having applied the principles cited in paragraph 7 of this judgment, that the alternative basis for relief has been demonstrated on pleading grounds so as to justify an order striking out any part of the FASC.

68 Before making final orders on the application, I wish to make some observations arising from the age of this matter. The proceedings have been on foot for more than a decade. The file is substantial and is now contained in a large box. Although some delay in the matter in the last year may be explained by the Plaintiff and the First Defendant awaiting the decision of the High Court in Coventry, it is not clear what the reasons are for prior delay. Since August 2005, however, the Civil Procedure Act 2005 has been in force. No doubt, the parties to these proceedings will bear in mind the statutory obligations and duties of parties contained in s.56 of that Act, and the statutory injunction to eliminate delay in s.59, in approaching the further conduct of the proceedings.

69 The First Defendant’s Notice of Motion is dismissed with costs.

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