Southern Equities Corp Ltd (in Liq) v Bond & Ors No. Scgrg-96-113 Judgment No. S441
[1999] SASC 441
•1 October 1999
SOUTHERN EQUITIES CORPORATION LTD (IN LIQUIDATI0N) v BOND & ORS
[1999] SASC 441
Civil
DEBELLE J. (ex tempore) This is an application to strike out certain pleadings on the ground that they disclose no reasonable cause of action or on the grounds that they are prejudicial or embarrassing. There are only two pleadings in respect of which it is alleged that no reasonable cause of action is disclosed. I will identify them in the course of these reasons. For the rest, the allegations as to prejudice or embarrassment are made on a variety of grounds which can be identified in each of the relevant paragraphs of the statement of claim.
I will, in these reasons, deal with the matters of substance. There may be some matters of detail to be attended to at the end.
For the purposes of these reasons, I deal with the statement of claim in the manner in which it is proposed to be amended. That is the statement of claim as amended, together with the document which has been called an insert, the latest version of which is dated 1 October 1999.
The first complaint is as to para 252.1(a). Paragraph 252.1 reads:
“John Bond knew the facts and matters set out in paragraphs 120A to 120C prior to his resignation as a director of SECL on 19 July 1991 and if he knew the facts pleaded in paragraph 131A prior to his resignation as a director of SECL on 19 July 1991 then he was under a duty both fiduciary and statutory as a director of SECL to:
(a) reveal those facts to SECL;
(b) take steps to recover the SECL Artworks.”
It is intended that the plea on what I will call the conditional hypothesis that John Bond knew certain facts prior to 19 July 1991 is embarrassing. It is asserted that a person should not be required to answer a hypothetical case. This submission fails for the following reasons. It is necessary to read para 252.1, together with the plea in para 131A, where the plaintiff pleads that “at a date not presently known to the plaintiffs but between February 1991 and September 1993” John Bond was informed by Craig Bond or Alan Bond of the information listed in para 131A. It is apparent that the pleader in para 252.1 is referring to the facts as alleged in para 131A and is pleading that, if the plaintiffs can prove that the information was obtained prior to his resignation as a director, then John Bond is in breach of his fiduciary statutory duties as a director. I do not think that the plea is either embarrassing or prejudicial. It is a plea which is capable of being answered. At the end of the day, the issue depends upon whether the plaintiffs will be able to prove that the knowledge was acquired prior to the resignation of Mr John Bond as a director on 19 July 1991. The plea is not unlike a common form of pleading which states that further allegations are conditional on facts being gleaned by way of discovery. The objection to the plea is, therefore, dismissed.
It is convenient to deal with another objection at this stage. It was asserted that the plea in para (b) of para 252.1 that John Bond failed to take steps to recover the SECL art works is improper in that John Bond, being but one director of SECL, had no authority himself or, indeed, any power or title to take steps to recover the art works. It is acknowledged by the plaintiffs that the plea is inelegant. It is plainly intended to state that John Bond failed to cause steps to be taken. There are a number of steps that he could have taken. He could have sought to persuade other directors to join him and convene a meeting of the board or, at least, to have alerted the board or officers of his company to his knowledge so that the company could itself take steps to recover the art works. As I have said, this plea is to be amended to make the allegation clear. There is no need at this stage to make any formal orders striking it out. I think that its intention was clear notwithstanding the inelegance of its expression.
The next objection also stems from the pleadings in para 252.1. It is implicit in that plea that the plaintiffs are alleging that John Bond had fiduciary and statutory duties to disclose what he knew after he had resigned as a member of the board of SECL on 19 July 1991. Mr Conti, who appeared for John Bond, submitted that the plaintiffs are relying on a cause of action not known to the law. The effect of his submission was that the duties of a director, be they statutory, common law or fiduciary, would cease once he resigned as a director of the company. Mr Hoffman, who appeared for the plaintiffs, acknowledged that there was a degree of novelty in the plea. However, it was Mr Hoffman's submission that, notwithstanding resignation, a director might be required, in certain circumstances and in the proper discharge of his duties as a director, to disclose knowledge which had come into his possession. In making that submission he did not, as I understand the submission, distinguish between knowledge acquired while he was a director and knowledge acquired after his resignation.
It has been said that the nature and extent of fiduciary duties are not closed. If a director of a company during the time of his directorship acquires the knowledge of a fraudulent disposition of assets of a company of which he is a director, there may be a strong argument for the proposition that, even after his resignation, he has a duty to disclose that information to the company or its directors or proper officers.
Shortly stated, what is being alleged in this case is that there have been fraudulent dispositions of property belonging to SECL. It is further alleged that Mr John Bond knew of those fraudulent dealings and some of that knowledge was acquired prior to his resignation as a director. It has already been held in Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 that a director cannot escape his fiduciary obligations as a director by resigning. See also Addstead Limited v Liddan Pty Ltd (1997) 25 ACSR 175. Where a fraud is being perpetrated upon a company, a proper discharge of the fiduciary obligations of a former director who acquired knowledge of the fraud prior to his resignation may involve an obligation to make disclosure to the company, its directors or other officers. Whilst the question has a degree of novelty, I do not think it can be said that it is a question upon which the plaintiffs could not possibly succeed. I will not, therefore, strike out those paragraphs which contain allegations to the effect that John Bond had an obligation to disclose information gleaned prior to his resignation and after the time of his resignation.
Some of the allegations also appear to allege an obligation to disclose information gained after his resignation. That allegation may, as a matter of law, be more difficult to sustain. I acknowledge the force of Mr Conti's submissions in that regard. Nevertheless, I am not prepared to strike it out given the close relationship between the two issues. I am further encouraged not to strike out these allegations because they do not involve any questions of fact which are not raised in respect of other causes of action upon which the plaintiffs rely. That is to say, the defendant is not being embarrassed by having to meet questions of fact which would not otherwise arise. All that is involved is but one of a number of questions of law to which those facts give rise. I, therefore, do not strike out those pleas.
The next complaint concerns the plea in para 253A which appears to be based upon the second limb of the principles as they were enunciated in Barnes v Addy (1874) 9 LR Ch App 244. The elements of that cause of action are that a person has knowingly given assistance to a person who has acted fraudulently or in breach of trust. It is asserted that, whilst there is a plea of knowledge, there is no plea of assistance. The submission is correct, the defect in the pleading is acknowledged by the plaintiffs. However, it might be said that reference to the particulars of the plea, that is to say, reference to paras 188A to 188M, disclose what might be assistance by Mr John Bond. Once this paragraph is amended in the way which is suggested, then the grounds of objection dissipate. I acknowledge that, even when amended, the plea raises a question whether membership of a board of directors can constitute assistance of the kind contemplated in Barnes v Addy. There is no objection to this plea on the ground that it discloses no cause of action, nor do I think there could be. One question for the trial judge is whether it will be sufficient for the purpose of the principles in Barnes v Addy that the assistance amounts to no more than that a person is simply a director of a company. That having been said, it may well be that the plaintiffs will seek to prove that Mr John Bond's involvement as a director of Carindale and other companies was not merely as a member of the board but was something more direct. No doubt, that will be the question to which evidence will be directed.
The next group of objections relate to the plea by the plaintiffs of a conspiracy to defraud SECL in paras 259 and following. It is alleged that the plaintiffs have failed to plead the elements of this tort, those elements being a combination of the defendants, the effectuation by the combination of an unlawful purpose, and resulting damage to the plaintiffs. When read as a whole the plaintiffs have, in my view, pleaded the necessary elements and I dismiss the objection. I should add that the essential premise for the objection was that the involvement of Mr John Bond was pleaded as being a matter to be inferred from knowledge of certain facts as pleaded in the statement of claim. It is asserted that mere knowledge of those facts was an insufficient ground upon which to base any plea of his being a party to the conspiracy. In essence, that is an objection to the question whether the inferences which the plaintiff seek to draw can properly be sustained. At the end of the day, that is a matter for the trial judge after hearing all the evidence. It is not a matter which justifies striking out any of these pleadings or asserting that the necessary elements of the tort have not been pleaded.
The final objection relates to a plea of unconscionable conduct in paras 263 to 267. The plaintiffs assert that John Bond, along with the other defendants, had been guilty of unconscionable conduct. The principles relating to this equitable doctrine were examined in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. They have, of course, received subsequent examination by the High Court. However, it is convenient to refer to the reasons of Mason and Deane JJ in Amadio. The effect of the reasoning of their Honours is that unconscionable conduct in this context exists when unconscientious advantage is taken of an innocent party by a stronger party. I refer particularly to the observations of Mason J at 461 and 462 and to those of Deane J at 474 to 477.
Reliance on the principles of unconscionable conduct in the circumstances of this case is mistaken. The essence of this doctrine is to strike down transactions in which a person engages by reason of the unconscientious conduct of another and which result in a benefit to the person who is acting unconscionably. That is not the gist of the pleas in paras 263 and 267. Instead, the gravamen of the plaintiffs’ complaint is that there was a failure by the defendants to disclose what is now alleged to be their fraudulent activity in a way which caused harm to the company. There is no plea that either of the companies or the liquidator have acted in consequence of the actions of the defendants. This is simply a case where it is alleged that former directors of the plaintiff companies and other persons have acted in the pursuance of a series of fraudulent transactions designed to remove assets belonging to the two plaintiff companies.
It is true, as was said in Amadio, that the categories of unconscionable conduct are not closed. It is also true, as Mr Hoffman said, that Mason J pointed out that fraud, misrepresentation, breach of fiduciary duty, undue influence and indeed unconscionable conduct of itself are all species of unconscionable conduct. The actions of these persons might well be said to be breaches of their fiduciary duties to the company but the fact that a breach of fiduciary duty might be a species of unconscionable conduct is not a reason which justifies the present claims made by the plaintiffs on the ground of unconscionable conduct. For those reasons I would strike out paras 263 to 267 of the statement of claim.
There are two other more detailed matters. The first concerns the plea in para 258, the first of the paragraphs which plead the cause of action of a common law conspiracy. The plea simply states, “The plaintiffs repeat paragraphs 1 to 257 above”. It is objected that the plea is oppressive in that it requires the defendant to track through the whole of the pleading. On one view, when read in context the plea is not oppressive. There are particulars given of the allegations of conspiracy. They are spelt out in para 259A. Subsequent paragraphs deal with the allegations as a combination and of the steps taken in pursuance of the alleged conspiracy. In this way the plaintiffs readily identify the paragraphs on which they rely. The plea in para 258 might be said to be by way of introduction. The pleading of the conspiracy is not grounded upon it. There seems to be no reason why it needs to be included and it may therefore be struck out.
The second complaint contains an apparent inconsistency between the terms in which paras 259 and 259A are expressed as to the time when the defendant Mr John Bond became a part of the conspiracy. That inconsistency is acknowledged by the plaintiffs and Mr Hoffmann indicated the manner in which that inconsistency might be addressed. He will do so by way of an amended pleading, the general nature of which was mentioned in the course of his submissions.
In the result, only one alleged cause of action has been struck out. However, the plaintiffs must make a number of amendments to the statement of claim. I will deal with objections to the statement of claim made by other defendants and will then order the filing of an amended statement of claim and fix dates for filing defences and other pleadings.
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