Thomas v TAIAROA
[2020] FCCA 3524
•22 December 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
| THOMAS v TAIAROA & ANOR | [2020] FCCA 3524 |
| Catchwords: BANKRUPTCY – Application to set aside bankruptcy notice – whether cross-demand, set-off or cross-claim – whether demand in same right. |
| Legislation: Corporations Act 2001 (Cth), ss.180, 236, 598(1), 568(4) |
| Cases cited: Aklia Holdings Pty Ltd v The Carter Group Pty Ltd (in liq) [2017] QSC 75 Ballard v Multiplex Ltd (2008) 68 ACSR 208 Carey v Freehills (2013) 303 ALR 445 Chawan v Euphoric Pty Ltd (2009) ACSR 252 Dean v Antunes [2016] NSWSC 1845 Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 Giles v Rhind [2003] Ch 618 Ivory v Telstra Corporation Limited [2010] FMCA 123 Ivory v Telstra Corporation Limited [2010] FCA 1361 Morris v IMF Bentham Limited [2018] FCA 1009 Prudential Assurance Co. v Newman Industries (No.2) [1982] CH 204 |
| Applicant: | LUKE THOMAS |
| First Respondent: | KERI TAIAROA |
| Second Respondent: | LLL NOMINEES PTY LTD |
| File Number: | BRG 1061 of 2019 |
| Judgment of: | Judge Jarrett |
| Hearing date: | 16 April 2020 |
| Date of Last Submission: | 16 April 2020 |
| Delivered at: | Brisbane |
| Delivered on: | 22 December 2020 |
REPRESENTATION
| The Applicant in person via telephone link |
| Solicitors for the Respondents: | DSA LAW Pty Ltd |
ORDERS
The application filed on 24 March, 2020 be dismissed;
The order made on 5 March, 2020 be confirmed;
The applicant pay the respondents costs of and incidental to the application filed on 24 March, 2020 to be assessed, if not otherwise agreed, pursuant to the provisions of the Federal Circuit Court (Bankruptcy) Rules 2016.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 1061 of 2019
| LUKE THOMAS |
Applicant
And
| KERI TAIAROA |
First Respondent
| LLL NOMINEES PTY LTD |
Second Respondent
REASONS FOR JUDGMENT
On 18 November, 2019 the respondents caused the issue of a bankruptcy notice against the applicant. The bankruptcy notice was based upon a costs orders made in the Supreme Court of Queensland and an order for the payment of the costs as assessed. Copies of each of those orders were attached to the bankruptcy notice.
By application made on 11 December, 2019, the applicant applied for an order that the bankruptcy notice be set aside. He also sought orders that:
a)the time for compliance with the bankruptcy notice be extended on the grounds that the applicant had applied to set aside and/or stay the judgment or order in respect of which the bankruptcy notice was issued; and
b)the time for compliance with the bankruptcy notice be extended “on other grounds”.
By an interlocutory application made on 3 March, 2020 the applicant sought further orders, namely an order that his principal application be adjourned until a date after an application made by him to set aside the costs order was heard and determined or alternatively, that the applicant be granted an extension of time to comply with certain orders of a Registrar made on 29 January, 2020.
On 5 March, 2020 the application in a case filed on 3 March, 2020 was heard by a Registrar and dismissed. The adjournment was refused, as was the request for an extension of time within which to comply with the orders made on 29 January, 2020. The application filed on 11 December, 2019 for an order setting aside the bankruptcy notice was also dismissed.
By this application the applicant seeks to review the Registrar’s orders.
The review is a hearing de novo of the applicant’s application upon the material before the Registrar and any other material that the Court gives the parties leave to rely upon: rule 20.03 Federal Circuit Court Rules 2001. The applicant sought leave of the Court to file and read an affidavit (unsworn) of Luke Thomas filed 15 April, 2020. Leave was not opposed and I granted the applicant that leave.
The applicant argues that he has a valid counterclaim set-off and or cross demand against:
a)the first respondent on grounds that include:
i)breach of contract;
ii)misleading and deceptive conduct by the respondent in his capacity as director of La La Land Byron Bay Pty Ltd (in liquidation) ACN 092 061 688 (“La La Land”); and
b)the second respondent on grounds that the second respondent aided, abetted, counselled or procured the conduct of the first respondent.
In total, the applicant has filed five affidavits. The first, filed on 11 December, 2019 has 441 pages, of which 432 are annexures. There are two filed on 28 January, 2020. The first annexes a draft statement of claim which is 65 pages in length. The second consist of just three paragraphs. There is an affidavit filed on 4 March, 2020. It is 395 pages in length, of which 390 are annexures. There is also an affidavit filed on 15 April, 2020 (by leave) consisting of 396 pages of which 378 are annexures. In total then, the applicant relies upon more than 1300 pages of material.
The bankruptcy notice is based upon an order of a Registrar of the Supreme Court of Queensland made in proceeding number BS8834/2018 on 11 November, 2019 whereby the applicant was ordered to pay to the respondents the sum of $11,528,92, being their assessed costs pursuant to the orders of Burns J made on 21 August, 2018 and 18 June, 2019. The former order of Burns J is attached to the bankruptcy notice. The latter is not. No issue was taken with that by the applicant and properly so: Ivory v Telstra Corporation Limited [2010] FMCA 123, appeal dismissed: Ivory v Telstra Corporation Limited [2010] FCA 1361.
The applicant was one of the applicants in the Supreme Court proceedings in which he initially sought an interlocutory injunction on his own behalf and on behalf of La La Land. Injunctions were sought against the respondents to the present application and another person so as to prevent them from alienating the company’s property or some of it and in particular, a nightclub business. The application was unsuccessful. The applicant, not surprisingly, was held not to have standing to bring the proceedings. The first costs order made on 21 August, 2018 resulted from that failed application. The second costs order was made against the applicant because of an argument he pursued about the identity of the costs assessor to be appointed to assess the costs under the first costs order.
On 5 December, 2019 the applicant made an application to the Supreme Court of Queensland seeking orders to stay, or alternatively, set aside the costs orders made on 21 August, 2018 (referred to in the application as 17 August, 2018) and 18 June, 2019. The applicant pursued that application on the basis that:
a)the decision was tainted by fraud, which he intended to detail in a supplementary affidavit;
b)facts had been discovered after the order was made which may entitle him to be relieved from the order, which he also intended to detail in a supplementary affidavit; and
c)he had been “assessed and authorised by ASIC as an ‘eligible applicant’ … a fact discovered after the orders were made that, if discovered in time, may have entitled me to an order or decision in my favour or to a different order, as the “eligible applicant” status, to the best of my knowledge, gave me the grounds to bring the interlocutory injunction application in BS 8834/18”.
That application was before the Supreme Court on 10 February, 2020. Amongst other orders, the applicant was ordered to file further submissions and the application was otherwise adjourned to the Registry. It has not yet been determined. The costs orders remain extant.
The applicant gives the following background to his claim that he has a genuine demand or claim against the respondents.
He claims that he and the first respondent were “joint owners” of La La Land. It owned and operated a nightclub from premises in Byron Bay. Another person, Thomas Raftopoulos (the respondent in proceedings BRG1062/2019) was an “associate” of the company. The applicant does not explain what he means by the term “associate”. It seems that Mr Raftopoulos provided services to the company in one form or another.
The applicant alleges that between November, 2014 and September, 2015 he was the licensee and manager of La La Land’s nightclub business and it made over $400,000 in profit before tax per annum. He claims that in February, 2015 the first respondent made a verbal threat to him that he would liquidate the company. He does not say why the threat was made. In around July, 2015 the applicant alleges that the first respondent told him that he did not want the applicant managing the business. He again threatened to liquidate the company. The applicant refused to cease being the manager of the business.
In September, 2015 the applicant says that he received an offer from the first respondent and Mr Raftopoulos to purchase the applicant’s shares in La La Land for $400,000. He declined the offer. He alleges that on 25 September, 2015 the respondent “fraudulently and without my knowledge or consent, altered the Company’s ASIC register, by way of an alleged shareholder resolution with Mr Raftopoulos and appointed [another person] as voluntary administrator to the Company”. He says that “Within weeks [the first respondent] and Mr Raftopoulos effectively “phoenixed” the Company’s primary assets for approximately $7000 to LLL”. LLL Nominees Pty Ltd is the second respondent in this case. He alleges that the first respondent and Mr Raftopoulos jointly own the second respondent in these proceedings.
The applicant says that he has grounds for a counterclaim, set off or cross demand against the respondents in this case. He has issued proceedings against the voluntary administrator of La La Land. It is not at all clear, however, how a claim against the voluntary administrator of La La Land is a counterclaim, set off or cross demand against the respondents in this case.
He has also issued several proceedings against people including the respondents in this case. They are best summarised in the affidavit of Francesco Starvaggi filed on 19 February, 2020 as follows:
18. On 20 December 2018, at the Applicant’s request, on the basis of his unverified and unilateral allegations concerning the Respondents and other parties, the Australian Securities & Investments Commission (ASIC) conferred authorisation upon him as an ‘eligible applicant’ on behalf of La La Land Byron Bay Pty Ltd (ACN 092 061 688) (In Liquidation) (La La Land) for the purposes of Part 5.9 of the Corporations Act 2001. This authorisation allows the Applicant to bring certain legal proceedings, including applying for the issue of examination summonses, on behalf of the company in liquidation, La La Land.
19. In the time following, the Applicant caused a number of legal proceedings in the Federal Court of Australia to be issued by, or on behalf of La La Land, purportedly pursuant to the Corporations Act 2001 (the Act), including proceedings:
i. QUD 18/2019 (concerning the issue of public examination summonses pursuant to s.596A and s.596B of the Act),
ii. QUD 41/2019,
iii. QUD 407/2019 and
iv. QUD 438/2019.
20. These proceedings were issued against a number of parties respectively, including without limitation, the Respondents, Peter Raftopoulos and the liquidator of La La Land, Andrew Poulter (Liquidator). In the proceedings, the Applicant sought relief in the form of declarations, injunctive relief (freezing orders), damages, equitable damages, orders for the transfer of shares as well as “interests in equity” [sic].
21. On 23 December 2019, the Federal Court of Australia ordered that:
i. pursuant to Rule 30.11 of the Federal Court Rules 2011, proceedings QUD 407 of 2019 and QUD 438 of 2019 be consolidated under proceeding QUD 41 of 2019;and
ii. the consolidated proceeding QUD 41 of 2019 be transferred to the Supreme Court of Queensland.
22. On 10 February 2020, his Honour Justice Flanagan of the Supreme Court of Queensland ordered that proceedings BS 206/20 and BS 8834/20 be consolidated under proceeding BS 13700/17, which is an earlier proceeding the Applicant issued in that Court against the Liquidator. The Applicant refers to proceeding BS 13 700/17 at paragraph 18 of his first affidavit.
The claims that the applicant seeks to pursue in the above proceedings include claims for:
a)orders pursuant to s.598 of the Corporations Act 2001 (Cth) that the respondents (and others) compensate La La Land in respect of fraud, breaches of fiduciary duty and negligence (all of which are unparticularised);
b)derivative actions on behalf of La La Land seeking compensation to be paid by the respondents and others to La La Land on account of unparticularised negligence and other conduct;
c)a claim that La La Land (a company in liquidation) transfer shares to the applicant;
d)claims for declarations against the respondents concerning alleged breaches of directors’ duties under s.180 of the Corporations Act.
e)various other claims of La La Land intimated against the respondents, purportedly concerning an alleged ‘insurance claim’, breach of contract and misleading and deceptive conduct.
The claims are for damages, compensation or other unliquidated sums alleged by the applicant to be payable by the respondents to La La Land. The applicant has been designated an “eligible applicant” for the purposes of s.598 of the Corporations Act. That section permits the applicant to bring an application to a Court on behalf of La La Land and if the Court is satisfied that:
a)a person is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation; and
b)the corporation has suffered, or is likely to suffer, loss or damage as a result of the fraud, negligence, default, breach of trust or breach of duty;
the Court may make such order or orders as it thinks appropriate against or in relation to the person and may so make an order against or in relation to a person even though the person may have committed an offence in respect of the matter to which the order relates: s.598(1) of the Corporations Act. The orders that may be made against a person include an order directing the person to pay money or transfer property to the corporation and an order directing the person to pay to the corporation the amount of the loss or damage: s.568(4) of the Corporations Act.
The applicant has annexed a draft statement of claim to one of his affidavits filed on 28 January, 2020. However, the use to which he intends to put that statement of claim is not at all clear. It does not appear to be a statement of claim for use in any of the Supreme Court proceedings or for use in any of the Federal Court proceedings. It has no court title to it, nor any file number. The applicant does not swear that the factual matters set out in the draft statement of claim are true.
In his second affidavit filed on 28 January, 2020 the applicant swears that the amount of his counterclaim, set off or cross demand against the respondents is in excess of $1 million and exceeds the amount claimed in the bankruptcy notice by $980,000 or more. He says that the counterclaim, set off or cross demand was not raised in the proceedings that resulted in the orders to which the bankruptcy notice relates because at the time he had not obtained authorisation from ASIC to bring part of the proceedings and he was not aware of potential causes of action available to a creditor or a shareholder against the shareholder, creditor and/or fiduciary.
Consideration
The applicant argues that the counterclaim, set off and/or cross demand for breach of contract and misleading and deceptive conduct are mutual and in the same right. However, the difficulty with this argument is that they are not. Even if the applicant has demonstrated that he has a genuine demand, set off or cross-claim against the respondents, it is not in the same right as is the judgment against him. A counterclaim, set off or cross demand may only be set up to meet the demands of a bankruptcy notice if it is due against the judgment creditor in the same right as is the judgment against the debtor which forms the basis of the bankruptcy notice: Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 351 – 352. Here, the applicant’s proposed demand set off or cross-claim is brought by him for La La Land as an eligible person for the purposes of s.569 of the Corporations Act. The prayer for relief set out in his draft statement of claim confirms that the action (wherever it might be brought) is brought on behalf of La La Land. The liquidator of the company will be entitled to any of the fruits of the applicant’s claims. The order obtained by the respondents against the applicant is against him personally. There is no suggestion that he is not personally responsible for it.
The applicant recognises that what he wishes to claim in his counterclaim is what he describes as “Reflective Loss”. Ordinarily, a shareholder cannot recover damages merely because the company in which he is interested has suffered damage which is reflected in the loss in value of his shares: Prudential Assurance Co. v Newman Industries (No.2) [1982] Ch 204. The applicant concedes that such a principle is well established in Australia. However, he argues that there are exceptions and that his counterclaim is within one of the exceptions.
The applicant draws my attention to the decision of McPherson JA in Thomas v D’Arcy [2005] 1 QdR 666 where his Honour said:
[7] In Johnson v Gore Wood & Co [2002] 2 AC 1, 35-36, Lord Bingham stated the relevant principles in the form of three propositions:
“(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223, Heron International, particularly at pp 261-262, George Fischer, particularly at pp 266 and 270-271, Gerber and Stein v Blake, particularly at pp 726-729.
(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber.
(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v Sheard, at pp 195-196, Heron International, particularly at p 262, R P Howard, particularly at p 123, Gerber and Stein v Blake, particularly at p 726. I do not think the observations of Leggatt LJ in Barings at p 435B and of the Court of Appeal of New Zealand in Christensen v Scott at p 280, lines 25-35, can be reconciled with this statement of principle.”
There are exceptions to the rule. Again, the applicant referred me to McPherson JA in Thomas v D’Arcy (above) at [10] where his Honour said:
[10] There are, of course, exceptions to this rule. Perhaps the best known is that a corporator may sue “derivatively” for what is called a fraud on the minority (more accurately a fraud on the company: see K. W. Wedderburn, in [1958] Cambridge Law Journal at 93–94) to recover corporate property or assets misappropriated by directors or controlling shareholders: Burland v. Earle [1902] A.C. 83, 93. In such proceedings, the corporation must be joined as a party both to ensure it is bound by the judgment and also that any assets recovered or their value are accounted for to it and not to the individual shareholder: Spokes v. Grosvenor Hotel Co. [1897] 2 Q.B. 124, 128–129. Otherwise it would in substance sanction payment to that shareholder of an unauthorised dividend or distribution of capital…
The other members of the Court in Thomas v D’Arcy (above) (Williams and White JJA) agreed with McPherson JA. White JA said:
[37] I have had the advantage of reading the reasons for judgment of McPherson J.A. and Williams J.A. and I agree with them. Where separate duties are owed to a company and an individual who happens to be a shareholder in the company it is the nature of the damages sought to be recovered which is important. If, no matter how pleaded, the damages are merely reflective of losses sustained by the company they may not be recovered by the individual. It is that characteristic which will be determinative.
[38] The New Zealand Court of Appeal in Christensen v. Scott [1996] 1 N.Z.L.R. 273, as Williams J.A. has pointed out, concluded, erroneously in my view, that there need only be an independent duty owed to a shareholder to permit recovery of damages even if identical to the loss suffered by the company. Notwithstanding that Lord Cooke of Thorndon sought to explain Christensen v. Scott (he was a member of that Court) in Johnson v. Gore Wood & Co. [2002] 2 A.C. 1 at 45 by suggesting that the language of the judgment is guarded and provisional it is difficult to see how the reasoning in Christensen v. Scott can stand with that in Johnson v. Gore Wood or, for that matter, Gould v. Vaggelas (1985) 157 C.L.R. 215.
Section 236 of the Corporations Act permits a person to bring proceedings on behalf of the company if the person is a member, former member, or person entitled to be registered as a member of the company and the person has been granted leave to do so pursuant to s.237 of the Corporations Act. The right to pursue a derivative action, however, is not available where the company is in liquidation: Chawan v Euphoric Pty Ltd (2009) ACSR 252. The applicant does not suggest here that he is entitled to pursue the current proceedings pursuant to section 236 of the Corporations Act.
It is clear from his draft statement of claim that even if the allegations made by him in the statement of claim are true and even if those matters give rise to the causes of action asserted by the applicant, the loss that he seeks to recover is the company’s loss. The relief sought in the prayer for relief bears that out.
The principle in Prudential Assurance Co Ltd (above) and Johnson v Gore Wood & Co (above) applies even when the company is in liquidation, or has been deregistered: Ballard v Multiplex Ltd (2008) 68 ACSR 208 at [48]; Morris v IMF Bentham Limited [2018] FCA 1009 at [89]; Dean v Antunes [2016] NSWSC 1845 at [49].
The applicant argues that there is now a further exception to the rule against reflective loss. He directs my attention to Giles v Rhind [2003] Ch 618, a decision of the Supreme Court of Appeal. In that case, the claimant was a former company director who was also a shareholder in the company. He brought proceedings against a defendant who had conducted a business in competition with that of the company, in breach of contractual obligations owed to both the claimant and the company. The company’s action for damages had been discontinued due to its inability to find security for costs, as a result of impecuniosity caused by the defendant’s wrongdoing. The terms on which the action was discontinued precluded the company from bringing any further proceedings in relation to its claim. The claimant sought to recover for a variety of losses, including the loss of the value of his shares. The Court of Appeal allowed the claim to proceed to trial. It considered that it would be unjust to allow a wrongdoer to defeat a claim by shareholders on the basis that the claim was trumped by a right of action held by the company which his own wrongful conduct had prevented the company from pursuing. It concluded that the “reflective loss” principle, in so far as it was relevant, did not apply in those circumstances.
Although referred to in Aklia Holdings Pty Ltd v The Carter Group Pty Ltd (in liq) [2017] QSC 75 at [74] and Carey v Freehills (2013) 303 ALR 445 at [448] Giles v Rhind has not been adopted or applied in Australia. Paraphrasing what was said by McDougall J in Ballard v Multiplex Ltd (above) at [48], if effect is to be given to this aspect of the submissions for the applicant, it is a matter for an intermediate, or perhaps final, appellate court.
However, assuming for the minute that what was said in Giles v Rhind (above) applies, the difficulty for the applicant is that the company still exists, albeit in liquidation. The liquidator is seized of the ability to pursue the company’s rights and any relief to which the company might be entitled. The company has not been prevented from bring any action against the respondents to recover its loss. Whether it does so is a matter for the liquidator. The applicant asserts, without any evidence to establish the fact, that the first respondent and the liquidator are “joint wrongdoers” and that the liquidator is acting merely as the first respondent’s “puppet”. He asserts that the liquidator is “making it impossible for the applicant to pursue a claim in the company’s name”. But there is no evidence that that is so. The draft statement of claim proffered by the applicant does not seek to join the liquidator personally nor the company in liquidation to whatever proceedings are intended by that statement of claim.
Conclusion
The obligation on the applicant is to demonstrate that he has a genuine demand, set off or cross-claim. The Court must be satisfied that it has a reasonable probability of success and that it is just that that claim should be determined before any bankruptcy proceedings. On the evidence before me, I am not so satisfied. Despite the enormity of the material relied upon by the applicant, given the nature of the claim that he wishes to pursue and the material before me in support of it, I can only conclude that his proposed demand, set off or cross-claim is speculative at best.
Moreover, the demand or claim must be in the same right as the judgment against the applicant. It is not in this case.
The application to review the Registrar’s decision must be dismissed and the Registrar’s decision made on 5 March, 2020 confirmed. To the extent that the applicant seeks an extension of time within which to comply with the requirements of the bankruptcy notice until the proceedings are completed in the Supreme Court, that application too, must be dismissed.
The respondents should have their costs of and incidental to the proceedings to be assessed, if not otherwise agreed, pursuant to the provisions of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth).
I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 22 December, 2020.
Associate:
Date: 22 December 2020.
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