Vakiloroaya v HVPS Holdings Pty Limited
[2022] FCA 1192
FEDERAL COURT OF AUSTRALIA
Vakiloroaya v HVPS Holdings Pty Limited [2022] FCA 1192
File number(s): NSD 179 of 2022 Judgment of: RARES J Date of judgment: 15 September 2022 Catchwords: CONTRACTS – election – where inventor assignor allegedly induced by fraudulent representation to assign rights to intellectual property in consideration of monthly payments – where assignor became aware of fraud and continued to demand and received part payments of outstanding consideration from assignee – where assignor knew of fraud and right to avoid assignments – where assignor issued statutory demand to assignee under s 459E of Corporations Act 2001 (Cth) – where court set aside statutory demand - whether assignor elected to affirm assignments
CORPORATIONS – insolvency – whether leave to proceed in appeal under s 36(5) of Patents Act 1990 (Cth) against company in creditors voluntary liquidation should be granted under s 500(2) of Corporations Act 2001 (Cth) – summary dismissal – where applicant has no reasonable prospect of successfully prosecuting appeal under s 31A of Federal Court of Australia Act 1976 (Cth) – Held: leave refused
PATENTS – where assignor applied under s 36 of Patents Act 1990 (Cth) for declaration that assignee not an eligible person – where Commissioner found no power to make declaration under s 36 where assignor allegedly induced by fraud to allow assignee to apply for patent – where assignor appealed to court under s 36(5) of Patents Act – whether any reasonable prospects of successfully prosecuting appeal
Legislation: Competition and Consumer Act 2010 (Cth) Sch 2 (Australian Consumer Law) s 243
Corporations Act 2001 (Cth) ss 459E, 500(2)
Federal Court of Australia Act 1976 (Cth) s 31A(1)
Patents Act 1990 (Cth) ss 36, 160
Cases cited: Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305
Immer (No 145) Pty Limited v Unity Church in Australia Property Trust (NSW) (1993) 182 CLR 26
Matthews v Smallwood [1910] 1 Ch 777
Division: General Division Registry: New South Wales National Practice Area: Intellectual Property Sub-area: Patents and associated Statutes Number of paragraphs: 60 Date of hearing: 15 September 2022 Counsel for the Applicant: Mr H P T Bevan SC with Mr R J Boadle Solicitor for the Applicant: Corporate Legal Counsel for the Respondent: Ms E Whitby Solicitor for the Respondent: Phillips Ormonde Fitzpatrick Lawyers ORDERS
NSD 179 of 2022 BETWEEN: VAHID VAKILOROAYA
Applicant
AND: HVPS HOLDINGS PTY LIMITED
Respondent
ORDER MADE BY:
RARES J
DATE OF ORDER:
15 SEPTEMBER 2022
THE COURT ORDERS THAT:
1.The interlocutory application filed on 7 June 2022 be dismissed.
2.The appeal be dismissed.
3.The applicant pay the respondent’s costs.
4.The parties bring in draft orders as to any alternative costs order and in respect of any application for assessment in a lump sum.
THE COURT NOTES THAT:
5.The interlocutory application was argued on the basis of the amended notice of appeal (intellectual property) and statement of facts and contentions annexed to the affidavit of Zohra Ali sworn 1 June 2022.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(Revised from the transcript)RARES J:
The applicant, Dr Vahid Vakiloroaya is an inventor. He seeks an order under s 500(2) of the Corporations Act 2001 (Cth) for leave to proceed against the present respondent, HVPS Holdings Pty Limited, now in liquidation. Dr Vakiloroaya and Stephen Heaton were directors and shareholders of HVPS from its incorporation on 23 May 2014. HVPS set about trying to commercialise Dr Vakiloroaya’s inventions.
Relevantly, Dr Vakiloroaya assigned to HVPS his rights to an invention in a system and method to improve airconditioning that became the subject of patent application 2017243880 (the 880 application). By a deed of agreement dated 19 September 2016 between Dr Vakiloroaya, HVPS, Independent Products Pty Limited and Mr Heaton (the 2016 deed), Dr Vakiloroaya assigned, and confirmed all prior assignments, to HVPS relating to his present and future intellectual property rights in the invention, including the 880 application.
Dr Vakiloroaya alleges that he was induced to enter into the 2016 deed and other dealings in his invention because Mr Heaton made fraudulent representations to induce him to do so, as I explain below. I have assumed (as did the parties for the purpose of this application) that Dr Vakiloroaya would be able to prove at a trial that Mr Heaton (who is not a party) acted fraudulently as Dr Vakiloroaya asserted.
The circumstances of this appeal
In 2021, Dr Vakiloroaya applied to the Commissioner of Patents under s 36 of the Patents Act 1990 (Cth) for a declaration that, in effect, HVPS was not an eligible person to be named as patentee in respect of the 880 application, and that, instead, he was the only eligible person by reason of Mr Heaton’s fraud.
On 22 February 2022, a delegate of the Commissioner dismissed the application. The delegate decided that, because the 880 application had been assigned to HVPS in exchange for significant consideration, it was outside the Commissioner’s powers to require restitutio in integrum and, therefore, she could not make a declaration under s 36. In addition, if there were such power, the delegate said that she was not prepared to exercise it.
Because HVPS is in liquidation, Dr Vakiloroaya filed his interlocutory application seeking leave to proceed. For its part, HVPS opposes that application and also, if it were granted, seeks security for costs on the basis that it fears Dr Vakiloroaya is unlikely to be able to pay its costs.
In his amended notice of appeal Dr Vakiloroaya seeks relief, relevantly, under s 243 of the Australian Consumer Law in Sch 2 of the Competition and Consumer Act 2010 (Cth) and ss 36(5) and 160 of the Patents Act that each of a deed of agreement that he made with HVPS on 15 April 2016 (the 2016 appendix D deed), the 2016 deed and a deed of assignment of his rights in respect of the 880 application that he made on 19 January 2017 (the 2017 assignment) is void, in whole or, in the alternative, to the extent that it purported to assign to HVPS intellectual property rights, including but not limited to the 880 application, or alternatively orders under s 243 that those documents be rescinded ab initio and that HVPS do all things necessary to transfer the intellectual property rights, including the 880 application, back to Dr Vakiloroaya.
Dr Vakiloroaya claimed that, under the 2016 deed, he was entitled to be paid sums progressively as consideration for his agreement to assign the intellectual property rights in the invention. He asserted that, as the inventor, in April 2016, he had permitted a provisional application, that became a priority document for the 880 application, to be filed in HVPS’s name as applicant and he signed documents to enable that to happen, in reliance on and induced by Mr Heaton’s fraudulent scheme. He claimed that, if he had known the truth, he would not have permitted the provisional application or the 880 application to be filed in HVPS’s name as applicant, or agreed to sign or signed documents, in particular, the 2016 deed and the 2017 assignment.
The parties joined issue on the application for leave on the basis of the issues raised in the amended notice of appeal and Dr Vakiloroaya’s statement of facts and contention in his appeal annexed to an affidavit of his solicitor. First, HVPS contended that Dr Vakiloroaya had elected to affirm the deeds that he seeks to avoid, or have declared void ab initio, and that the appeal will fail so that leave should not be granted to proceed against it. Secondly, HVPS relies on the fact that it has no cash resources and a current cash deficit of over $1.1 million of which its secured creditors, known as the investor group, are owed over $630,000 and unsecured creditors the balance. HVPS also has a contingent liability to Dr Vakiloroaya of nearly $300,000 in respect of moneys owed to him under the 2016 deed and a memorandum of agreement that he made with HVPS on 12 July 2018 (the 2018 memorandum).
Background
It is common ground that, prior to the time Dr Vakiloroaya entered into the 2016 deed, Mr Heaton, who was then the managing director of HVPS, had made representations to him that he (Mr Heaton) had been able to secure interest in the invention and a substantial order from BHP Billiton Limited for airconditioning units using the interest in the invention and air conditioning system that was the subject of the 880 application.
In reliance on Mr Heaton’s representations, on 1 April 2016, Dr Vakiloroaya said that he had permitted HVPS to file the provisional patent application (the 2016 provisional application) which became the 880 application, and, soon after, he entered into the 2016 appendix D deed.
Dr Vakiloroaya said that on 5 August 2016, Mr Heaton gave him an email appearing to be an order by BHP for airconditioning units. He said that this gave him confidence that Mr Heaton and HVPS could commercialise Dr Vakiloroaya’s inventions, because BHP was a large, well-maintained and respectable company. Over the following weeks, Mr Heaton followed up with further emails about BHP’s supposed interest and orders for units. Importantly, as noted above, on 19 September 2016, Dr Vakiloroaya entered into the 2016 deed induced by Mr Heaton’s fraudulent representations.
On 19 January 2017, Dr Vakiloroaya executed the 2017 assignment. It recited that, in consideration of $1, he assigned to HVPS the invention and all improvements to it in respect of the Commonwealth of Australia and all other countries throughout the world, including the right for HVPS to apply to be granted “industrial [scil: intellectual] property rights” protecting the invention and improvements, including patent applications in HVPS’s name. He promised that he would do everything necessary on his part to permit HVPS, as assignee, to perfect its title.
On 25 January 2017 Dr Vakiloroaya resigned as a director of HVPS.
On about 31 March 2017, HVPAS caused the 880 application to be filed in its name. It is now in a national phase entry and claims priority from the 2016 provisional application that HVPS had filed on 1 April 2016.
In late April 2017, both Dr Vakiloroaya and HVPS discovered that Mr Heaton had fraudulently created and made representations to each of them about his communications with BHP and that BHP had neither ordered any units nor had any interest in the invention.
Dr Vakiloroaya re-joined HVPS’s board on 18 July 2017 and remained a member until 17 October 2018. During this period, Dr Vakiloroaya sought legal advice as to his position. He also attended board meetings on 8 September 2017, 9 October 2017, 29 June 2018 and 29 September 2018 at which discussions occurred, as recorded in the minutes, as to HVPS’s financial position, its attempts to raise money and to exploit the 880 application and other intellectual property.
Andrew Calvin was Dr Vakiloroaya’s solicitor, who appears to have acted for him generally with respect to his dealings with his intellectual property rights. He attached to his affidavit of 5 September 2022 file notes that he had made earlier, including one on 31 August 2017 in which Dr Vakiloroaya told him that a board meeting would occur at 2 pm on that day. Dr Vakiloroaya said that he did not think he would get his payment then and wished to issue a statutory demand. Mr Calvin noted that Greg Tunridge, one of the directors of HVPS, had spoken to Mr Heaton, who had alleged that Dr Vakiloroaya was in breach of the 2016 deed, which the latter denied. Mr Calvin included under the file note’s “Actions” heading: “Consider whether can void ab initio or seek damages”, and recorded a doubt as to whether Mr Heaton had sufficient money to make it worthwhile suing him.
On 6 September 2017, Mr Calvin wrote to Mr Heaton on Dr Vakiloroaya’s behalf asserting that Mr Heaton had engaged in fraud or misleading and deceptive conduct. The letter asserted that Mr Heaton’s conduct gave Dr Vakiloroaya the rights to damages and to have the 2016 deed rescinded ab initio.
The board minutes for 9 October 2017 recorded that HVPS’s liabilities included $6000 then due to Dr Vakiloroaya. The minutes noted that HVPS had paid just $42,000 to Dr Vakiloroaya as a result of HVPS achieving an extension of a convertible note issued by the investor group.
Under the 2018 memorandum, Dr Vakiloroaya and HVPS acknowledged that the parties to the 2016 deed had agreed that to vary the timing of the monthly payments of $13,916.67 due to him under it in the period (cl 2B and 2C):
June 2017 to June 2018 (inclusive) were not paid on the due dates, but were replaced by the following payments:
Ÿ$5,000 in June 2017;
Ÿ$2,500 in August 2017;
Ÿ$42,000 in September 2017;
Ÿ$4,000 in October 2017;
Ÿ$4,000 in December 2017;
Ÿ$7,000 in January 2018;
Ÿ$5,000 in February 2018;
Ÿ$10,000 in April 2018;
Ÿ$2,500 in June 2018; and
Ÿ
$2,000 in July 2018.
C. It is agreed that no other payments will be made prior to the Sunset Date,
so that at 30 September 2018, the amount outstanding to Vakiloroaya
under the Agreement, as varied, will be $138,666.67.(emphasis added)
The 2018 memorandum recorded that HVPS was proposing a recapitalisation through a capital raising and conversion of specific debts to equity. It gave Dr Vakiloroaya the right, on certain other conditions, if the recapitalisation occurred, to receive fully issued ordinary shares to the value of $150,000 and, in exchange, he would agree to forego 70% of the outstanding sum due to him. The deed provided in cl 11(d):
Other than as described in this document, the rights of HVPS and Vakiloroaya in relation to the [2016 deed] remain in full force and effect.
(emphasis added)
The capital raising contemplated by the 2018 memorandum did not bear fruit and as a result, in early October 2018, Dr Vakiloroaya immediately sought to enforce his right to be paid the amount of $138,666.67 then owing to him.
On 4 October 2018, Dr Vakiloroaya wrote to Mr Turnidge, following an earlier exchange of emails with Mr Turnidge and other members of the company’s board in which he was seeking payment, saying:
I spoke to my lawyer together with a barrister that I can now challenge [the 2016 deed] that I have signed based on fake facts provided to me and challenge the ownership of patent (I am not going to do that unless I think it is essential).
I have really been screwed on signing [the 2016 deed] and even that agreement has never been followed respectfully. So if we are insolvent let’s consider we are and if we are not I shall be paid.
My lawyer will mail the breach of agreement and payment notice by next week sometimes [sic] for my Sep dept [sic] which is 138666 AUD as the company didn’t provide me any payment plan by today (based on my last email).
(emphasis added)
At around this time, Mr Calvin began writing letters of demand to HVPS.
On 5 October 2018, Mr Calvin, on the letterhead of his then firm, Ash Street Partners Pty Limited, wrote to HVPS, noting that it was indebted to Dr Vakiloroaya for the $138,666.67 under the 2016 deed. Mr Calvin informed HVPS that his client intended, on about 9 October 2018, to serve a statutory demand under s 459E of the Corporations Act on HVPS for all moneys owing to him.
On 9 October 2018, Mr Calvin wrote to the solicitors for HVPS, Wisewould Mahoney. He referred to their letter of 8 October 2018, and in particular denied the assertion that HVPS was not obliged to make any payments to Dr Vakiloroaya under the 2016 deed or the 2018 memorandum. The letter stated that, rather, the position was that HVPS “is in breach of the [2016 deed] by its regular and long standing failures to pay monies owing to our client under the [2016 deed]”. The letter referred to Dr Vakiloroaya’s 4 October 2018 email saying:
The company has repeatedly since about May 2017 (within 8 months of the date of the [2016 deed]) failed to pay to our client amounts owing under the [2016 deed] and now, despite his many good faith accommodations and even a stand-still under [the 2018 memorandum], it is apparent that HVPS has no intention of acting as if it was bound by the [2016 deed] except when it suits its own ends.
(emphasis added)
Mr Calvin reasserted Dr Vakiloroaya’s entitlement to payment of the debt due to him. It asserted that Wisewould’s letter of 8 October 2018:
may be a repudiation of [the 2016 deed] and [the 2018 memorandum]. Our client may be required to consider whether to elect to affirm one or both of these documents and sue for damages, or elect to accept the repudiation, terminate and sue for damages. Our client is considering his position.
(emphasis added)
The letter referred to Dr Vakiloroaya’s position that Mr Heaton had induced him to enter into the 2016 deed and transfer three patent applications to HVPS by his fraudulent misrepresentations. It said that Dr Vakiloroaya:
…is entitled to certain declarations including setting aside the [2016 deed], return of the (remaining) third patent [viz: the 880 application] to him, an order for damages for the failure of HVPS to prosecute the first and second patent applications and payment of interest and costs.
Our client is considering his position on these matters.
Resolution
If you [sic] client fails to pay to our client the amounts your client has acknowledged is owing to him by 5pm on 12 October 2018 then our client will take such action as advised.
The statutory demand
On 19 October 2018, Dr Vakiloroaya caused a statutory demand to be served on HVPS under s 459E of the Corporations Act that claimed $152,583.34 was due to him under cl 4.2 of the 2016 deed. The statutory demand was signed by Leigh Adams of Owen Hodge, as his solicitor. Dr Vakiloroaya said that Mr Adams had advised him in respect of the statutory demand. Dr Vakiloroaya affirmed the affidavit in support of the statutory demand in which he verified his claim that, under cl 4.2 of the 2016 deed, the amount claimed was “due and payable by the Debtor company” and that he was the person who had dealings with HVPS that gave rise to the debt. He deposed: “I believe that there is no genuine dispute about the existence or the amount of the debt”.
On 7 November 2018, Mr Adams recorded in a file note that:
·Dr Vakiloroaya had seen a barrister that day; and
·the barrister agreed the the forgery allegations (relating to Mr Heaton’s creation of documents about the alleged interest and order of BHP) could enable Dr Vakiloroaya to terminate the 2016 deed. Dr Vakiloroaya had asked Mr Adams to arrange to speak with the barrister about his options.
On 14 November 2018, Mr Adams made another file note that recorded his telephone conversation with Brendan Burke of counsel. He noted that Bill Kalantzis, of another firm of solicitors, Kalantzis Lawyers, was discussing the issue of fraud, damages for lapsed patents and the representation that HVPS was to commercialise them. The file note recorded that Mr Burke’s advice was due the previous Friday and the following matters:
Set aside the deed ab initio; fraud (letters fr BHP); difficulties – perpetrated by directors –
Set aside the deed → kills the stat[utory] demand.
(emphasis added)
I infer that the content of the conversation recorded Mr Burke’s advice that if Dr Vakiloroaya wished to set the deed aside ab initio, his claim under the statutory demand would be rendered hopeless.
On 15 November 2018, Mr Adams recorded in another file note that Mr Calvin was to meet Mr Burke to discuss the fraud issue.
On 26 November 2018, Mr Calvin recorded in a diary note that Dr Vakiloroaya had told him that Mr Adams had met Mr Burke who was keen on mediating of the statutory demand dispute. The note recorded that, while termination of the 2016 deed for breach was possible, that was not Dr Vakiloroaya’s preferred option, and: “Discussed the fraud issues – if we’re not going to claim void from beginning then could be a red herring”.
On 30 November 2018, Mr Adams made another file note that recorded that:
·the purchase order was a fraud and that BHP had confirmed that it was;
·there was a question as to whether the transfer of the third patent [being the 880 patent application] had been based on fraud;
·“Who owns P3 [being the 880 application]? P3 was assigned based on the fraud: [Dr Vakiloroaya] wants to challenge ownership of P3”; and
·they were contemplating the consequences of reporting fraud to police thereafter.
Mr Calvin said in his affidavit of 5 September 2022 that neither he nor the firms with which he worked had been involved in acting in respect of the statutory demand or subsequent proceedings in respect of it. In his affidavit, Mr Calvin said neither he nor any of his employees, to the best of his knowledge and belief, had advised Dr Vakiloroaya in relation to the effect that the issue of a statutory demand might have had on his rights to the return of the ownership of the patents (scil: patent applications) that Dr Vakiloroaya had, or may have, assigned to HVPS.
Likewise, in his affidavit of 5 September 2022, Dr Vakiloroaya said that he did not know and was not told that he had a choice between, on the one hand, terminating the 2016 deed and, on the other, serving a statutory demand and:
I did not know and was not told that entering [the 2018 memorandum] to address what were the outstanding payments by HVPS to me might later prevent me from terminating the [2016 deed] so as to get [the 880 application] back. I did not know and was not told that I had a choice between, on the one hand, terminating [the 2016 deed] and, on the other, serving a statutory demand. In the same way, I did [scil: not] know and was not told that defending the bankruptcy proceedings on the basis of outstanding payments might later prevent me from terminating [the 2016 deed].
(emphasis added)
Dr Vakiloroaya defended HVPS’s challenge to the statutory demand in the Supreme Court of Victoria before Gardiner AsJ. In doing so he was aware that HVPS was incurring liability to its lawyers in acting for it in that proceeding in circumstances where he had informed HVPS that he had the right to avoid the 2016 deed on the basis of Mr Heaton’s fraudulent representations.
On 2 April 2019, Gardiner AsJ ordered that the statutory demand be set aside and that Dr Vakiloroaya pay HVPS’s costs of the proceeding. Those costs were assessed on 22 July 2019 in the sum of $37,923.60 and remain unpaid.
Dr Vakiloroaya’s submissions
Dr Vakiloroaya asserted that he cannot be inferred to have made any election to affirm the 2016 deed, the 2017 assignment or the 2018 memorandum (collectively, the dealings) simply because he served and then pursued his claim to enforce the statutory demand and his earlier claims that HVPS should pay him the money due under the 2016 deed. He contended that at no point would the law treat him as having elected to affirm any of the dealings and that he remains entitled to pursue the relief he seeks in this appeal from the delegate’s decision under s 36 of the Patents Act. He submits that, although he knew of the fraud that he claims induced him to enter into the dealings from about May 2017, he was never called upon to make an election and has not done so to this day.
Dr Vakiloroaya argued that the questions of whether he had made an election to affirm, or, as HVPS also asserted in the alternative, was estopped by his conduct from denying that he had affirmed, the 2016 deed was a matter for trial. He contended that there was a real issue about the nature of the knowledge that a person must have before a court could find that he or she has elected to affirm a contract in circumstances where the contract did not require the making of an election. He submitted that this triable issue arises in circumstances such as the present where he had become aware of conduct on which he could rely to take action to bring the contract to an end, but had not done so.
He referred, in particular, to what Deane, Toohey, Gaudron, and McHugh JJ had said in Immer (No 145) Pty Limited v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at 41–43 that it is not necessarily the case that a party to a contract, who is aware either of the right to rescind or of facts giving rise to a right to rescind, will be held to have elected to affirm the contract if or she acts on the basis that the contract remains on foot. Dr Vakiloroaya argued that, at least where it is not necessary to make a choice as to how to act, the party will be entitled to keep his, her or its options open, until it is necessary in fairness to communicate one way or the other what that party’s position is.
He contended that the statutory demand could not be treated as an election to affirm the 2016 deed, because a failure of HVPS to comply with it only provided rebuttable evidence of insolvency in a proceeding to wind up the company by force of ss 459G(2)(a) and 459S of the Corporations Act. He submitted that because the statutory demand had been set aside, he could not be treated as having made an election. Likewise, he argued that the 2018 memorandum did not evince an intention to affirm the 2016 deed or abandon his right to rescind it. Dr Vakiloroaya also contended that in seeking to pursue his claims of HVPS’s indebtedness to him and to recover money from it did not amount to an election to affirm any of the dealings. He submitted that at no point did he ever communicate that he had exercised a right to terminate the 2016 deed. Rather, he has sought such relief from the Commissioner in that respect and later from the Court in this appeal.
He argued that there was no evidence of any reliance by HVPS to establish that he was estopped from denying that he had affirmed the 2016 deed or other dealings.
The security for costs issue
Dr Vakiloroaya also contended that, if security for costs were to be ordered, it ought to be in a modest amount bearing in mind that all of the issues were by now fairly clear and much of the evidence had already been collected so that the trial would be relatively short.
HVPS is in liquidation and, on the evidence, it is unclear if Dr Vakiloroaya will be able to meet the not insubstantial costs of the appeal, were he to lose, as I consider would occur. The trial would be likely to last three or four days. Were I to have had to decide on an amount for security for costs, my impression based on the evidence of the solicitors, is that an amount in the region of $120,000 would be appropriate. I would have ordered that any security be paid in tranches. However, Dr Vakiloroaya is an individual who owns property with his wife. There would have been a serious issue as to whether his right to pursue the appeal should be inhibited by an order for security, notwithstanding his potential inability to meet those costs. However, it is not necessary to decide that matter.
Consideration
In Immer 182 CLR at 41–42, Deane, Toohey, Gaudron and McHugh JJ said:
The true nature of election is brought out in this sentence from the seminal work of Spencer Bower and Turner, The Law Relating to Estoppel by Representation [3rd ed. (1977), p. 313]: “It is of the essence of election that the party electing shall be 'confronted' with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice.”…
As Spencer Bower and Turner point out in the passage quoted earlier, at the heart of election is the idea of confrontation which in turn produces the necessity of making a choice. But in a case such as the present one, the choice is not merely one of affirming the agreement; it involves as well the abandonment of the right to rescind. Abandonment is more readily inferred in some circumstances, for instance where the choice arises once and for all…. The point is that where the right to rescind is a continuing one, it is not so readily concluded that the party entitled to rescind has abandoned that right completely as opposed to taking no action to exercise the right at the time in question.
(emphasis added)
Their Honours also said (at 42–43):
In Tropical Traders Ltd. v. Goonan [(1964) 111 CLR 41 at 55] Kitto J. commented:
“Not that election is a matter of intention. It is an effect which the law annexes to conduct which would be justifiable only if an election had been made one way or the other.”
On the other hand, in Sargent v. A.S.L. Developments Ltd. [(1974) 131 CLR 634 at 656] Mason J. said of the elements essential to the making of a binding election:
“The question is complicated because in some instances election may take place as a matter of conscious choice with knowledge of the existence of the alternative right and in other cases it may occur when the law attributes the character of an election to the conduct of a party.”
But, in drawing this distinction, Mason J. was focusing on the dichotomy between awareness of the right to rescind and awareness of the facts giving rise to the right. We do not read that passage from his Honour's judgment as implying that a party to a contract who is aware either of the right to rescind or of facts giving rise to a right to rescind will necessarily be held to have elected to affIrm a contract if he or she acts on the basis that the contract remains on foot. Such an implication is at odds with the notion of being confronted with the necessity of making a choice.
(emphasis added)
In Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 at 325–327, Isaacs J, giving the judgment of Knox CJ, Starke J and himself, discussed the doctrines of what he then called “waiver”, which incorporated the principles of election and estoppel, saying (at 326):
“A waiver must be an intentional act with knowledge” (per Lord Chelmsford L.C. in Earl of Darnley v. Proprietors &c. of London, Chatham and Dover Railway [LR 2 HL 43 at 57]). First, “some distinct act ought to be done to constitute a waiver” (per Parke B. in Doe d. Nash v. Birch [1 M & W 402 at 406] and per Williams J. in Perry v. Davis [3 CB (NS) 769 at 777]); next, it must be “intentional,” that is, such as either expressly or by imputation of law indicates intention to treat the matter as if the condition did not exist or as if the forfeiture or breach of condition had not occurred; and, lastly, it must be “with knowledge,” an essential supported by many authorities, from Pennant's Case [2 Co 171 at 173] and down to Matthews v. Smallwood [[1910] 1 Ch 777]. “Waiver” is a doctrine of some arbitrariness introduced by the law to prevent a man in certain circumstances from taking up two inconsistent positions (see per James L.J. in Pilcher v. Rawlins [7 Ch App 259 at 268 ff]). It is a conclusion of law when the necessary facts are established. It looks, however, chiefly to the conduct and position of the person who is said to have waived, in order to see whether he has “approbated” so as to prevent him from “reprobating”—in English terms, whether he has elected to get some advantage to which he would not otherwise have been entitled, so as to deny to him a later election to the contrary (see per Lord Shaw in Pitman v. Crum Ewing [[1911] AC 217 at 239]). His knowledge is necessary, or he cannot be said to have approbated or elected.
(emphasis added)
Isaacs J contrasted what amounted to an election (or a “waiver” as he described it) as the act of the party asserting a right with the principle of estoppel by conduct. He explained that estoppel by conduct arises from the fact that the other party acted to his, her or its detriment, in reliance on the conduct of the party asserting a right. The detriment establishes the foundation for the preclusion of the other’s ability to deny that his, her or its conduct caused the former to act in that way.
I can readily infer that, in issuing and defending the proceeding relating to the statutory demand, subjectively, Dr Vakiloroaya wished to keep his options open and to see whether HVPS would pay him more money before deciding whether he would exercise his right to avoid, or seek to have avoided, the 2016 deed (and the other dealings).
However, in my opinion, there is no reasonable prospect of Dr Vakiloroaya succeeding in this appeal on his claim that he is entitled to relief avoiding the 2016 deed or other dealings. The only reasonable inference on the material in evidence is that by no later than his service of the statutory demand on HVPS, he had elected to affirm the 2016 deed and other dealings that he now seeks to avoid based on Mr Heaton’s fraud. His persistence in seeking to defend the statutory demand was a further manifestation of an election.
Dr Vakiloroaya knew from at least May 2017 of Mr Heaton’s fraud that had induced him to enter into the 2016 deed and the 2017 assignment. Yet, he continued to seek to enforce, and received, payments from HVPS under the 2016 deed to which he would not have been entitled had he exercised his right to rescind it ab initio based on the fraud of which he was aware. He also knew from at least the discussion he had with Mr Calvin on 31 August 2017 that he may have been able to avoid the 2016 deed for fraud. At that time, HVPS was not paying him strictly in accordance with its obligations but, as cl 2B to the 2018 memorandum stated, it was making payments to him from time to time.
In about September 2017 or early October 2017, Dr Vakiloroaya received $42,000 in partial discharge of the amount due to him under the 2016 deed, which, as he knew, HVPS had raised from obtaining the extension of a convertible note. Dr Vakiloroaya attended the board meeting of 9 October 2017 at which he became aware (had he not been aware earlier) that HVPS was incurring further obligations to creditors and raising money, some of which had been, and was in the future to be, used to pay him what he was owed under the 2016 deed. He allowed HVPS to continue in that position. As cl 2B of the 2018 memorandum recorded, he received multiple subsequent payments in partial discharge of HVPS’s obligations under the 2016 deed. He later negotiated, in July 2018, the 2018 memorandum for a standstill. In that document, again advised by solicitors, as it appears from its content, he affirmed to HVPS that the 2016 deed was in full force and effect and that he was agreeing to forego the right to enforce the 2016 deed immediately so that he would be entitled to be paid $138,666.67 at the end of the standstill period on 30 September 2018 if the recapitalisation did not occur and he did not decide to take up shares.
Soon after 30 September 2018, when the standstill period came to an end, Dr Vakiloroaya, communicated on 4 October 2018 to Mr Tunridge and, I infer, other members of the board, both his awareness of his right to rescind the 2016 deed and that his lawyers had confirmed to him that he had this right. Yet, he insisted that HVPS pay what he claimed was owed to him. When that did not happen, he caused the statutory demand to be served, supported by his affidavit of 19 October 2018, verifying that the debt of $152,583.34 was owing under the 2016 deed and that there was no defence to his claim. He must have been aware by then that HVPS would have had to spend considerable money in seeking to set aside the statutory demand, as it did. That is reinforced by the assessment of the costs of nearly $40,000 that Dr Vakiloroaya had to pay it under the Supreme Court’s order.
As the quotation from Spencer Bower and Turner that Deane, Toohey, Gaudron and McHugh JJ cited in Immer 182 CLR at 41 made clear:
It is of the essence of election that the party electing shall be ‘confronted’ with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice.
If a landlord accepts rent knowing that he can terminate the lease for an existing breach, the landlord elects to waive the breach and cannot later rely on it: (Matthews v Smallwood [1910] 1 Ch 777 at 786–787 per Parker J). Similarly here, Dr Vakiloroaya had a plethora of opportunities to assert his right to avoid the 2016 deed and the other dealings in order to reclaim his intellectual property, including the 880 application, based on Mr Heaton’s fraud. But, instead, he persisted in a course of demanding and receiving payments under and in accordance with the 2016 deed on the basis that it was legally binding, a situation that he now seeks to eschew.
In my opinion, Dr Vakiloroaya cannot blow hot and cold or, as Isaacs J had put it, approbate and reprobate: Craine 28 CLR at 326. Were I to grant leave to proceed against HVPS under s 500(2) of the Corporations Act, I am satisfied that, on the basis of the test in s 31A(1) of the Federal Court of Australia Act 1976 (Cth) there is no reasonable prospect of Dr Vakiloroaya successfully prosecuting this appeal and it would be summarily dismissed.
Conclusion
I am of opinion that leave to proceed under s 500(2) against HVPS in liquidation should be refused with costs. That is because of the strong likelihood that Dr Vakiloroaya could not successfully prosecute his appeal. I will give the parties an opportunity to make submissions about any alternative order for costs.
I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Rares. Associate:
Dated: 5 October 2022
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