Alexander & Anor v Burne & Ors

Supreme Court of NSW|2013-11-13|Before: Young AJ

Introduction 1This dispute concerns the sale, or at least the purported transfer, of an accounting practice. In summary the plaintiffs say that the transfer was void for want of procedural regularity in the decision to transfer the practice, or that such a transfer is void, or that it was a breach of certain duties owed by the vendors to the plaintiffs. Those are largely matters for a final hearing. This application is a strike-out application. The defendants say that the plaintiffs' pleadings are deficient in that they do not plead, in a proper way, certain causes of action, and that those pleadings lack sufficient detail which detail is necessary for the defendants to respond to them in their pleading. Those are the matters with which this judgment is concerned. 2As will be seen from the following discussion, some of the concepts involved in the case are complex and the law is clearly in a state of development. Traditionally, when dealing with an application to strike out pleadings, a judge does not usually strike out something that is arguable. However, in light of s 56 and following of the Civil Procedure Act 2005, there is an increasing tendency for judges to ensure that costs are not wasted in exploring blind alleys, by taking a more robust attitude. I will return to this thought.

The Parties 3The first plaintiff, Melissa Alexander, was, and presumably still is, the sole director and shareholder of the second plaintiff, MAA (ODB) Nominees Pty Ltd. The second plaintiff is, in turn, the trustee of the MAA (ODB) Family Trust. There is a company which was once called BDO Group Pty Ltd, which later changed its name to BDO Kendalls Group Pty Ltd and is now known as the MSB Group Pty Ltd. It is now in liquidation. That commenced on 5 October 2012. It was the ultimate parent company of those companies which formed the BDO Kendalls Group. Importantly for this application, it was the trustee of at least five unit trusts. The second plaintiff was from about 17 December 2007 a unitholder in each of those trusts. 4The first to fifth defendants, namely Edgar Burne, Eric William Passaris, Phillip Wayne Rundle, Rana Pala and Robert Ian Peck, were directors of BDO Group. The sixth to ninth defendants, respectively Pat Donato, John O'Donnell, Paul Motta and John Blight were either officers or directors of BDO Group and are said by the plaintiffs to have controlled its operations. The tenth defendant, Grant Thornton Australia Limited, purportedly purchased or acquired the accounting practice run by BDO Group. It should be noted that almost all of this information is taken from the allegations in the Statement of Claim. It has not, of course, been subject to testing by evidence at trial at this preliminary stage. It is enough to refer to the allegations in the Statement of Claim for the purposes of this judgment. 5The first plaintiff had been a partner in an accounting practice which carried on business in this State and in the Australian Capital Territory. In 2007 that practice merged with a Victorian practice which led to the creation of the unit trusts. The plaintiffs, together with BDO Group, and other unitholders and their principals, entered into a Unitholders Deed on 20 November 2007. That deed is not in evidence, but the Statement of Claim pleads that it had had the following terms. The deed reserved to the unitholders the decision to dispose or sell any part of the BDO accounting business or enter into a merger with another firm or accounting practice. Such a decision could not be made by the Board of BDO Group. Any such decision had to be made at a meeting of unitholders by a special majority, i.e. a two-thirds majority of those persons eligible to vote at the meeting. The two-thirds proportion was to be determined per capita and not per equity or unit holding in the trust. 6A meeting was held on 27 April 2012 in order to vote upon a resolution to sell the accounting practice of BDO Group to the tenth defendant. The central complaint in the plaintiff's case is that the requisite special majority was not reached: 44 unitholders voted in favour, whereas 46 votes were required, because there were 69 unitholders eligible to vote on that day. Nevertheless, it is said against the defendants that the first to ninth of them entered into contracts with the tenth by which BDO's accounting practice was sold to the tenth defendant. 7In consequence of the foregoing, the plaintiffs say that they have suffered loss and damage because they could no longer afford to repay a loan they owed to the St George Bank, upon which the bank sued in Victoria and obtained a judgment debt, to which the first plaintiff consented, in the sum of $665,976.43. 8In summary, therefore, it is claimed that (1) the first to ninth defendants breached their fiduciary duties to the unitholders, (2) that they knowingly assisted BDO Group to breach its fiduciary obligations as trustee, (3) the tenth defendant is in knowing receipt of trust property and (4) that it committed the tort of inducing breach of contract, the contract being that between the first to ninth defendants and the unitholders.

The Iterations of the Pleadings 9The foregoing is taken from the Statement of Claim filed on 4 June 2013 by which the action was commenced. Problems were identified with that pleading such that on 7 August 2013 the Chief Judge in Equity ordered that the plaintiffs file and serve an Amended Statement of Claim by 23 August 2013. That order was not complied with. 10On 2 September 2013 the defendants were provided with a draft Amended Statement of Claim. That document is at Annexure A to the affidavit of Timothy Alexander Atkin affirmed on 12 November 2013. A later pleading is at Annexure E of that affidavit. Paragraph 37 of that proposed later pleading is in the following terms: The First to Ninth Defendants knowingly induced the BDO Trustee to breach its duties, as pleaded in paragraph 36 hereof, in that they as the controllers of the BDO Trustee caused the BDO Trustee to purportedly sell its assets to Grant Thornton and otherwise cease to trade in circumstances where there was no authority for them to take those steps under the Unitholders Deed. 11Complaint was made of that paragraph. During the hearing Mr M K Condon SC, for the plaintiffs, handed up a proposed amendment by which [37] would be deleted and new paragraphs [37A]-[37E] would be inserted into the pleading. That document became MFI 1. In consequence of that, Mr D F C Thomas, counsel for the first to ninth plaintiffs, made no complaint about the proposed [37A]-[37E] (at transcript 4:49-50).

Knowing Assistance 12However, complaint is still made about [38] which provides as follows: Further or in the alternative to paragraph 37, the First to Ninth Defendants knowingly assisted the BDO Trustee to breach its duties, as pleaded in paragraph 36 hereof, in that they as the controllers of the BDO Trustee caused the BDO Trustee to purportedly sell its assets to Grant Thornton and otherwise cease to trade in circumstances where: (a) there was no authority for them to take those steps under the Unitholders Deed; and (b) The breaches of trust committed by the BDO Trustee (being those pleaded in paragraph 36 hereof) were serious and not excusable, and thus constituted dishonest and fraudulent conduct on its part; 13Leaving aside the split infinitive, that paragraph is defective. The claim is that the first to ninth defendants knowingly assisted the trustee of the unit trust to breach its fiduciary obligations. In Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 the Lord Chancellor said: [S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. 14Paragraph 38 of the pleading is directed to the second limb of that rule. It is said that the first to ninth defendants knowingly assisted the BDO Group to breach its duties qua trustee. The High Court has made it tolerably clear that it is not enough, when pleading that cause of action, to say that the trustee was in serious breach of the trust and that the assistor had knowledge of that serious breach. There must be a dishonest and fraudulent design. 15In Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 at 164-165 [182]-[183] that Court said: Say-Dee ... made the submission that in Australian law the "dishonest and fraudulent design" requirement had been superseded and that it was sufficient to plead and prove any knowing participation in a breach of trust or fiduciary duty, save for "a de minimis breach". However, Say-Dee accepted that this qualification had not been stated in Consul. [Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373] In its final form, the submission put by Say-Dee was that a defendant who had not received a direct financial benefit "but has participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the reach should be liable to the beneficiary of the duty/trust for the consequence of the breach". This submission should be rejected. 16Drummond AJA in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 at 379-384; 89 ACSR 1 at 351-356 [2104]-[2126] interpreted this to mean that a trivial breach of trust, or one which could be excused under s 85 of the Trustee Act 1925, would be insufficient to ground liability for knowing assistance, but that a breach which was more serious than that would amount to a "dishonest and fraudulent design". His Honour went on to say at 384 [2123] that it was not necessary for a beneficiary to show that the trustee's conduct was "morally reprehensible". 17The words of judges as enunciated in their judgments are not to be treated as though they were statutes. McHugh J said as much in Scott v Davis [2000] HCA 52; (2004) 204 CLR 333 at 370 [108]-[109]. Nevertheless, the words "dishonest and fraudulent design" require something more than a serious breach of trust. There must be some plan on the part of the trustee to defraud the trust, knowing it to be a defrauding of the trust, for the trustee to be liable under this second limb of Barnes v Addy. And it is in that plan that the first to ninth defendants had to assist. 18In Nicholson v Morgan (No 3) [2013] WASC 110; 8 ASTLR 277 at 292 [59] Edelman J said that "it is sufficient to say that there is a strong argument that" a "design" means a "purpose" such that there must be a pleading which pleads that intention or purpose on the part of the trustee, and that the assistor assisted in furtherance of that intention or purpose. His Honour did not decide the point, but the judgment points, in my respectful view, in the correct direction. There must be a plan or intention to defraud the beneficiary. 19In the context of a case regarding malicious prosecution, namely Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509, Brennan J at 532 explained what was meant by the word "purpose": Purpose, when used in reference to a transaction, has two elements: the first, a result which the transaction is capable of producing; the second, the result which the person or persons who engage in or control the transaction intend it to produce. Or, to express the concept in different terms, the purpose of a transaction is the result which it is capable of producing and is tended to produce. 20Lord Sumption JSC approved that formulation in Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 at 941 [9]. 21Such a plan or purpose as outlined in [15] supra is not pleaded. And, even if it were the case that a serious breach of trust would be sufficient to make the defendants liable for breach of trust, that breach would have to be particularised: Farah v Say-Dee at 162 [170] and rule 15.3 of the Uniform Civil Procedure Rules 2005. 22Mr Condon puts that even if the key passage from the judgment of Drummond AJA in the Bell Group case was not fully in accord with the majority of recent decisions, a pleading based on it must be arguable and should not be struck out. 23However, as indicated earlier, particularly in complex cases, it is important to ensure that cases proceed on the basis of sound principle and even if a point is arguable, a pleading may be struck out if it is likely to impede the just and quick disposal of the real issue. 24For the above reasons, [38] should be struck out but there should be leave to replead one more time.

Allegations against Grant Thornton 25The form of pleading at Annexure E to Mr Atkin's affidavit pleaded a case of unjust enrichment against the tenth defendant. It was said that the tenth defendant was unjustly enriched to the detriment of the second plaintiff because it took the benefit of the business and the second defendant's interests in the unit trust. At the hearing on 13 November 2013 that pleading was objected to by the tenth defendant. However, since that time another form of the pleading has been drafted and given to the tenth defendant. Those are now embodied in new paragraphs [40]-[47]. In his written submissions dated 28 November 2013 Mr Guidon, for the tenth defendant, no longer objects to the plaintiffs being given leave to file that last pleading.

Costs 26The defendants should have their costs of the Motions. They have been largely successful. The first to ninth defendants succeeded in having some of the pleading struck out. The tenth defendant succeeded in forcing the plaintiffs to replead their case against it to its satisfaction. The tenth defendant makes a further application, by written submission, that its costs should be payable forthwith pursuant to r 47.2(1) of the Uniform Civil Procedure Rules 2005. Certainly it is true that there has been some delinquency on the part of the plaintiff in complying with orders of this Court, whether made by a judge or a registrar. Indeed, when he last appeared before the Chief Judge, Mr Condon, on behalf of the plaintiffs, apologised for those failures to comply. The tenth defendant relied on the decision of Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd [2002] NSWSC 432; (2002) 55 NSWLR 1 to say that the plaintiff's conduct had been unreasonable and that conduct was what caused the incurring of costs. It is true that the plaintiffs' conduct has been unsatisfactory, but it has not been unreasonable. I do not think mere delay, unless it is a very long delay, or a contumelious disregard of a court's orders, can be characterised as unreasonable. Therefore, I refuse to order that the tenth defendant's costs be paid forthwith.

Orders 27The orders are as follows: (1)Leave to amend the Statement of Claim by deleting paragraph [37] and by substituting new paragraphs [37A] - [37E] as handed up in Court on 13 November, 2013. (2)Order that paragraph [38] be struck out, with leave to replead on one more occasion by no later than 17 February, 2014. (3)Order that the plaintiffs pay the costs of the Motions.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 January 2014

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