Andrew Hugh Jenner Wily v Nauru Phosphate Royalties Trust

CATCHWORDS : APPEAL - from decision of Associate Justice dismissing proceedings against one defendant pursuant to UCPR r13.4 - appeal dismissed - no question of principle.

LEGISLATION CITED : Fair Trading Act 1987 Trade Practices Act 1974

CASES CITED : Commonwealth of Australia v BIS Cleanaway [2007] NSWSC 1075 Edenden v Bignell [2007] NSWSC 1122

Andrew Hugh Jenner Wily in his capacity as Liquidator of Business Australia Capital Finance Pty Ltd ACN 002 426 726 (in liquidation) (First Plaintiff) Andrew Hugh Jenner Wily in his capacity as Liquidator of Business Australia Capital Mortgage Pty Ltd ACN 090 781 187 (in liquidation) (Second Plaintiff) PARTIES : Andrew Hugh Jenner Wily in his capacity as Liquidator of Bondedge Pty Ltd ACN 079 163 581 (in liquidation), (Third Plaintiff) Nauru Phosphate Royalties Trust (First Defendant) James Miller & Partner trading as Ernst & Young (Second Defendant) HLBC Pty Limited ACN 104 193 777 (Third Defendant)

COUNSEL : TS Hale SC (Plaintiffs) I M Jackman SC / N Kidd (Defendants)

SOLICITORS : M D Nikolaidis & Co (Plaintiffs) Henry Davis York (First Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50135/07 ANDREW HUGH JENNER WILY (AS LIQUIDATOR OF BUSINESS AUSTRALIA CAPITAL FINANCE PTY LTD (IN LIQ) & ORS v NAURU PHOSPHATE ROYALTIES TRUST ORS JUDGMENT 1 HIS HONOUR: This is an appeal from a decision of Associate Justice Macready given on 26 November 2007. His Honour ordered that the plaintiffs' proceedings as against the second defendants be dismissed with costs. He made those orders pursuant to UCPR rule 13.4. Background 2 The background to the proceedings is set out at [4] to [13] of his Honour's reasons. Since the parties accepted that his Honour there gave an uncontroversial summary of the background, I will incorporate those paragraphs:

[4] The Nauru Entities owned various real property in Australia. In 2003 and early 2004 Ernst & Young was engaged by certain of the Nauruan Entities, as well as the third defendant HLBC Pty Ltd (on behalf of the Nauruan Entities) to provide certain services relating to the management and proposed refinancing and sale of certain of the properties.

[5] Four invoices issued by Ernst & Young in April 2004 to the Nauru Entities and to HLBC were for services rendered and they remain unpaid. The amount unpaid is $560,347.65.

[6] Between 2004 and 2006 there were legal proceedings between the Nauru Entities on the one hand and the BA Group and HLBC on the other hand relating, inter alia, to caveats lodged on the title of the properties by the BA Group in respect of unregistered mortgages claimed to have been granted by the Nauru Entities to the BA Group.

[7] A Deed of Settlement and Release, which resolved those proceedings, was dated 16 October 2006 and made between the Nauruan Entities, the BA Group and HLBC (the Deed). Ernst & Young were not a party to the Deed, nor were they a party to the legal proceedings that were settled by the Deed.

[8] The Deed provided, inter alia, for the payment of $2 million by the Nauru Entities into a bank account to which the joint signatories were the solicitor for the BA Group and the solicitor for the Nauru Entities (the Account).

[9] Clause 4 of the Deed set up a detailed regime as to how the Account was to be disbursed. Broadly speaking, the regime provided for the following: (a) The BA Liquidator would use his best endeavours to procure written releases of the Nauru Entities by specified third parties (referred to in the Deed as "Priority Creditors") in respect of amounts claimed (referred to in the Deed as "Priority Creditor Sums") by those third parties to be owed to them by one or more of HLBC, the BA Group or the Nauru Entities; (b) One of the listed "Priority Creditor Sums" was the claim by Ernst & Young for $560,348. (c) The Deed stated that the Nauru Entities " deny any liability whatsoever " for the Priority Creditor Sums and further that the BA Group " make no admission as to the quantum of the liability ". In other words, the Account was established on the express basis that the Priority Creditor Sums were not accepted by the Nauru Entities or the BA Group as being owed. (d) Clause 4.2 made provision for the progressive payment out from the Account of amounts agreed to be paid to each Priority Creditor in consideration for their giving written releases of the Nauru Entities. (e) Clause 4.4 specifically provided that the entirety of the priority creditor releases were to be furnished to the Nauru Entities by no later than 30 June 2007, " failing which the balance of the funds then standing to the credit of the Account are to be paid to [the Nauru Entities] ".

[10] In effect the Nauru Entities set aside $2 million and agreed that the BA Liquidator could use that money to procure releases in favour of the Nauru Entities from various creditor claims, including Ernst & Young's claim for $560,348, and that if the liquidator procured such releases from all of the specified creditors by 30 June 2007, the liquidator could keep any leftover balance of the $2 million fund. However, if the BA Liquidator did not procure all the releases by 30 June 2007, then the balance of the $2 million fund would be payable to the Nauru Entities.

[11] On 18 January 2007, the BA Liquidator wrote to Ernst & Young advising of the deed of settlement, referring to their claim and requesting further evidence in support of Ernst & Young's claim to enable the liquidator to consider it. Subsequently, further correspondence and negotiations took place between Ernst & Young and the BA Liquidator in relation to Ernst & Young's claim, but there was no agreement in relation to the settlement of the Ernst & Young claim or the giving of a release to the Nauru Entities . Not being a party to the deed Ernst & Young were under no obligation to give any such release.

[12] The 30 June 2007 deadline for satisfaction of the condition under the Deed passed.

[13] The BA Liquidator has commenced these proceedings in which it seeks declarations and orders relating to the entitlement to the Account. As Ernst & Young is not a party to the Deed under which the Account was established it submits that it is not a necessary party to those claims (being the relief claimed in paragraphs 1, 2, 3, 5 and 7A in the Commercial List document). 3 It is necessary to bear in mind, as the Associate Justice pointed out later in his reasons, that before the deed made on 16 October 2006 was executed and delivered, Mr Wily (in his capacity as liquidator of what the Associate Justice called the BA Group (the corporations that for present purposes it is convenient to refer to as the plaintiffs) made enquiries of the second defendants (to whom, as did the Associate Justice, I will refer as Ernst & Young) to ascertain the amount of any claim that Ernst & Young might have against the first defendant (the Nauru entities). Ernst & Young stated, in answer to those enquiries, that the amount claimed was, in round figures, $560,000. It would appear that Mr Wily, or those working for him, took that at face value and caused the figure (the precise figure and not the rounded figure that I am using for convenience) to appear in the deed. 4 To jump ahead: it is Mr Wily's case that the maximum amount owing to Ernst & Young, having regard to the terms on which they undertook the work in respect of which the various fees were earned or said to have been earned, was in round figures $38,000.

The plaintiffs' case generally 5 The case that Mr Wily sought to make out against Ernst & Young, as articulated in something called an "amended commercial list document" filed on 28 September 2007, is not entirely easy to discern. An understanding of the case is not facilitated by the way in which it has been referred to in submissions, both before the Associate Justice and before me. In essence, however, the case that is "pleaded" (to use a convenient but strictly speaking inaccurate term) is as follows: (1) Ernst & Young undertook certain work for the Nauru entities pursuant to a retainer described as an "exclusive mandate"; (2) Ernst & Young's entitlement to be paid their fees, or the great bulk of their fees, was conditional on obtaining certain described outcomes; (3) those outcomes were not achieved; (4) thus the fees, or the great bulk of them, did not become payable; (5) nonetheless Ernst & Young charged the whole amount of the fees; (6) when Mr Wily or his assistants enquired of Ernst & Young as to the amount owing, they were told the full amount ($560,000) and not the amount said in fact to be actually owing (said not to be more than $38,000); (7) Ernst & Young's conduct, in asserting to Mr Wily that all the fees that it had rendered were due and payable, was misleading or deceptive or likely to mislead or deceive; (8) Mr Wily relied on that conduct by entering into the deed in the form in which it was drawn; (9) Mr Wily suffered loss, in effect because he lost the opportunity to deal with all the priority creditors described in the deed (including Ernst & Young) by 30 June 2007, and thus to receive, for the benefit of the companies of which he was liquidator, the balance (if any) of the $2 million "Reserve Sum" referred to in the deed. 6 It will be necessary to return in more detail to the articulation of the case on causation.

The deed 7 At this stage, I note that by the terms of clause 2 of the deed the "applicants" described in it, who either were or included the Nauru entities in these proceedings, agreed to pay the "Settlement Sum" and the "Reserve Sum" defined in the deed. The former can be disregarded. The Reserve Sum was required by clause 3.2 of the deed to be paid into a defined account upon the terms and subject to the conditions set out in clause 3.4 and following of the deed and was to be held in accordance with the provisions of clause 4. 8 In substance, the liquidator was to seek to procure a release, in a defined form, from each priority creditor named in the deed. It was contemplated that as each creditor released his or its claim, he or it would be paid out in an agreed amount that had been negotiated with the liquidator. By clause 4.4, if all the priority creditors' claims had been dealt with prior to 30 June 2007, any balance of the Reserve Sum not used to discharge the claims of priority creditors would go for the benefit of the corporate entities being the companies of which Mr Wily is liquidator and as well, I think, the third defendant in these proceedings. 9 There were some eleven priority creditors referred to in the deed. Five of those were recorded as being creditors in the amount of "nil": this reflecting the fact that at the time the deed was made, it was unclear who owed what to whom. The debt of Ernst & Young, a named priority creditor, was one of those which was quantified. It appears to be the case that Mr Wily dealt with the claims of all the named priority creditors except Ernst & Young, and did so before 30 June 2007. Thus, had Mr Wily been able to deal also with the claim of Ernst & Young, and if the total of the settlements negotiated was less than $2 million, the benefit to the various corporate entities described in clause 4.4(a) would have flowed to them.

The plaintiffs' case on causation 10 I said that it would be necessary to return to the detail of the pleaded claim on causation. The allegation that the plaintiffs suffered loss by reason of the alleged misleading or deceptive conduct is set out in paragraph 61. What follows is alleged not as material facts but as "particulars"; but nothing turns on that. 11 The first head of damage alleged - the cost of negotiating claims - can be disregarded for present purposes although I have some difficulty understanding how an expense that would have been incurred in any event (i.e., if the misleading or deceptive conduct had not occurred) can be recoverable as damage. 12 The second head of loss alleged is, I think, either the loss of the balance of the Reserve Sum or the loss of the opportunity to obtain that balance. 13 Paragraph (c) of the particulars says that that loss "will have been caused by the conduct of the EY entities by reason of the following: "In representing and maintaining that it was owed the said sum of $566,347.65 [sic] and that it would not execute a Priority Creditor Release for any sum less than that sum...the EY entities were demanding that an [sic] exchange for executing a Priority Creditor Release a sum substantially in excess that [sic] to which they would be entitled. In consequence, the BA liquidator [Mr Wily] could not justify including such a sum in the EY Priority Creditor Release...". 14 The key allegation is then set out in paragraph (d) of the particulars: (d) In consequence of the said conduct there was included in the Priority Creditor sums in the Deed the Priority Credit sum of $560,348.00 against the Priority Creditor referred to as Ernst & Young. Had the Ernst & Young entities represented to the B.A. Liquidator the actual sum, if any, which they were owed or a sum might reasonably represent would determine as the amount to which they were entitled, the B.A. Liquidator would have caused that sum to be included as the Priority Creditor Sum in the Deed, the total of the Priority Creditors would have been reduced by the difference between that sum and $560,348.00 and that sum would prior to 30 June 2007 have been included in the Ernst & Young Priority Creditors Release.

15 To jump ahead a little: it will be seen that the pleaded case is that Ernst & Young had made it plain that it would be satisfied with nothing less than the full amount of $560,000 owing to it. However, the pleaded case set out in paragraph (d) does not suggest that the inclusion of any different amount in the deed would have affected the attitude of Ernst & Young. Nor is it suggested in the pleadings that if the liquidator had ascertained that Ernst & Young's claim was (as he would have it) grossly overstated, he would have left Ernst & Young out of the deed completely, and would have sought to deal with Ernst & Young in some different way. 16 I mention this last point because there is some suggestion in the evidence of Ms Fleur Evans to the effect that she might have suggested to Mr Wily that he proceed in a different way had she known that the Ernst & Young claim was grossly over-inflated. Ms Evans was an insolvency manager working in Mr Wily's practice, and who appears to have had day-to-day responsibility for at least part of the administration of the affairs of the BA Group whilst Mr Wily was its liquidator.

The reasons below 17 The application to the Associate Justice under rule 13.4 was made on the basis that the pleaded case disclosed no reasonable cause of action. As it appears from the reasons of the Associate Justice, that turned on what was said to be a fundamental deficiency in the case on causation. The Associate Justice noted at [29] of his reasons that "[t]he core of the second defendant's submission is that the plaintiff had no entitlement to the balance of the $2 million fund in the circumstances because there was no obligation whether contractual or otherwise which would require Ernst & Young to give a written release." His Honour followed up by noting at [30] that there was no claim that, before the deed was made on 16 October 2007, Mr Wily received any assurance from Ernst & Young that they would sign, or might sign, a release. As his Honour thus (in my respectful view correctly) said: "[T]he focus thus is on the representation which is alleged to have been made by Ernst & Young to the liquidator." His Honour dealt with that question in the following paragraphs of his reasons. 18 Part of the debate before the Associate Justice focused on the concluding words of paragraph 59 of the contentions. Those concluding words allege that Ernst & Young represented, before the deed was made (and, it would appear, since) "that they would not provide a Priority Creditor Release...unless the sum of $560,347.65 was included" as the relevant amount in the deed. 19 The Associate Justice noted that this was not a representation that Ernst & Young would give a release but, rather, two representations. The first was as to the amount owed. The second was that Ernst & Young would take no less. Mr Hale of Senior Counsel, who appeared for the plaintiffs before the Associate Justice and before me, said (as the Associate Justice noted at [33]) that the concluding words of paragraph 59 would be deleted. However, equivalent words appear in paragraph 61(c), as I have noted. It has not been suggested that those words should have been or will be deleted. 20 For reasons that are less than clear to me, the Associate Justice was taken to some of the evidence on which the plaintiffs propose to rely to make good their case if it were allowed to go to trial. That evidence included the evidence of Ms Evans. Her evidence included some speculation as to what she would have done or might have done had she known before the deed was made that the amount claimed by Ernst and Young was, on the plaintiff's case, grossly overstated. 21 The Associate Justice analysed that evidence and concluded at [39]: [39] Based on this evidence there is a fundamental problem with the causation aspect. Mr Wily and his employees were involved in the liquidation of the BA group. They were not liquidators of the Nauran entities and able to deal with claims made on those bodies in the ordinary way a liquidator would deal with claims in the liquidation. Mr Wily had no right to expect or require any of those creditors to give him a release. The fact that he entered into an agreement which required him to produce for the purposes of other persons, such a release is not to the point. There is nothing that Ernst & Young did which would entitle him to believe that they proposed to give him a release. 22 His Honour then dealt briefly with further discussions said to have taken place after the deed had been executed and said that nothing material arose from those discussions because "the nexus between the representation and the damage is dependent upon the liquidator inserting some other sum in the deed before its execution". 23 It might be - I express no view - that if Ernst and Young had claimed some different and much lower sum then the deed would have been drafted to reflect the amount of that claim. But any such case is fundamentally inconsistent with the pleaded proposition that at all material times Ernst and Young was insisting on payment of the full amount of $560,000. It is, I think, a reasonable inference that even if Ernst and Young were prepared to give a release (and since they were not a part to the deed they could not be obliged to do so) they would not have given any release except upon payment of the whole or substantially the whole of their claim. (There is evidence that Ernst and Young might have taken a 25% discount for prompt payment; nothing came of this and in any event 75% of $560,000 is still a lot more than $38,000.)

The alleged error 24 It is suggested that the Associate Justice erred in his analysis of the case on causation. I do not think that he did so. It seems to me that as long as it remains a part of the pleaded case on causation that Ernst and Young would never have accepted less than $560,000, and would not have executed a deed of release until they had been paid that amount, the plaintiffs cannot say that they lost anything by the alleged misleading or deceptive conduct of which they complain. That is because, as Mr Wily makes clear, he was not prepared to pay that amount, or anything like it, to Ernst and Young. The point is a very narrow one. However, it is a point defined by the pleadings on which the plaintiffs chose to advance their claim. In those circumstances, as the Associate Justice concluded and I conclude, the pleaded case on causation is fundamentally flawed. There is no doubt that the power to order summary dismissal was enlivened.

An application to replead 25 Late in the piece, indeed in the course of submissions in reply, Mr Hale sought to advance the proposition that the plaintiffs should have been given an opportunity to replead. This arose, he said, because the Associate Justice did not deal with the claim that they wished to put. The claim that they wished to put appears to have been not the pleaded claim that the deed would have been made and that Ernst and Young remained as a priority creditor but with some lower status, but a case that the deed would have been made without Ernst and Young being mentioned at all as a priority creditor. 26 There is nothing in the written submissions in response (provided by the plaintiff to the Associate Justice) to suggest that the plaintiffs ever put before the Associate Justice that they wished to make out such a case. Paragraph 17 touches on the point. It appears to assert that the plaintiffs' case was "that but for EY's conduct there would have been nothing in the Deed of Settlement to impose on the Liquidator an obligation to obtain a Deed of Release from EY to release it from its claim of $560,347." That seems to be no more than a loose but not substantially inaccurate paraphrase of paragraph (d) of the particulars to paragraph 61. 27 In paragraph 24(a) of the submissions the plaintiffs submitted to the Associate Justice that "the requirement under the Deed for a Deed of Release from E Y arose as a result of the misleading and deceptive conduct of EY". That is not the case that is pleaded. The case that is pleaded is that Ernst and Young would have been named as a party in a correctly drafted deed but their priority creditor sum would have been substantially lower. It does not appear from the submissions from which I am quoting that the plaintiffs appreciated that what they were saying in paragraph 24(a) varied from their pleaded case, let alone that they wished to seek an opportunity to amend so as to raise it. If the plaintiffs did not perceive that, and did not seek the opportunity to amend, I cannot see how the Associate Justice erred in failing to allow them that opportunity. 28 Finally, in paragraph 27 of the document, the plaintiffs canvassed before the Associate Justice a range of possibilities that might have occurred had Ernst and Young told the liquidator what the plaintiffs say was the correct amount owing. They stated: [27] EY, in its submission at paragraph 53, appears to misunderstand the import of the use of that phrase and similar phrases in the particulars to paragraph 61. 29 There is nothing in there to suggest that the plaintiffs' claim was anything other than that presented to and analysed by the Associate Justice. Conclusion 30 Accordingly, on the narrow point on which this appeal turns, I am satisfied that no error is shown in the reasons of the Associate Justice. Further, there having been no application to his Honour for an opportunity to replead, I do not see that his Honour erred in ordering the summary dismissal of the case consistent with the application that had been made by Ernst and Young. Declaratory relief 31 The relief that was claimed against Ernst and Young included not only damages but also declaratory relief. The first relevant declaration is set out in prayer 4: a declaration that Ernst and Young are not entitled to payment of the sums claimed or any sums claimed in their priority creditor claim referred to in the deed. 32 The second declaration sought is that Ernst and Young or some of the parties included within that description have engaged in misleading or deceptive conduct in representing that they were owed the sum of $560,000 to which I have referred. 33 The Associate Justice did not deal separately with those prayers for relief. It is suggested that he erred in that he dismissed the whole of the claim against Ernst and Young without giving reasons for the dismissal of claims for declaratory relief. 34 It does not appear that the application was argued before the Associate Justice on the basis that the claims for declaratory relief could be sustained even if there were summary dismissal of the "pleaded" claims, but that does not seem to matter. The declarations ought not to be made in circumstances where, as I have concluded, the order made by the Associate Justice for summary dismissal can stand. There are, however, independent reasons why this is so. 35 As to the first declaration: the plaintiffs are not parties to the relationship between Ernst and Young and the debtors (or alleged debtors) who owed (or who are alleged to owe) the sums that comprised Ernst and Young's priority creditor claims. For all I know, Ernst and Young and those debtors may have resolved their differences. For all I know, they may be oceans apart. It does not matter and they should not be forced to litigate their disputes simply because the plaintiffs wish it. 36 Mr Hale submitted that the declaration would be of utility because it would be of assistance in quantifying the damages that the plaintiffs might recover from the Nauru entities. I do not agree. If the plaintiffs succeed on their case against the Nauru entities, their claim will be in essence one for the loss of opportunity to be paid money pursuant to clause 4.4 of the deed. The courts every day quantify damages for lost opportunity. If an element of the claim is the amount that should have been paid to Ernst and Young or for which Ernst and Young claims could have been settled, the Court can quantify that. It does not need to make a declaration to do so. 37 As to the second declaration claimed: in circumstances where, as I have concluded, the claim for damages should not proceed a mere declaration of contravention of s52 of the Trade Practices Act 1974 or s42 of the Fair Trading Act 1987 goes nowhere. It is entirely lacking in utility and the court should not entertain it. That is supported by the authorities referred to by Brereton J in Commonwealth of Australia v BIS Cleanaway [2007] NSWSC 1075 at [28] and following, as was pointed out by Barrett J in Edenden v Bignell [2007] NSWSC 1122 at [24] and following and [46] and following. 38 There is no point in repeating what their Honours said. It is necessary to say only that I adopt and apply their analyses.

Order 39 The consequence is that the appeal is dismissed with costs.

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