Appellant/Defendant v 1st Respondent/1st Plaintiff

1 This is an appeal from a judgment of an associate judge, delivered on 10 May 2016, dismissing the defendant's summons filed 23 December 2015. With respect to part of the statement of claim, the defendant had sought summary judgment, alternatively a permanent stay, or that certain paragraphs be struck out.

2 Although the summons was dismissed, the defendant was partially successful as the plaintiffs were required to replead paragraph 17 of the statement of claim. There was no appeal on this issue.

3 The plaintiffs filed a further amended statement of claim on 1 June 2016. It was to this document that the parties addressed their submissions, there having been no substantive changes to the paragraphs relevant to the issues on appeal.

4 The plaintiffs' claim is a straightforward one. The first plaintiff sues in his capacity as liquidator of the second plaintiff. After a period in administration, the second plaintiff was placed into liquidation. It is alleged the "relation-back day", as that term is defined in s 9 of the Corporations Act 2001 (Cth), is 23 August 2012; and that the 6 month period ending on the relation-back day commenced on 24 February 2012 ("the Relation-Back Period").

5 The plaintiffs simply allege the second plaintiff was, "[a]t all material times ... indebted to the defendant, which debt was unsecured". Then a series of payments during the Relation-Back Period, totalling $3,652,317.70, are alleged to have been made by the second plaintiff to the defendant. It is also pleaded that each payment was a "transaction",[1] and, at the time it was made, the defendant was an unsecured creditor of the second plaintiff. This, it was alleged, resulted in the defendant receiving more than it would receive if the payments were set aside and the defendant was to prove in the winding up of the second plaintiff.

6 This provides the basis upon which it is then alleged that the payments were an unfair preference, or each of the payments was an unfair preference, within the meaning of s 588FA of the Corporations Act.

7 The debts the subject of the allegations were governed by terms of trade between the second plaintiff and the defendant. There were terms of trade agreed in 2008, 2011 and 2012.

8 As to the questions raised at first instance, more specifically, the defendant, amongst other things, sought:

(1) The proceeding be stayed, alternatively there be judgment in its favour in respect of the plaintiffs' claims in paragraphs 10, 11, 13, 15 and 17 of the statement of claim, pursuant to r 23.01(1) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) or, alternatively, under s 18 of the Civil Procedure Act 2010 (Vic).

(2) Alternatively, summary judgment pursuant to s 62 of the Civil Procedure Act.

(3) Alternatively, paragraphs 10, 11, 13, 15 and 17 of the statement of claim be struck out under r 23.02(c) or (d) of the Supreme Court Rules or, alternatively under s 18 of the Civil Procedure Act.

9 On appeal, the defendant only sought to challenge the associate judge's decision based upon s 18 of the Civil Procedure Act and r 23.02 of the Supreme Court Rules in seeking the relief set out in paragraph 8(1) or (3) above.

10 In refusing to grant relief sought as set out above, the associate judge made the following key findings:

(1) To the extent that the defendant might rely on the retention of title clauses under the 2008 terms of trade or the 2011 terms of trade, such clauses do not establish that the defendant is a secured creditor, such that the clauses afforded the defendant security in the context of the voidable transaction provisions of the Corporations Act.[2]

(2) It is clearly arguable that the purchase money security interests, as that term is defined in s 14 of the Personal Property Securities Act 2009 (Cth), of the defendant arising under the 2012 terms of trade only have effect in respect of dealings which took place after the Personal Property Securities Act was introduced.[3]

(3) A purchase money security interest can only secure an unpaid purchase price of the stock itself and not other debts owing to the defendant for other purposes.[4]

(4) If the purchase price of the stock has been paid for by the second plaintiff either by cash on delivery or by later payment, then there is no purchase money security interest over that stock.[5]

(5) Even assuming that there is some post-Personal Property Securities Act-stock, the defendant must establish that the stock has some value as security.[6]

(6) There was no evidence on the application as to when the stock, which is said to be the subject of the defendant's security at the time of the payments, was supplied.[7]

(7) The contractual position will be governed by the terms of trade which applied from time to time, in particular, the retention of title clauses in the various iterations of the terms of trade.[8]

(8) The position as to whether the defendant was a secured creditor in the relevant sense at the time of each of the payments is complex and requires a good deal more evidence and analysis.[9]

(9) As to the 50/50 arrangement between the second plaintiff and the defendant,[10] it has to be demonstrated the arrangement has been complied with by way of the actual appropriation of the payments, and then demonstrated that the payments the plaintiffs are trying to recover are the subject of that defence.[11]

(10) It is not for the plaintiffs to anticipate the defendant's defence or the efficacy of what the defendant contends as to the existence of the alleged security.[12]

(11) If the defendant contends it has security in respect of the debts, it is for the defendant to plead and particularise why.[13]

11 On the pleading point, his Honour referred to a passage in Odgers' Principles of Pleading and Practice in Civil Actions in the High Court of Justice,[14] as follows:[15]

But the pleader should never allege any fact which is not material at the present stage of the action, even though [she or] he may reasonably suppose that it may become material hereafter. It is sufficient that each pleading in turn should contain in itself a good prima facie case, without reference to possible objections not yet urged. It is not necessary to anticipate the answer of the adversary ... "It is no part of the statement of claim to anticipate the defence and to state what the plaintiff would have to say in answer to it."

12 There were slightly different submissions about the precise role of the court on the hearing of an appeal from a decision of an associate judge under r 77.06 of the Supreme Court Rules. As I have found no error with the decision, it is unnecessary to address these submissions in any detail.[16] Suffice to say, this is a rehearing and not a hearing de novo. It is also an appeal from an interlocutory decision. In these circumstances, to succeed, the defendant must demonstrate a legal, factual or discretionary error[17] on the part of the associate judge.[18]

13 On the evidence that was before his Honour and on the state of the authorities at the time, there is no error apparent in his Honour's reasoning. Without going through each of the matters referred to above, on the substantive non-pleading issues, there was insufficient evidence for his Honour to be able to conclude that the case as pleaded ought not be able to proceed. In particular, there was no evidence of the value of the stock at any particular point in time. Without such evidence of value, it was not possible for the defendant to establish that it was a secured creditor for the amounts claimed, whatever the terms of trade applied to the stock in question.

14 Supplementary fresh evidence was put before this court by the defendant without any opposition by the plaintiffs.[19] The supplementary fresh evidence did not materially alter the position. There was still no evidence of:

(1) Compliance with the 50/50 arrangement by way of due appropriation of the payments; and that the payments the subject of the statement of claim are covered by this arrangement, thereby giving a defence which is a complete answer to the claim.

15 Documents relevant to these issues may or may not give rise to difficulties for the plaintiffs at the trial when seeking to establish that the relevant debts are unsecured. However, the absence of the relevant evidence does not provide a basis to strike out the statement of claim.[20] Further, the position does not give rise to a conclusion that the plaintiffs do not have a proper basis for making the claims made, for the purposes of s 18 of the Civil Procedure Act.

16 On the pleading point, there is some substance to the defendant's submission that, without further information contained in the statement of claim, the defence may not be able to precisely define the issues between the parties. Also, I accept that the allegation that the defendant was an unsecured creditor is a pleading of a conclusion and that there is evidence to suggest the defendant may be a secured creditor with respect to some or all of the debts the subject of the claims.

17 However, the solution to these difficulties is not to require the plaintiffs to plead to matters in anticipation of the defences which might be raised. Upon the defendant pleading how it is alleged it is a secured creditor, it will be for the liquidator to plead, by way of reply, the facts which address the defences to the claim, and the material facts to be relied upon in establishing that the defendant was an unsecured creditor for each of the debts.

18 In my view, this approach is far more consistent with the overarching obligations under the Civil Procedure Act.

19 I am considerably fortified in this conclusion based on a number of observations made by Edelman J in the recent decision of Hussain v CSR Building Products Limited, In the matter of FPJ Group Pty Ltd (in liq),[21] which was a judgment delivered shortly after the associate judge's judgment.

20 This decision concerned issues raised at trial with respect to s 588FA of the Corporations Act. The matter proceeded to trial despite the fact that there were no company records for stock, and the liquidator could not take an account of any stock on hand.[22]

21 Further, there was no evidence that explained the goods to which each of the payments the subject of the preference claim related.[23]

22 Furthermore, there was no evidence of whether or not the goods the subject of the retention of title claim had been sold.[24]

23 None of these matters were barriers to making a claim or proceeding to trial, albeit that they created some difficulties for the liquidators at trial.

24 The observations of Edelman J are particularly relevant to the issues raised on this appeal concerning pleadings. His Honour stated as follows:[25]

Thirdly, even if an inference could be drawn that all of the goods had been sold by FPJ Group [the company in liquidation], the failure of the liquidators to plead this matter or to raise it earlier has had the effect of precluding CSR [who was the respondent] from exploring other issues. For instance, issues might have arisen concerning whether CSR retained title to any goods sold where only part of the payment had been made for those goods. Would a claim by CSR to title over goods held by a third party amount to security in those circumstances? The failure of the liquidators to allocate payments to goods that were supplied also precluded an examination of this issue.

Fourthly, and further to the third point, if this point had been pleaded in reply by the liquidators or had been raised at any point prior to oral closing addresses then it might have been met with a response ...

(Emphasis added.)

This passage makes plain that it was his Honour's view that the issues concerning the level of the stock and the sale of stock were matters that could properly be raised in reply.

25 I have read paragraphs 144 to 180 of Edelman J's judgment carefully. It is enough for present purposes to state that, accepting the correctness of his Honour's conclusions (and I note counsel for the plaintiffs submitted I should not[26]), those conclusions do not establish the liquidator has made a claim without having a proper basis for doing so, for the reasons already discussed above.

26 Before leaving the decision, I note Edelman J's comments[27] concerning the proper timing of the determination of the value of the security, and that the position is far from clear. This adds another layer of complexity which makes it even more inappropriate to grant the relief sought under s 18 of the Civil Procedure Act.

E. Disposition of the appeal and further conduct of the proceeding

27 In these circumstances, the appeal must be dismissed. However, I do not propose to let the matter rest there.

28 The liquidator has maintained there is a proper basis for the proceeding. He has sworn an affidavit stating the matters in the statement of claim are true and correct.

29 However, the court is in no position to form any meaningful final view on this given the state of the evidence. Moreover, the evidence, such as it is, does raise some serious questions about the basis for each payment being the subject of a claim.

30 Subject to further submissions, I propose to take over the management of this proceeding at least until the pleadings are closed, which should occur by 8 August 2016 when the mediation is scheduled.

31 It is only when the defendant has properly articulated its defences, and the plaintiffs have responded by way of reply, that the court would be in a position to properly assess the appropriateness of the position adopted by the plaintiffs.

32 Further to this end, the court will carefully monitor the conduct of the parties to ensure the prompt exchange of any critical documents, and the efficient provision of any other information that is the subject of any reasonable request.

[1] See Corporations Act, s 9.

[10] The details of this arrangement are explained at [16] and [39].

[15] D B Casson and I H Dennis, Odgers' Principles of Pleading and Practice in Civil Actions in the High Court of Justice (Steven & Sons Limited, 22nd ed, 1981), 101.

[16] I was referred to the following: Wilson v Building Commission of Victoria [2015] VSC 629, [8] (John Dixon J); Cleal Holdings Pty Ltd v JG King Developments Pty Ltd [2015] VSC 573, [16] (Digby J); Hou v Westpac Banking Corporation [2014] VSC 606, [37] (Warren CJ); AusNet Electricity Services Pty Ltd v Liesfield [2014] VSC 474, [68]-[74] (Robson J); Mainstream Construction (Aust) Pty Ltd v Carr Electrical Pty Ltd [2014] VSC 317, [81]-[84] (Cavanough J); Schreuders v Grandiflora Nominees Pty Ltd [2014] VSC 310, [30] (Garde J); Oswal v Carson [2013] VSC 355, [11] (Ferguson J).

[17] House v The King [1936] HCA 40; (1936) 55 CLR 499, 504.10-505.9 (Dixon, Evatt and McTiernan JJ).

[18] This is putting to 1 side cases where material fresh evidence is admitted which changes the circumstances of the case to what was before the associate judge: cf Mainstream Construction (Aust) Pty Ltd v Carr Electrical Pty Ltd [2014] VSC 317, [53] (Cavanough J).

[19] With respect to fresh evidence on such an appeal, see, for example, Australia and New Zealand Banking Group Ltd v Loftus [2014] VSC 342, [38]-[39] (Ginnane J) and the cases there cited.

[20] See Nicholson Street Pty Ltd (Receivers and Managers Appointed) (In Liquidation) v Letten [2015] VSC 583, [60] (Judd J). I note that this decision was overturned by the Court of Appeal yesterday, but not on grounds relevant to the pleading deficiency: [2016] VSCA 157, [2], [42] and [56] (Whelan and Ferguson JJA, with whom Kaye JA agreed).

[21] [2016] FCA 392.

[26] The plaintiffs made 4 distinct submissions as to why they contended the case should not be followed on the issue of whether debts the subject of a retention of title clause before the Personal Property Securities Act were a security for the purposes of s 588FA(1)(b) of the Corporations Act. It is unnecessary to provide the detail of these submissions.