By Interlocutory Process filed on 15 November 2018, the Applicants, Mr Bailey and Galtari Pty Ltd (in liq) ("Company") apply for leave to amend their Statement of Claim filed on 16 November 2017 in accordance with a document which is annexed to that Interlocutory Process. The application for leave is opposed by the Second, Fourth and Sixth Defendants, Mr Brett Smith, Mr Damon Maloney and Tecthon Building Services Pty Limited, but in substance by Mr Smith in respect of claims relating to Mr Smith.
In particular, the application for leave to amend was opposed in respect of paragraphs 110-112, 115 and 132 of the proposed Amended Statement of Claim. Paragraph 110 of the proposed Amended Statement of Claim pleaded that, relevantly, in causing the Company to enter into a deed of guarantee, Mr Smith acted in breach of pleaded directors' duties, allegedly as a de facto director of the Company. Paragraph 111 alternatively pleaded a breach of directors' duties by failure to take any steps to prevent the Company from entering into a deed of guarantee. Paragraph 112 pleaded that, relevantly, Mr Smith was liable to compensate the Company for loss suffered as a result of entry into the deed of guarantee. Paragraph 115 pleaded that Mr Smith was, alternatively, involved in the Third Defendant's breach of directors' duties and thereby contravened statutory duties himself and was liable to compensate the Company for loss in consequence. Paragraph 132, relevantly, pleaded that the Liquidator was entitled to recover as a debt due to the Company, from Mr Smith, the amount of the loss suffered by a particular creditor, Buckra Pty Limited ("Buckra").
Mr Smith opposes the filing of the proposed Amended Statement of Claim on the basis that he was released by a Personal Insolvency Agreement which he had entered into and the claim against him is liable to be summarily dismissed or struck out. That Personal Insolvency Agreement was dated December 2013 and provided, relevantly, that upon completion of Mr Smith's obligation under that agreement, he would be released from all provable debts. That agreement took effect in the context of relevant provisions of the Bankruptcy Act 1966 (Cth), to which I will return below.
I have been assisted by comprehensive submissions of Counsel, both by Mr Burnett who appears for Mr Smith and the companies associated with him, and by Mr Golledge who appears for the Plaintiffs. My attention has been drawn to the principles that are applicable, in particular, to an application for summary dismissal. I proceed on the basis that the Court would be unlikely to grant leave to amend the Statement of Claim, in respect of the relevant paragraphs, if those paragraphs could then be summarily dismissed or struck out. It is sufficient for present purposes to refer to the Court of Appeal's decision in Perera v Genworth Financial Mortgage Insurance Pty Ltd (2017) 94 NSWLR 83 at [30] where Leeming JA (with whom Macfarlan and Simpson JJA agreed) summarised the applicable principles. His Honour there noted that those principles all had in common the need for exceptional caution to be exercised, and that the inquiry was directed to the demonstrated certainty of the outcome of the litigation, as opposed to its prospects of success. All parties accepted that the standard for summary dismissal was a demanding standard. Here, it seems to me that Mr Smith's application was primarily based on the prospects that the pleadings could be summarily dismissed, because they were incapable of success.
Mr Smith submits, in effect, that each of the claims put against him, by way of breach of directors' duties or in respect of a claim under s 588M of the Corporations Act 2001 (Cth), give rise to debts or liquidated claims which are released by his Personal Insolvency Agreement. With all respect to the way in which that argument was put by Mr Burnett, it will emerge below that this was an unlikely case for a summary judgment application to succeed, given the legal complexities of the issues that were raised by it.
Returning now to the Personal Insolvency Agreement of Mr Smith, I noted above that it provided that he would be released from all provable debts, upon compliance with the relevant provisions. That agreement was entered into December 2013. Prior to that date, in about July 2012, the Company had entered into the guarantee which is the subject of the relevant proceedings. After that date, the Company was placed in voluntary administration in 2014 and transitioned to winding up in 2015. Mr Smith's Personal Insolvency Agreement takes effect in the context of relevant provisions of the Bankruptcy Act. Section 230 of the Bankruptcy Act provides that, if a personal insolvency agreement provides for a debtor to be released from a provable debt, the agreement operates to release the debtor from that provable debt unless it is set aside or terminated. There is no suggestion that the agreement has been set aside or terminated. Section 82 of the Bankruptcy Act in turn provides for debts that are provable in bankruptcy. As Mr Burnett points out, s 82(1) is framed in wide terms, and provides that:
"Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or at which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy."
Section 82(2) of the Bankruptcy Act relevantly provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. Mr Burnett fairly accepted that, at least for the purposes of this application, the Court should proceed on the basis that, if the relevant claims were in the nature of claims for unliquidated damages, or would arguably be in the nature of claims for unliquidated damages, then s 82 of the Bankruptcy Act would not have the result that they were provable in a bankruptcy and they would not be within the scope of Mr Smith's Personal Insolvency Agreement. Mr Burnett did not seek to contend, at least for the purposes of this application, that any of the claims arose by reason of a contract, promise or breach of trust so as to be excluded from the scope of s 82(2) of the Bankruptcy Act.
Mr Burnett in turn helpfully drew attention to authorities dealing with the scope of s 82 of the Bankruptcy Act, which include Bryson AJ's decision in Auto Group Ltd v England [2008] NSWSC 402, where his Honour considered whether a claim is brought by a company against its managing director for moneys misdirected in respect of false invoices or liquidated debts were provable in the bankruptcy, and described the difference between liquidated and unliquidated damages, observing that:
"Damages are liquidated where their assessment is substantially a matter of calculation as a result, usually, of some contractual provision which establishes the amount of damages to be paid in some event and does not leave damages for assessment. Damages are unliquidated in all cases except those where there is some contractual or statutory mechanism which provides means of calculating the damages without any process of assessment. Where damages are to be assessed on principles of the law of damages, however simple the process may be, they are unliquidated."
Mr Burnett also drew attention to my decision in Gordon in his capacity as liquidator of Lyon Form Pty Ltd (in liq) v Leon Plant Hire Pty Ltd (in liq) [2015] NSWSC 397 where I considered that question, in the context of a final hearing rather than an application opposing an amendment to a statement of claim or a summary dismissal application, and considered in particular whether claims there fell within the scope of a personal insolvency agreement, where they were in the nature of a claim for breach of directors' duties. I there noted (at [96]) that a claim would only fall within the scope of a personal insolvency agreement if it was either a liquidated claim, or an unliquidated claim that arose by reason of contract, promise or breach of trust, the matter for which Mr Burnett does not contend. I noted that, conversely, the claim would not be provable in bankruptcy and would not be extinguished by a personal insolvency agreement if it was properly characterised as a claim for unliquidated damages not arising by reason of a contract, promise or breach of trust. I referred to Auto Group Ltd v England above, and held, expressly with hesitation, that a claim for two particular amounts paid out was in substance one for liquidated damages. Plainly, that holding did not extend any further than the position where the compensation sought for breach of directors' duties was there limited to the two particular amounts paid out.
Returning now to Mr Smith's claim that, in effect, there is no serious argument capable of going to trial that the relevant claims are not extinguished by his Personal Insolvency Agreement, it is necessary to return to the proposed pleading. As I have noted above, paragraphs 110-112 of the proposed Amended Statement of Claim conclude with the proposition that Mr Smith is, relevantly, liable to compensate the Company for loss suffered as a result of the entry into the deed of guarantee. Paragraph 129, which is not challenged by Mr Smith, pleads the loss suffered by the Company as a result of the entry into the deed of guarantee as the amount paid to Buckra in discharge of the guarantee; the amount still owed to Buckra pursuant to the guarantee; and the costs incurred in the liquidation of the Company, plus the costs of the voluntary administration and the deed of company arrangement. Paragraph 132, on which Mr Burnett places significant reliance, reflects the language of s 588M of the Corporations Act in claiming that the Liquidator is entitled to recover, as a debt owed to the Company, the amount of the loss suffered by Buckra.
So far as the claims for breach of directors' duties are concerned, it seems to me that, with all respect to Mr Burnett's able submissions, the loss claimed is calculated by reference to three elements. It may well be that the amount paid to Buckra in discharge of the guarantee is a liquidated amount. The amount still owed to Buckra pursuant to the guarantee may well be a liquidated amount, although I have not been taken to the particular terms of the guarantee. I will assume, without deciding, that it is likely to be readily calculated as a matter of arithmetic by the terms of the guarantee rather than by contractual principles. It seems to me, however, that the costs incurred in the liquidation and the voluntary administration and the deed of company arrangement are not liquidated amounts, so far as they are not capable of being calculated by any simple process of arithmetic. That is the case, not at least, because there are other steps that would need to be taken, as a matter of substance, including, for example, court processes in respect of the assessment of any remuneration that is not approved by creditors. In order to obtain summary dismissal, or an order refusing the amendment on the basis that the loss fell within the scope of the Personal Insolvency Agreement, Mr Smith would have to show that no serious argument was available that the loss arising from those three components should be assessed as a whole, not one by one, and that it was then liquidated in character. It does not seem to me that that is in any way beyond argument, since it can arguably be put that the loss suffered is a single amount, comprising those three components, one of which is unliquidated in character. I do not, of course, reach any finding that that is the case, which is a matter to be determined at a final hearing. All I need determine here is that that proposition is not so remote that it could not be established at a final hearing.
So far as the Liquidator's claim is concerned, I recognise the strength of Mr Burnett's argument that the proposed pleading treats the amount recoverable as a debt, consistent with the language of s 588M of the Corporations Act. I also recognise that Mr Burnett draws attention to the decision in Taylor v Rudaks [2007] FCA 1962, which treated the amount recoverable under s 588M of the Corporations Act as recoverable as a debt, although recognising that there may be issues as to its quantification. So far as a timing issue arises in respect of the amount, Mr Burnett draws attention to Vale v TMH Haulage Pty Ltd (1993) 31 NSWLR 702, which recognised that the amount recoverable under a predecessor to s 588M of the Act, s 556 of the Companies Code (NSW), may be a contingent amount, before a winding up occurs, at least where a winding up is likely. Mr Burnett also fairly draws attention to aspects of the pleading that suggest that the relevant transactions would render the Company insolvent.
Recognising all those matters, it seems to me that there is still an open question as to whether, as the case law now stands, and particularly given developments in the case law as to how compensation under s 588M of the Corporations Act is to be calculated, the amount recoverable can be treated as a debt or liquidated claim for all purposes, rather than for the limited statutory purpose specified in s 588M, which makes it recoverable as a debt owed to a company. Recent case law, including the decisions in Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 and SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830, have recognised a more complex quantification exercise, in claims under s 588M of the Corporations Act, than was perhaps anticipated by earlier authorities in this area. Again, it is not necessary for me to conclude, and I do not conclude, that a claim under s 588M of the Corporations Act is not a debt, and I recognise that it is plainly a debt at least for the purposes specified in the section itself. However, it does not seem to me that the contention that it is liquidated, or to be treated as a debt for the purposes of s 82 of the Bankruptcy Act, and therefore for the purposes of the Personal Insolvency Agreement, is so plainly correct that the contrary is not arguable, either at first instance or at an appellate level.
Third, an issue arose in respect of the Liquidator's Reply, whether these matters would not be within the scope of the Personal Insolvency Agreement, because an exception would be available under s 153 of the Bankruptcy Act, so far as the conduct alleged amounted to fraud or a fraudulent breach of trust to which Mr Smith was party. That matter was pleaded, expressly, in the proposed Statement of Claim, so as to seek to invoke that exception, and was the subject of review in an earlier decision of Gleeson JA in Re Galtari Pty Ltd (in liq) [2018] NSWSC 917. His Honour there noted, rightly in my view, that there was an open question whether fraud in that provision meant fraud in the common law sense or had the wider meaning in equity, and there noted that Counsel for Mr Randell, another defendant, and Mr Smith, then accepted that it was not appropriate that the Court determine the ambit of that exception, in respect of the earlier amendment application in these proceedings. Mr Burnett fairly accepts that the Court should proceed on the basis that it is arguable that the concept of fraud has a wider meaning. He submits that, taking the pleading as a whole, there is no arguable case of fraud against Mr Smith, even in the broader sense, because the pleading, as against the First Defendant, alleges a breach of professional duty, and proceeds, as against the First Defendant, on the basis that the giving of certain advice caused the entry into the guarantee, and that it would not have occurred but for that advice. Mr Burnett submits that, in that circumstance, it is self-evident that a case of fraud cannot be established, where it is pleaded that Mr Smith acted on professional advice in respect of entry into the guarantee.
It seems to me, with all respect to Mr Burnett, that there is a very high degree of artificiality in that approach to that matter. Mr Burnett and Mr Golledge have both accepted, rightly, that the Court must have regard to the pleading in determining this application and that is plainly correct, so far as that this is not an occasion to determine the merits of the proceedings. However, a case would not be summarily dismissed having regard only to the pleading and without reference to the other evidence which may be led at a final hearing to make good the claims alleged. The difficulty with Mr Burnett's submission, it seems to me, is that it assumes, without justification, that every aspect of the Plaintiffs' pleaded case will be made out in full, at least against the First Defendant, so that the case against Mr Smith must fail. That, of course, neglects the reality that the Plaintiffs' pleaded case against the First Defendant may fail, in whole or in part, and in that situation reliance on professional advice may not be established, and the pleaded case of fraud against Mr Smith may be established. The proposition that fraud against Mr Smith cannot be established is not self-evident once one recognises that it is not self-evident that the Plaintiffs will succeed in their claim against the First Defendant in respect of professional advice, reliance upon it, or the result if that advice had not been given.
All of these matters suggest that the relevant aspects of the Statement of Claim would not have been summarily dismissed, because they were capable of succeeding at a final hearing. In any event, I would also not have exercised a discretion to decline leave to amend, where the existence of the fraud exception is self-evidently a question of fact, which can only properly be determined upon evidence at a final hearing. More broadly, it seems to me that this is not a proper case to refuse an amendment, in respect of matters that I have found are potentially arguable, where the case against Mr Smith will nonetheless continue in respect of other aspects of the proceedings, and it is by no means apparent that there would be any substantial saving of Court time, or of the parties' resources, given the range of matters already in issue, if the question of the impact of a Personal Insolvency Agreement is not left to be determined at trial.
For these reasons, I do not accept that the amendment should not be permitted, on the basis that the specified paragraphs would be liable to be summarily dismissed and struck out against Mr Smith. I will amend order 1 previously made this morning so that leave is now granted to the Plaintiffs to file the proposed Amended Statement of Claim in respect of the proceedings generally.
[3]
Costs
Application is made by the Plaintiffs for the costs of the contested application for leave to amend, on the basis that the substantive contest was between the Plaintiffs on the one hand and the Second Defendant on the other. As I understand that submission, it is put on the basis that this is a discrete application and that costs should follow the event.
Mr Burnett responds that this was the Plaintiffs' application for leave to amend and the Plaintiffs required that leave. While that is correct, so far as it goes, the application took longer than it would otherwise have taken, both at a hearing, and in respect of the steps that led to it, because it was opposed by Mr Smith, and ultimately that opposition was not successful. In these circumstances, it seems to me that it is a proper order that Mr Smith pay the Plaintiffs' costs of and incidental to the application for leave to file its Amended Statement of Claim. Those costs are thrown away, irrespective of the outcome of the proceedings, because they would not have been incurred had the application not been opposed.
Accordingly, I make an additional order that the Second Defendant pay the Plaintiffs' costs of and incidental to the Plaintiffs' application to file and serve its Amended Statement of Claim, as agreed or as assessed.
[4]
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Decision last updated: 24 March 2019