Cole v Challenge Bank Ltd

Federal Court of Australia|2001-10-09|Before: Carr J

introduction 1 The Court has before it three motions on notice. In the first motion the first respondent seeks an order, under Order 20 rule 2 of the Federal Court Rules, that the proceedings be dismissed or forever stayed on the alternative grounds that no reasonable cause of action is disclosed, the proceeding is frivolous or vexatious or that it is an abuse of process. In the second part of that motion the first respondent asks for an order that the applicants give security, pursuant to Order 28 rule 2 of the Federal Court Rules, for its costs in the application in the sum of $90,000 by way of a payment of that amount into Court and that in the meantime all further proceedings be stayed. 2 In the second motion the second respondent seeks an order that paragraphs 49 to 58 of the applicants' substituted statement of claim (which plead their case against the second respondent) be struck out and their claim against it be dismissed. 3 In the third motion the second respondent seeks an order that the applicants pay into Court the sum of $90,000 (or such other sum as the Court may determine) as security for its costs. 4 These reasons relate to the two strike-out motions.

factual background 5 The following recital of the factual background of this matter is taken largely from the applicants' minute of substituted statement of claim (which I shall refer to as the statement of claim), filed by leave granted by the District Registrar on 29 June 2001. This recital should not be taken, in any way, as amounting to findings of fact. It is simply my assessment of the proceedings on the current state of the evidence which has not yet been tested. 6 The applicants were the sole directors and shareholders (in their statement of claim their shareholding is, somewhat confusingly, described as "through the Cole Unit Trust") of a company called Cole Engineering Pty Ltd which is now in liquidation. I shall refer to that company as Cole Engineering. Cole Engineering was incorporated in 1955 by the father of the male applicant. From about that time until late last year it carried on the businesses of manufacturing agricultural machinery and distributing steel at Kellerberrin in the Western Australian wheat-belt. 7 The first respondent has always been Cole Engineering's banker over the years, providing both loan and overdraft facilities. The second respondent is a firm of chartered accountants. On 24 August 2000 the applicants caused Cole Engineering to appoint two of the partners in the second respondent to be administrators of the company pursuant to s 436A of the Corporations Law. 8 It would appear that Cole Engineering diversified from its principal business activity at an unspecified time within the last four years. The applicants say that Cole Engineering advanced approximately $1 million to an associated company called Sport Specific Australia Pty Ltd which manufactured and distributed a sports drink under licence. It also appears that that was not a successful venture. 9 Over a period of four years from about December 1996 the applicants say that Cole Engineering, with the approval of the first respondent (such approval being denied by the first respondent) exceeded the limits on its financial accommodation on several occasions "without any negative consequences flowing therefrom". The applicants say that Cole Engineering ensured that over an agreed period of time the moneys owing were reduced to being within the set agreed limits. 10 The applicants contend that Cole Engineering was at all material times a viable and profitable business. 11 However, early last year Cole Engineering sought financial advice from the second respondent and another consultant each of which, so they plead, furnished reports that Cole Engineering was financially viable. 12 Next the applicants plead that on several occasions during 2000, an employee of the first respondent, Mr Nick Marmont demanded financial information from Cole Engineering. Partly to satisfy those demands, but also to upgrade their accounting systems for GST compliance, Cole Engineering purchased computer software which did not operate satisfactorily and eventually failed. The applicants plead that Cole Engineering kept the first respondent informed about those difficulties. Eventually they say that they engaged a firm of chartered accountants to provide the information sought by the first respondent. Part of the applicants' case is that in making those demands for financial information and refusing to continue to provide financial accommodation to Cole Engineering, the first respondent engaged in conduct that was, in all the circumstances (summarised below) unconscionable within the meaning of that term in s 51AC of the Trade Practices Act 1974 (Cth) ("the Act"). 13 The next matter upon which the applicants rely as amounting to part of the unconscionable conduct engaged in by the first respondent concerns a meeting held on 7 August 2000 at the offices of the first respondent. Those present included the male applicant, other representatives of Cole Engineering and representatives of the first respondent. During that meeting Mr Cole asked the first respondent to restructure the financial accommodation provided to Cole Engineering in a manner which would enable it to continue to trade and meet all of its obligations. He also asked that Cole Engineering be given a suitable opportunity to obtain alternative financial accommodation or an injection of equity. The applicants claim that the first respondent immediately and summarily rejected those requests or proposals. The applicants say that those refusals constitute the second and third elements of the first respondent's alleged unconscionable conduct. 14 The fourth element is said to be constituted by a letter sent by the first respondent to Mr Cole, in his capacity as managing director of Cole Engineering, stating that unless the first respondent's demands for financial information were complied with by 4.00pm on 18 August 2000, the first respondent would withdraw its financial accommodation, demand repayment of all outstanding debts in full and appoint a receiver/manager to Cole Engineering. The fifth element of alleged unconscionable conduct by the first respondent is that on 23 August 2000 Mr Marmont telephoned Mr Cole and said that the first respondent "would not continue to support" Cole Engineering unless the applicants agreed to the appointment of the second respondent as administrators pursuant to the Corporations Law. Mr Marmont is said to have used words to the effect that: "We want you to appoint Norgard Clohessy as administrators. If you don't we will appoint them as receiver/managers at 9.00am tomorrow morning." 15 By way of particulars of the alleged unconscionable conduct the applicants refer to the relative strength of the bargaining position as between the first respondent and Cole Engineering, they allege that they and Cole Engineering were required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the first respondent and that Mr Marmont exerted undue influence or pressure on the applicants and Cole Engineering. They also refer to matters of which they say the first respondent was well aware, relating, amongst other things, to the difficult financial circumstances of Cole Engineering at the relevant time. Then the applicants plead that the first respondent, at a time when the economic situation of the rural community in Western Australia was at an "extremely low ebb" refused to continue to provide financial accommodation to Cole Engineering, by seeking without good reason to terminate or substantially reduce that financial accommodation and by placing demands upon it for financial information which it could not reasonably provide. The applicants further plead that in refusing to continue to provide financial accommodation to Cole Engineering the first respondent engaged in unconscionable conduct, again contrary to s 51AC of the Act. 16 Then the applicants plead, further and in the alternative, that the conduct of the first respondent in withdrawing financial accommodation and doing so without affording Cole Engineering a reasonable opportunity to procure alternative facilities, and in insisting that the applicants appoint the second respondent as administrators and permitting the second respondent to exercise the power of sale over assets which the first respondent held by way of security in what is said to be an irresponsible and imprudent manner which resulted in the assets failing to realise anywhere near their true value, the first respondent also engaged in unconscionable conduct contrary to s 51AC of the Act. 17 The applicants say that as a result of the first respondent's alleged unconscionable conduct in breach of s 51AC of the Act they were induced to appoint the second respondent as administrators to Cole Engineering which subsequently resulted in the liquidation of that company and that they thereby suffered loss and damage. The applicants' particulars of loss are, in summary, as follows: · the loss of the opportunity of appointing an administrator who would "in all likelihood" have ensured a more favourable outcome of the administration for all stakeholders of Cole Engineering than that which was achieved by the second respondent; · the loss of the opportunity for Cole Engineering to trade out of its difficulties or obtain an injection of equity or holding sales of stock and equipment and other assets in reduction of its liability to the first respondent; · the difference in value of the applicants' shareholding "through the Cole Unit Trust" in Cole Engineering in that such shareholding was rendered valueless by the liquidation of the company; · a unit owned by Cole Engineering was sold to reduce its indebtedness; · the applicants have lost their source of income previously derived from Cole Engineering; · the loss of the opportunity to continue providing funding to Sport Specific Australia Pty Ltd in its claim against a firm called Anchor Foods "… which would have been of financial benefit to the Applicant (sic) as the directors and shareholders of Sport Specific Australia Pty Ltd"; · general damages for "stress and inconvenience and loss of business reputation". 18 Next the applicants allege that the first respondent's conduct, in making the demands for financial information and threatening to withdraw financial accommodation and appoint a receiver/manager unless the second respondent was appointed as administrator, constituted unconscionable conduct within the meaning of that term "in the General Law" and within the unwritten law contrary to s 51AA of the Trade Practices Act. To some extent this is particularised by an allegation that the will of the applicants was overborne such that their decision to appoint the second respondent as administrator was not "independent and voluntary" and that they were deprived of an opportunity of making a worthwhile judgment as to what was in their best interests. 19 Finally, the applicants plead a case of misleading or deceptive conduct under s 52 of the Act. The plea is that, during the telephone conversation on 23 August 2000 Mr Marmont used words to the effect that: "If you appoint Norgard Clohessy the bank would look favourably on this and would continue to support you." 20 The applicants say that this amounts to a representation as to a future matter within the meaning of s 51A of the Act. The applicants say that that representation was false, misleading, inaccurate and untrue in that the first respondent did not continue to support Cole Engineering or give preference to it continuing as a going concern. 21 The applicants say that they were induced by that representation into believing that if they agreed to the appointment of the second respondent as administrators then the first respondent would work with the second respondent and Cole Engineering to give preference to the option of it continuing as a going concern. 22 Next the applicants plead that as a consequence of the alleged misleading and deceptive conduct of the first respondent they were induced into appointing the second respondent as administrators to Cole Engineering and that they thereby suffered the same loss and damage earlier pleaded in their amended statement of claim. In paragraph 48 the applicants plead that they were induced to appoint the second respondent as a result of the alleged misleading or deceptive conduct and the alleged unconscionable conduct on the first respondent's part. 23 The applicants' case against the second respondent is pleaded on two bases. First, it is said that the second respondent owed a fiduciary duty to various persons including the applicants and that in breach of that fiduciary duty did or failed to do the things referred to in paragraph numbered 52 of the amended statement of claim (the renumbering is out of order) whereby the applicants suffered loss and damage. The breaches of duty are, in summary, stated to have been the following: · to transfer the sum of $75,000 to the second respondent's trust account from the trading account of Cole Engineering when that company was "desperate for liquidity"; · refusal or refusal properly to pursue various commercial opportunities which would have enabled Cole Engineering to trade itself out of difficulties; · refusing regularly to attend at the business premises of Cole Engineering; · refusing, for the first 20 days of the administration, to process purchase orders or to purchase material required to complete outstanding orders; · refusing to familiarise itself at all or failing properly to familiarise itself with the "seasonal nature of the business of Cole Engineering" and the "peculiar conditions that prevailed in the rural community in which" the company operated; · failing, refusing or neglecting to pursue debtors of Cole Engineering properly or at all. 24 Secondly, the applicants plead that the second respondent owed them (and others) a duty of care to ensure that the administration of Cole Engineering was properly conducted, that all avenues for saving it as a going concern were properly investigated and that its assets were marketed and sold to achieve the best possible return. The applicants plead that the second respondent in breach of that duty failed properly to conduct the administration. Such failure is particularised in a similar, if not identical, manner as in relation to the alleged breach of fiduciary duty. The applicants plead that as a result of the second respondents' negligence they have suffered loss and damage. 25 The applicants seek as against the first respondent damages pursuant to s 82 of the Act and further or alternative relief under s 87 of the Act. As against the second respondent they seek equitable damages for breach of fiduciary duty and damages at common law for negligence.

the respondents' contentions AND MY REASONING 26 The respondents acknowledge the stringent test which is applied by a court when asked to strike out an application on the grounds that no reasonable cause of action is disclosed. That is, whether the case is so clearly untenable that it cannot possibly succeed: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130.

FINANCIAL SERVICES 27 In its two sets of supplementary submissions the first respondent says that, in so far as the applicants rely upon s 51AA and s 52 of the Trade Practices Act, those sections do not apply because of the provisions of ss 51AAB and 51AF, respectively, of the Act. 28 Section 51AAB(1) relevantly provides that s 51AA of the Act does not apply to conduct engaged in in relation to financial services. Section 51AF(1) relevantly provides that Pt 5 of the Act does not apply to the supply, or possible supply, of services that are financial services. Section 51AF(2)(a) relevantly provides that s 52 does not apply to conduct that is engaged in in relation to financial services. 29 There are what can be regarded for present purposes as provisions which are comparable to s 51AA and s 52 respectively in s 12CA and 12DA respectively of the Australian Securities and Investments Commission Act 1989 (Cth) ("the ASIC Act"). 30 The expression "financial service" is defined in the Act as having the same meaning as in Div 2 of Pt 2 of the ASIC Act. Section 12BA of the ASIC Act defines "financial service" as meaning a service that: (a) consists of providing a financial product; or (b) is otherwise supplied in relation to a financial product 31 The expression "financial product" is also defined in s 12BA of the ASIC Act. It is relevantly defined as meaning a facility for taking money on deposit, a security, a futures contract, a contract of insurance, a retirement savings account or a superannuation interest. 32 In my view, it is arguable that the conduct about which the applicants complain was not engaged in, in relation to "financial services" as so defined. I doubt whether the making of a loan amounts to the provision of "a financial product" as that term is defined in s 12BA of the ASIC Act, but I should not be taken as deciding the point. In any event, if I had been persuaded that the point was not arguable, I would have granted leave to re-plead.

UNCONSCIONABILITY 33 In relation to the unconscionable conduct alleged against it, the first respondent says that to be unconscionable there must be serious misconduct or something clearly unfair or unreasonable. The term "unconscionable", so it was put, imports a pejorative moral judgment. I accept that submission - see Berbatis v Australian Competition and Consumer Commission [2001] FCA 757. 34 Then the first respondent says that, as a matter of law, in the absence of a fiduciary relationship, a bank has no duty to negotiate in good faith with its debtor, is entitled to pursue its own commercial interests in the negotiation and is not obliged to strike a bargain which is fair and reasonable to all parties. It says that the ordinary relationship of banker and customer or lender or borrower does not give rise to fiduciary duty even if it is a warm, valued and prolonged association. 35 Next the first respondent says that a mortgagee need not take into account the interests of the mortgagor before enforcing its securities, that it has no duty to preserve the mortgagor's business as a going concern before it enters into possession, that in the absence of any fiduciary duty it was under no duty to provide additional finance and might act in its own interests upon an event of default. 36 Accordingly, so the first respondent argues, despite the long-standing commercial relationship between the applicants and the first respondent, the latter was entitled to refuse further financing, that refusal did not constitute unconscionable conduct and it was under no legal duty to consider the depressed economic conditions in the rural community or any of the other matters pleaded in the statement of claim. As to duress, the first respondent says that if (as it asserts to be the law) the proper use of legal process does not constitute duress, then a bona fide threat to exercise rights conferred by the security can scarcely constitute duress either. Before s 51AC of the Act will be applicable, there must be some circumstances other than the mere terms of the contract itself that would render reliance on the terms of the contract "unfair" or "unreasonable" or "immoral" or "wrong". It makes the same submissions in relation to the alleged contravention of s 51AA.

my reasoning on the unconscionability points 37 The steps taken by the first respondent which the applicants contend amounted to conduct which was in all the circumstances unconscionable within s 51AC are particularised in paragraph 33 of the substituted statement of claim. 38 It should be noted that there is no suggestion on the applicants' part that Cole Engineering was not in default at the relevant times in meeting its financial commitments to the first respondent or that the first respondent did not have the right to exercise its rights under its securities, including the right to appoint a receiver/manager. 39 In those circumstances, I have had regard to the conduct complained of in paragraph 33 of the statement of claim, both individually and cumulatively. I have summarised those complaints at paragraphs 12 to 16 above. 40 In my view, the applicants' case under s 51AC of the Act is so clearly untenable that it cannot possibly succeed. In my opinion, the first respondent's alleged refusal to continue to provide financial accommodation to Cole Engineering in the circumstances pleaded, the making of demands for financial information, refusing to restructure financial accommodation in a manner which would enable Cole Engineering to continue to trade, refusing to give a suitable opportunity to obtain alternative financial accommodation or an injection of equity, writing the letter of 14 August 2000 demanding financial information and stating what it would do if that information was not provided and making the statement referred to in paragraph 32 of the statement of claim are incapable of amounting to unconscionable conduct within the meaning of s 51AC. It was not, in my view, arguably unconscionable for the first respondent so to conduct itself. On the applicants' case, the first respondent sought financial information from it, made it clear that it was not prepared to extend further financial accommodation or contemplate the extension of time for the obtaining of alternative financial accommodation or an injection of equity. It made it clear that it would exercise its rights to appoint receiver/managers unless the board of Cole Engineering appointed the second respondent as administrators. In the absence of any suggestion that Cole Engineering was not in default under its financial obligations to the first respondent, in my opinion, the material before the Court is such that the application should not be permitted to go to trial. 41 The same applies in my view to the allegation made in equity and under s 51AA of the Act which I have summarised at paragraph 18 above.

the section 52 claim 42 As to the allegation made under s 52 of the Trade Practices Act, the first respondent says that the mere fact that it ultimately withdrew its financial support to the applicants could not alone constitute a breach of that section. Then it is said that there was no falsity in the alleged representation because it was merely an expression of a present belief of the speaker. This latter submission, in my view, overlooks the plea of reliance upon s 51A of the Act. In any event, if there was any deficiency in the allegations of falsity, I would have granted leave to the applicants to re-plead in that regard. 43 The first respondent also says that the applicants have pleaded irrelevant matter, contrary to Order 11 rule 2 of the Federal Court Rules and have not given sufficient particulars of various aspects of their claim. In view of my conclusions below as to standing, it is not necessary for me to consider this submission.

the claims against the second respondent 44 The second respondent submitted that there was no fiduciary relationship between it and the applicants and it did not owe any duty of care to them. The second respondent argued that an administrator is in an analogous position to that of a company director. The present case, so it was put, did not fall within any of the exceptions to the established rule that, in general, a director's fiduciary duties are owed only to the company. It was submitted that it was sufficiently clear that, by analogy to directors' duties, the second respondent only owed a duty of care to Cole Engineering, not to the applicants as individual shareholders. 45 Were it necessary for me to decide these points, I would be inclined to the view that the law relating to company administrators is not sufficiently settled to make it obvious to the requisite extent that the applicants would fail in these claims. However, in view of my conclusions on the question of standing, set out below, it is not necessary for me to decide those points.

STANDING 46 The hearing of the first respondent's motion and the second respondent's motion for security for costs took place on 14 August 2001 and was adjourned part-heard. It was adjourned because the second respondent had the previous day served an affidavit upon which it wished to rely and also because the second respondent foreshadowed the strike-out motion which it has subsequently filed. The parties were given leave to file further submissions. They did so. 47 In each of those submissions the respondents contend that the applicants have no standing to bring these proceedings as their complaints are essentially for wrongs said to have been done to Cole Engineering: Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. 48 The respondents say that the applicants cannot recover a sum equal to the diminution of the market value of their shares or equal to the likely diminution in dividend, because such a loss is merely a reflection of the loss suffered by the company. In particular, the second respondent submits that the applicants are seeking to bring what amounts to a derivative action and that if this is to be done, it should be done under Part 2F.1A of the Corporations Law.

my reasoning 49 I think that the respondents are correct in their submissions to the effect that the applicants do not have sufficient standing to bring these claims and that the application is thus doomed to failure. 50 I have summarised above (at para 17) the loss and damage which the applicants seek to recover against the first respondent. The loss and damage which they claim against the second respondent in negligence is particularised in the same terms in paragraphs 37 and 58 of the statement of claim. 51 In my view, all those particulars except those given in what I shall describe as "the last bullet point" in each of those sets of particulars amount to claims to recover either diminution of the market value of the applicant's shares in Cole Engineering or loss of a dividend stream. [The truth of the matter is that the applicants are probably not shareholders - see the reference in paragraph 2 of the statement of claim to the Cole Unit Trust. They are probably holders of units in a unit trust, the trustee of which holds shares in Cole Engineering. But the motions were fought on the basis that the applicants were shareholders.] As to the claim in the last bullet point for general damages for "stress and inconvenience and loss of business reputation", there is nothing pleaded in the statement of claim which would support that claim. 52 In respect of the second respondent's alleged breaches of fiduciary duty, no particulars of loss are pleaded other than losses sustained by Cole Engineering. 53 In my opinion, it is sufficiently clear that the applicants are, in reality, seeking to recover losses allegedly sustained by Cole Engineering. In my view, the authorities sufficiently establish that they are not entitled to do this - see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204 at 222-3 cited with approval by the High Court of Australia in Gould v Vaggelas (1985) 157 CLR 215 at 219-220, 245 and 253. See also Johnson v Gore Wood & Co [2001] 2 WLR 72 at 94-95 (House of Lords). The present case is to be distinguished on its facts from Gould v Vaggelas. In Gould v Vaggelas the appellants personally acted to their detriment in response to the respondents' fraud. They sued to recover their personal losses which flowed from proceeding to incorporate the company and causing that company to acquire the relevant property. 54 It can be seen from paragraph 37 of the statement of claim that the relevant inducement pleaded was for the applicants to appoint the second respondent as administrator which is said to have resulted in Cole Engineering going into liquidation on the second respondent's recommendation. Anything that the applicants were induced to do in that regard was in their capacity as directors of Cole Engineering. They, as the board of Cole Engineering, appointed the administrators - see s 436A of the Corporations Law. If there is loss to be recovered by reason of any conduct on the part of the first respondent which induced that situation, it is quite clear that Cole Engineering, not the applicants, would be entitled to recover that loss. In my opinion, the same applies to the inducement pleaded in paragraphs 43, 44 and 48 of the statement of claim. As I say, this is in marked contrast to the facts in Gould v Vaggelas. 55 So far as the claims against the second respondent are concerned, any loss which flowed from the alleged non-feasance, misfeasance or breach of duty was sustained by Cole Engineering. 56 The applicants do not purport to bring this application as a derivative one on behalf of Cole Engineering, but in their own right. In doing so, they have, in my opinion, no standing. The application should be struck out on this basis alone. 57 Accordingly, I do not propose to consider the further submissions put on behalf of the second respondent in support of its motion to strike out the applicant's claim against it.

Conclusion 58 For the foregoing reasons, the statement of claim will be struck out and the application will be dismissed. The applicants should pay the respondents' costs of the application and of the motions referred to above, including any reserved costs. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Justice Carr.

A/g Associate: Dated: 9 October 2001 Applicants appeared in person:

Counsel for the First Respondent: Mr A J McLean

Solicitor for the First Respondent: Messrs Corrs Chambers Westgarth

Counsel for the Second Respondent: Ms A J Robertson

Solicitor for the Second Respondent: Messrs Phillips Fox

Date of Hearing: 14 August and 9 October 2001

Date of Judgment: 9 October 2001

Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (18 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (3)