DAVID CLARKE AIR CONDITIONING PTY LTD ATF DAVID CLARKE AIR CONDITIONING TRUST -v- QUANN [2016] WASC 73 (4 March 2016)

3 There are six defendants to the claim. The first defendant, Lindsay Edward Quann, is an accountant. The other five defendants are companies associated with him. All defendants are represented by the same practitioner.

4 The statement of claim is a difficult pleading to follow. The facts are not set out in chronological order. The same factual allegations are relied upon for multiple causes of action. There are many internal references to other paragraphs. But it was not challenged until the most recent amendments were introduced. The defendants initially wished to bring a wider challenge, including an application to strike out the whole of the statement of claim. The defendants would have required an extension of time under O 3 r 5 to bring that application: see O 20 r 19(3). They limited the challenge to the amendments made in 2016.

5 The plaintiffs plead that Mr Quann is a director of all of the corporate defendants, and a director and shareholder of the second, third, fourth and fifth defendants: par 1(j). They further plead that Mr Quann is the directing mind and will of the second, fourth and fifth defendants (par 28); and that he is a director and the directing mind and will of the sixth defendant: par 60C.

6 The plaintiffs plead that, in 2008, Mr Clarke engaged Mr Quann under a contract of engagement as a tax agent, and accounting, corporate, financial and business advisor to Mr Clarke and his companies and superannuation fund.

7 The plaintiffs plead against Mr Quann in various causes of action:

1. breach of the code of professional conduct for tax agents;
2. negligence in the discharge of professional obligations;
3. breach of contract;
4. breach of fiduciary duty;
5. misleading and deceptive conduct contrary to s 10 of the Fair Trading Act 1987 (WA); and
6. false representations contrary to s 12 of the Fair Trading Act.

8 In a significant amendment to the statement of claim, in par 60A to par 60R the plaintiffs plead, in substance, that in June 2013, the second, fourth, and fifth defendants entered transactions by which they created a security interest in favour of the sixth defendant, charging all of their property as security for debts to the sixth defendant. The plaintiffs say these transactions were made with knowledge of the plaintiffs' claims or potential claims, and the debts were created without the defendants receiving in return any or any proportionate value. The plaintiffs claim the creation of the debts would diminish the funds available to meet any judgment they might obtain and to that extent would defeat their claims. They claim relief under s 89 of the Property Law Act 1969 (WA), as well as in equity.

9 A further significant addition in the January 2016 amendments is the plea in pars 65A to 65D that the second, third, fourth and fifth defendants, with knowledge of breaches of fiduciary duty by Mr Quann, assisted him in those breaches of duty. The second, third and fifth defendants are also alleged to have received payments or other benefits (the benefit of an assumption of liability by the first plaintiff) procured in breach of the fiduciary duty.

10 The defendants apply to strike out the statement of claim in part on the basis that specified paragraphs failed to disclose a cause of action and/or may prejudice, embarrass or delay the fair trial of the action. The application relates to pars 60A to 60R, pars 65A to 65D, and also other less extensive amendments made in the most recent amendments to the statement of claim. I deal with each of them in turn in the reasons below.

11 It is now necessary to consider the role of pleadings in the context of case management techniques, including the pre-trial exchange of witness statements: Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82 [8]. This approach does not deny the need for a statement of claim to state the material facts to support the claim for relief, and for the pleadings to define with clarity and precision the issues or questions which are in dispute between the parties and fall to be determined by the court: see Nyoni v Patterson [2012] WASCA 171 [36] [38]. Pleadings ensure a basic requirement of procedural fairness, and, to do so, must state the case sufficiently clearly to allow the other party a fair opportunity to meet it: Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279, 286 287; Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490, 517; Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 [26].

12 What is needed to satisfy the requirement for a clear statement of the case will depend upon the nature of the allegation. An allegation of fraud, for example, must be clearly pleaded and particularised.

13 The defendants rely on two grounds under O 20 r 19(1), and contend that the impugned paragraphs of the statement of claim:

1. fail to disclose a cause of action; and/or
2. may prejudice, embarrass or delay the fair trial of the action.

14 On an allegation that the plea fails to disclose a reasonable cause of action, 'reasonable' means reasonable according to law. If the facts pleaded conceivably give rise to relief, then the cause of action should be held to be reasonable: Automotive, Food, Metals, Engineering, Printing & Kindred Industries Union of Workers Western Australian Branch v Bell-A-Bike Rottnest Pty Ltd [2005] WASCA 157 [54]. The question is whether it would be open to the plaintiffs, on the pleadings, to prove facts at the trial which would constitute a cause of action: see Mutual Life & Citizens' Assurance Co Ltd v Evatt [1970] UKPCHCA 2; (1970) 122 CLR 628, 631.

15 Pleadings may be struck out on the ground that they may prejudice, embarrass or delay the fair trial of the action 'because they are evasive, they conceal or obscure the real questions in controversy, they are ambiguous or not reasonably intelligible, they raise immaterial or irrelevant issues, they fail to confine the issues or state the case of the party in question with reasonable particularity, or they raise a case in terms which are simply too general': HartRoach v Public Trustee (Unreported, WASC, Library No 980044, 11 February 1998) 8 9; DM Drainage and Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170 [34].

16 The substance of the defendants' objections to the statement of claim is that:

(1) it contains bald allegations that are not pleaded with sufficient detail for the defendants to properly respond to them;

(2) allegations of fraud are made which involve 'unspecified causes of action based on generalised allegations of dishonesty or impropriety';

(3) the fraud pleadings are not pleaded sufficiently clearly or sufficiently particularised so as to permit them to be properly answered; and

(4) the alleged improper or fraudulent purpose has not been sufficiently pleaded and the material facts that are pleaded to support the plea of fraud are too vague and rely upon conclusions, the basis of which is not adequately pleaded.

17 The defendants also submit that there is documentary evidence supporting the legitimacy of the transactions complained of in pars 60A to 60R. The availability of evidence to refute the claim is not something to be considered on an application to strike out. The defendants could have applied for summary judgment on part of the claim, but made no such application. The proper course for the defendants now is to plead the material facts in answer to the claim. Whether the documents (which the court has not seen) are an answer to the claim is a matter for trial.

18 Paragraph 34 pleads that on or about 16 February 2009, in purported performance of the contract of engagement, Mr Quann provided advice to the second and third plaintiffs. Paragraphs (a) to (c) set out the substance of the words said. The defendants submit that those sub-paragraphs are 'bundled, vague and lack sufficient detail to be properly answered'. Except for the statement in par 34(b) that Mr Clark was given no information about the Harbour Pines Investment Trust (HPIT), other than that it would be a suitable vehicle for his investment, the challenged paragraphs purport to do nothing more than set out the effect of Mr Quann's words on a specified occasion.

20 Paragraph 35 pleads that, induced by advice given by Mr Quann, Mr Clarke caused the second plaintiff to make a payment of $56,000 to the HPIT (see par 26) and a further payment of $16,965 to the second defendant. The plaintiffs earlier pleaded, at par 21, that Mr Quann had advised Mr Clarke that he and the second plaintiff should enter a memorandum of understanding with the second and fourth defendants; and that the terms of the memorandum of understanding were to the effect that the second defendant would sell to the second plaintiff special income units in the GRV Property Trust and that the trustee of that trust would pay interest to the second plaintiff at the rate of 12% per annum. The memorandum is pleaded to be executed by the second and fourth defendants by Mr Quann as director: par 25.

Mr Quann did not apply any of the amounts paid by [the second plaintiff] towards subscriptions for units in the GRV Property Trust but applied the first payment of $50,000 pleaded in paragraph 26 towards subscription for units in the Karriview Unit Trust, then subsequently caused those units to be cancelled and applied all amounts paid as pleaded in paragraphs 26 and 35 (c) either towards subscriptions in special income units in HPIT or towards loans from [the second defendant] to [the fifth defendant] ...

22 The defendants submit that par 35A is vague and lacks sufficient detail to be properly answered. When it is read in the context of the preceding pleas, it is, in my opinion, sufficiently clear and detailed. The fact that the plaintiffs plead an alternative - that the money was applied towards subscriptions or loans - does not make the plea uncertain. The challenge to par 35A fails.

23 In par 34, the plaintiffs plead that on or about 16 February 2009, Mr Quann provided advice to the second plaintiff as to the taxation, accounting, corporate, financial and business affairs of Mr Clarke and the second plaintiff. Subparagraphs (a) to (e) set out the effect of the words used by Mr Quann in giving that advice.

24 Paragraph 35 pleads that Mr Clarke and the second plaintiff were induced by that advice and acted on it in entering a memorandum of understanding.

25 Paragraph 36 then pleads that the advice pleaded in par 34 was not in the best interests of the plaintiffs 'in that to the extent that the advice comprised representations as to future matters, when Mr Quann gave the advice there existed no reasonable grounds for him to make such representations'. Paragraphs 36(a) and (b) allege that Mr Quann's purpose in making those representations was to obtain a benefit for the second defendant rather than to the second plaintiff, and to obtain a benefit for HPIT and the GRV Property Trust and to protect the GRV Property Trust against any possible claims by the second plaintiff. The plaintiffs allege in par 36(c) that at all material times none of Mr Quann, the second, fourth, and fifth defendants, intended to treat the memorandum of understanding as binding upon them or to comply with its terms.

26 The defendants' challenge is confined to the allegation in par 36(b) that Mr Quann's purpose in giving the advice was to obtain a benefit for HPIT and the GRV Property Trust and to protect the GRV Property Trust against any possible claim by the second plaintiff. The defendants say that it is a 'bald statement lacking sufficient material facts to be properly answered'.

27 The plaintiffs submit that the plea states, as a material fact, the purpose for which Mr Quann gave advice. Whether he had that purpose will be a matter of inference from the material facts pleaded in other paragraphs of the statement of claim.

28 In the context of the surrounding paragraphs, I am satisfied that the plea is sufficient to enable the defendants to plead an answer and meet the allegation about Mr Quann's purpose.

29 Paragraph 43A pleads that, on or about to September 2008, Mr Quann presented Mr Clarke with an invoice for an amount of $350,000 plus GST, described as 'Being procuration fee for Stage 1 in Karriview Estate'; and a document tiled 'Heads of Agreement 2nd September 2008 - Re: Stage 1 in Karriview Estate Lifestyle Village (the September HOA)'.

30 In par 43B, the plaintiffs allege that, at the time of presenting Mr Clarke with those documents, Mr Quann:

(a) did not provide any explanation of the documents other than to say that the first plaintiff was required to pay the procuration fee plus GST immediately;

(b) did not draw Mr Clarke's attention to the differences between the September HOA and an earlier heads of agreement (the July draft HOA); and

(c) did not provide Mr Clarke with any opportunity for proper review of the September HOA, or advise him to obtain independent advice.

31 In paragraph 44, the plaintiffs plead that the terms of the September HOA were materially less advantageous to the first defendant (this is an obvious error, the intended reference being to the plaintiff), but materially more advantageous to Mr Quann and the second defendant than the terms of the July draft HOA.

32 The defendants submit that the plea in par 43B is vague and lacks sufficient detail to be properly answered, and that defects in that paragraph infect the following paragraphs in the statement of claim.

33 The plea in my opinion is sufficient. As the plaintiffs submit, it pleads that Mr Quann failed to take specified actions. There can be no uncertainty about what the plaintiffs allege.

34 The plaintiff pleads in this paragraph that, at the request of Mr Quann, and in the belief that the terms of the investment contained in the September HOA were materially the same as the terms of investment set out in the July draft HOA, Mr Clarke entered a loan agreement with the ANZ Bank, incurred certain liabilities, and caused payments to be made to the second defendant.

35 Paragraph 46 is based on the preceding paragraphs in which the plaintiffs plead:

(1) in July 2008, Mr Quann provided Mr Clarke with the July draft HOA: par 42;

(2) on or about 12 September 2008, Mr Quann without any or any adequate explanation to Mr Clarke changed the terms of the arrangement recorded in the July draft HOA: par 43;

(3) the September HOA superficially resembled the July draft HOA: par 43A;

(4) at the time of presenting the September HOA, Mr Quann did not provide any explanation of the documents, did not draw Mr Clarke's attention to the differences from the July draft HOA, and did not provide Mr Clarke with the opportunity for a proper review of the September HOA or advise him to obtain independent advice: par 43B.

36 The defendants submit that the plea is vague and does not plead the basis for the belief pleaded in par 46. But it is wrong to look at one paragraph in isolation. In the context of the preceding paragraphs of the statement of claim, the plaintiffs have sufficiently stated the basis for the belief pleaded.

Paragraphs 60G, 60H, 60I, 60L, 60M, 60Q, and 60R

1. From November 2010, Mr Clarke made demands upon Mr Quann for the return of funds invested by the first plaintiff and second plaintiff: par 60A.
2. Mr Quann was aware by not later than 1 January 2013 of claims or a potential claim by the plaintiffs against the second, fourth and fifth defendants: par 60B.
3. Mr Quann was a director and the directing mind and will of each of the second, fourth, fifth and sixth defendant, and his knowledge is to be imputed to each of them: par60C.
4. During the financial year ended 30 June 2013, the second, fourth and fifth defendants, at the direction of Mr Quann, caused to be created secured debts to the sixth defendant without receiving in return any or any proportionate value: pars 60D, 60I, 60N. In particulars to each of these paragraphs the plaintiffs refer to the balance sheet of the second defendant as at 30 June 2012 and 30 June 2013; and the execution by the defendants on 30 June 2013 of deeds of fixed and floating charge by which each of the second, fourth and fifth defendants acknowledged existing indebtedness to the sixth defendant and purported to create a security interest in favour of the sixth defendant over all of its property. The plaintiffs also assert in particulars that the fourth defendant purported to redeem units held by the sixth defendant in the GRV Property Trust and to create a debt to the sixth defendant.
5. The effect of the creation of each secured debt was that if the plaintiffs succeeded in a claim against the defendants or became a judgment creditor of them, the funds available to meet that judgment would be diminished to the extent of the security interest and the claim represented by the judgment would to that extent be defeated: pars 60E, 60G, 60O.
6. Alternatively, by causing the defendants to create the secured debt, Mr Quann breached his fiduciary duty to the plaintiffs: pars 60F, 60K, 60P.
7. By creating the secured debt, each defendant knowingly assisted Mr Quann in breach of the fiduciary duty and alienated an interest in all of its property with intent to defraud the plaintiffs by defeating their claims: pars 60G, 60L, 60Q.
8. By taking the benefit of the debt and security interest the sixth defendant knowingly assisted Mr Quann in breach of the fiduciary duty, and received the benefit of the alienations of property with knowledge that they were made with intent to defraud the plaintiffs by defeating their claims: pars 60H, 60M, 60R.

38 Paragraphs 60A to 60R are associated with amendments to the prayer for relief, in pars 8A to 8C, by which the plaintiffs seek orders with respect to the secured debts pleaded in pars 60D, 60I, and 60N:

1. an order that the alienation of property be declared void under s 89 of the Property Law Act, alternatively in the exercise of the court's equitable jurisdiction;
2. an order that the alienation of property represented by the creation of the security be declared void under s 89 of the Property Law Act, alternatively set aside in the exercise of the court's equitable jurisdiction; and

1. alternatively, an order that the secured debt is held by the sixth defendant in each case under a constructive trust for the plaintiffs.

39 The defendants submit that these pleas lack sufficient detail to be properly answered. Specific complaints are made that:

(1) pars 60G(a) and 60G(b) plead a fraud but the allegation is not pleaded clearly or particularised; and

(2) par 60H fails to plead the basis of the alleged intent to defeat the claims of the plaintiffs.

40 The fraud alleged in each case is intent to defraud creditors.

41 By s 89 of the Property Law Act:

(1) Except as provided in this section, every alienation of property made, whether before or after the coming into operation of this Act, with intent to defraud creditors is voidable, at the instance of any person thereby prejudiced.

(2) ...

(3) This section does not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors.

42 The principles governing the operation of s 89 were recently set out by Gilmour J in Federal Commissioner of Taxation v Oswal [2012] FCA 1507; (2012) 91 ATR 684 [21] - [25], applying the reasoning of the High Court in Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 546. Relevantly, for the present application:

(1) There is no superadded requirement to show dishonesty or fraud over and above an intention to hinder or delay creditors: the intention to hinder or delay creditors is the relevant species of fraud.

(2) The fact that a conveyance or assignment of property is made voluntarily, or the consideration was colourable, negligible or trivial may, support an inference of the existence of the intention to hinder or delay creditors, but need not do so.

(3) The statute requires proof of actual intention, but ordinarily the existence of the actual intention will be inferred from the objective facts.

(4) The intent to hinder or delay creditors is not required to be the sole or even the predominant purpose of the conveyance or assignment and it does not matter if the relevant intention was formed because of or at the instigation of another.

(5) If the natural and probable consequences of the disposition are such that its effect will be to defeat or delay creditors, the necessary inference of actual intention can be drawn and a court might more readily do so.

(6) The essence of the concept of defrauding creditors lies in a disposition which subtracts from the property which is the proper fund for the payment of the debts, an amount without which the debts cannot be paid.

(7) It is not necessary that the disposition affects creditors as a class generally; it is sufficient if one or some creditors are adversely affected.

(8) In this context 'creditor' is not confined to those to whom a debt is (at the time of the disposition) presently due and owing. It extends to impending liabilities and future creditors.

See also: First Industry Corp v Goh [2002] WASC 111; Singh v Singh [2009] WASCA 53.

43 The plea in the challenged paragraphs sufficiently sets out the basis of the allegation of intent to defraud for a plea under s 89. That challenge to those paragraphs will be dismissed.

44 The defendants also submit that pars 60L, 60M, 60Q, and 60R fail to plead the material facts of how the second and sixth defendant, as the case may be, knowingly assisted Mr Quann in his breach of fiduciary duty. The plaintiffs have given notice of amendments to correct references in these paragraphs to the second defendant where the intended reference was to the fourth or fifth defendant. Those required corrections do not affect the decision on the application to the strike out.

45 In each case, it is pleaded that the assistance was by creating the secured debt or taking the benefit of the debt and security interest. The plaintiffs plead, as material facts:

(a) the creation of a debt by the purported redemption of units in the GRV Property Trust: par 60I;

(b) the execution of a Deed of Fixed and Floating Charge acknowledging indebtedness and purporting to create a security: par 60I;

(c) the purported acknowledgement of an existing indebtedness, and the execution of a Deed of Fixed and Floating Charge: par 60N.

46 The allegation of knowledge in each case is based on Mr Quann's knowledge and his position as a director of the second, third, fourth and fifth defendants. The plaintiffs further plead that Mr Quann is the directing mind and will of each of the other defendants. On that basis, his knowledge is pleaded to be imputed to each of those corporate defendants. But the allegation is not confined to imputed knowledge.

47 The plea that Mr Quann was a director, and the directing mind and will of each of the other defendants, is also directly relevant to the plea of that the fourth defendant 'knowingly assisted' Mr Quann. The plaintiffs rely on the decision of the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 [243], where the court (Finn, Stone & Perram JJ) referred to various different manifestations of a third party's participation in another's breach of fiduciary duty, including:

... where the third party is the corporate creature, vehicle, or alter ego of wrongdoing fiduciaries who use it to secure the profits of, or to inflict the losses by, their breach of fiduciary duty.

48 The plaintiffs' case is that each of the defendants alleged to have knowingly assisted was the vehicle by which Mr Quann took the actions which are alleged to have been breaches of fiduciary duty, and on that basis is liable for the profit made from and the losses inflicted by his wrong. I am, of course, not concerned with whether that plea can be sustained. The plea is sufficient to state the plaintiffs' case and for the defendants to respond.

49 I note that the plaintiffs have also foreshadowed an amendment to par 60I, as the result of further discovery by the defendants. It is not necessary for me to consider that proposed amendment. The pleas currently standing will not be struck out.

50 The defendants submit that these pleas lack sufficient detail to be properly answered, and fail to plead material facts of how the second, third, and fifth defendants assisted Mr Quann in breaches of fiduciary duty.

51 Each paragraph refers back to other parts of the plea. This is perhaps the most difficult example of the practice in the statement of claim of referring to multiple other paragraphs within a plea.

Further and alternatively, in the circumstances of the matters pleaded in paragraphs 6 and 7 herein and by his conduct pleaded in paragraphs 8 to 19, 20 to 41, and 42 to 54 herein Mr Quann:

(d) engaged in actions which were not in the best interests of [the plaintiffs];

(e) engaged in actions which breached his fiduciary duty to [the plaintiffs] by:

(i) using his position as a party to the contract of engagement pleaded in paragraph 3 herein to obtain a private advantage;

(ii) permitting his personal interests to conflict with those of [the plaintiffs]; and

(iii) preferring his own interests and those of [the second third and fourth defendants] to the interests of [the plaintiffs].

53 Paragraph 65A to 65D allege that each of the second, third, fourth and fifth defendants, with knowledge of the breaches of fiduciary duty pleaded in par 65, assisted Mr Quann in those breaches of duty. In each case the allegation is of actual knowledge, based on Mr Quann being a director and 'the directing mind and will' of each defendant.

54 The allegation of assistance, in each case, requires regard to the earlier paragraphs referred to in each plea. Paragraph 65A is the most expansive, referring to the allegations in pars 20 to 41 and 42 to 54. Paragraph 65B refers to the allegations in pars 8 to 19; pars 65C and 65D to the breaches pleaded in pars 30 to 41. Paragraph 30 refers back to par 29 and to 'the circumstances of the parties having entered into the contract of engagement pleaded in paragraph 3'. Paragraph 29 in turn refers back to pars 20 to 23, and also to pars 26 and 32.

55 The second, third and fifth defendants are also alleged to have received payments procured by Mr Quann in breach of fiduciary duty.

56 The plaintiffs' position with regard to the challenge is, again, that the allegation of knowing assistance is based upon the plea that Mr Quann was the directing mind and will of each of the corporate bodies which are alleged to have assisted in the breaches of fiduciary duty.

57 When regard is then had to the referenced paragraphs, the particular acts of each corporate defendant, particularly in receiving and securing profits from the alleged breaches of duty, are set out. The plea requires some effort to tease out the various allegations, but it is, in my opinion, sufficient in law.

58 The application by the defendants to strike out the statement of claim will be dismissed. The defendants have not yet pleaded to the amended statement of claim. Further witness statements may also be required to meet the additional allegations.

59 The court has set aside days in the second half of June to hear this action. The further procedural steps will need to be programmed within a short period.