_du Boulay v Worrell & Ors_

Supreme Court of Queensland|2008-08-01|Before: Chesterman J

[1] The plaintiff was for some time the sole director and majority shareholder of

L.O.A. Industries Pty Ltd ('the company'). It owned and carried on three businesses: The Electric Sign Company, Salisbury Secretarial Services and All You Want Sign Shop. Its business was modest but by the end of 1996 it was admittedly insolvent. On 24 December 1996 the plaintiff appointed two of the defendants, Messrs Worrell and Khatri, administrators of the company. On 18 February 1997 the creditors of the company appointed those defendants as administrators pursuant to a Deed of Company Arrangement. At a meeting of creditors held on

5 December 1997 a majority in number of creditors voted to continue the administration while a majority in value voted in favour of liquidation. The administrators cast their deciding vote in favour of liquidation.

[2] The winding up produced nothing of benefit. No dividend was paid to creditors. The assets of the businesses, such as they were, were sold to the plaintiff for $4,500. He thereafter, apparently, continued to carry on those businesses which were unsuccessful.

[3] The company was deregistered on 11 November 1998.

[4] On 17 June 2004 the plaintiff issued proceedings out of the Townsville Registry of the Supreme Court claiming $805,819 damages against the defendants. Mr Lane who appears to have had little to do with the administration or liquidation of the company is sued on the basis that he was a partner with the other defendants in the firm Worrell Whitehill.

[5] The bases for the recovery of the money are said in the Claim to be that the defendants caused 'the plaintiff, his company and its creditors economic and financial loss' as a result of their

failure to fulfil their promise to ensure the survival of the company;

neglect of its fiduciary duty to look after the legal and equitable interests of the company;

failure to act in a proper and fit manner as constructive trustee of the company, its creditors and the plaintiff;

engaging in unconscionable conduct towards the company, its creditors and the plaintiff;

[6] As well it is said that the defendants 'extracted' about $60,000 from the company during the term of their administration and liquidation.

[7] The plaintiff's complaints about the defendants stem from their conduct of the administration and their decision to support, and bring about, the company's liquidation. The plaintiff's description of the impugned conduct tends to be diffuse and is not easy to summarise, but arise from these essential facts. The administrators required him to submit a proposal to the company's creditors. He initially proposed paying five per cent of the company's turnover into a trust account to be maintained by the administrators for disbursement to creditors. He later increased the percentage to 10 per cent after discussion with the administrators. They thought the offer inadequate and suggested to the plaintiff a form of offer that the profits arising from the conduct of the company's businesses should 'be accumulated and pooled with the amounts mentioned ... in clause 3 and paid to creditors in full and final satisfaction of all claims with a minimum of $20,000 to be paid ... in any particular year.' Clause 3 provided for the sale of property in Brisbane with the net proceeds being paid to the 'pool' for the purpose of paying a dividend to unsecured creditors. The company was to have the benefit of a moratorium against creditors' claims for three years.

[8] The plaintiff complains that this proposal was forced upon him by Mr Lane who insisted that it be put to the creditors rather than Mr du Boulay's own proposal. It is to be noted that the plaintiff signed the proposal which he says was prepared by the administrators. It was put to the creditors' meeting as the 'director's proposal'.

Mr du Boulay does not appear to have objected to that depiction, or complained at the time of Mr Lane's conduct, to the creditors or the Australian Securities Investment Commission ('ASIC') or anyone else.

[9] When the plaintiff first approached the defendants' firm to ask for assistance with his company's insolvency Mr Lane told him that the defendants were 'one of the best in the industry' and could implement a successful strategy to overcome 'the insolvency dilemma'. The plaintiff claims that from this conversation there arose an implied term in the company's 'agreement' with the defendants that they would secure the future viability of the company and ensure that it would be in a position to pay all creditors.

[10] The subsequent failure of the company is taken by the plaintiff as proof that the implied term was broken and that Mr Lane's remarks were deceitful, misleading, and a case of unconscionable dealing.

[11] After their appointment the defendants took about $27,000 from the company's cash resources. The monies were applied in meeting the running costs of the company, no doubt the costs of administration, and the payment of creditors. They later obtained $20,000 from the company's debtors to be applied in accordance with the Deed, i.e. to be accumulated with other funds for the payment of a dividend to creditors.

[12] The plaintiff complains that the withdrawal of these monies from the company left it without sufficient working capital for it to continue its operations.

[13] The plaintiff complains that if the defendants did not understand that this would be the inevitable consequence of their action they were negligent and if they did understand then their conduct was a deliberate attempt to drive the company into liquidation.

[14] The terms of the Deed required the remittance of company profits to the defendants as well as the preparation and delivery of monthly profit and loss accounts. Neither money nor accounts were sent. The plaintiff contends that the profits were somehow subsumed and could not be remitted, and that the accounts could not be prepared because the defendants had possession of the company's records.

[15] It was the failure in these two respects which led the defendants to recommend to the creditors at the meeting of 5 December 1997 that the company be wound up. They apparently canvassed the creditors for their support for that course. This is characterised by the plaintiff as evidence of the defendants' perfidy in pursuing a course they had agreed they would not follow, relying upon breaches by the plaintiff of the Deed which their conduct had made inevitable.

[16] There are obvious difficulties in the prosecution of the claim. Such standing as the plaintiff has to bring the application derives from his shareholding of the company yet the claim purports to recover monies lost, not by him, but by the company and its creditors. The basis for any duty, whether contractual or fiduciary, owed by the defendants as administrators or liquidators to the plaintiff is not obvious, nor is it easy to understand how a misrepresentation, whether fraudulent or in breach of the Trade Practices Act 1974, made to the plaintiff could have caused losses to the company or its creditors; or what standing the plaintiff has to sue for any misrepresentation made to the company.

[17] These difficulties are not resolved by the statement of claim, which in defiance of all established rules of pleading does not set out facts from which a legal conclusion is drawn and an intelligible claim is made. Instead it consists of a number of argumentative assertions of various aspects of the law in which are embedded assertions of fact. The facts do not themselves give rise to any discernible cause of action and the statements of law are incomplete and inaccurate.

[18] The closest the statement of claim comes to pleading facts is that it says:

In December 1996 a representative of the defendants said to the plaintiff that 'Worrell Whitehill was the best in the business and would protect the existence and interests of the business so that creditors could be satisfied'. This promise, or representation giving rise to a promissory estoppel, was breached when the defendants recommended and voted in support of liquidation.

The defendants rejected a proposal by the plaintiff that the company pay five per cent of total revenue into a trust account for creditors so that over time their debts would be paid. The defendants instead proposed that an amount of $20,000 owed to the company when paid be applied in reduction of the creditors' demands. The loss of the money 'placed an unsurmountable burden on the company's cash flow which prevented it from carrying on an economically viable enterprise.'

Requiring the payment of the $20,000 was a failure by the defendants to exercise the reasonable standard of care of administrators in that it deprived the company of working capital. For reasons not explained this breach is said also to be a breach of fiduciary duty and constructive trust.

Calculating an amount of profit to be distributed to creditors pursuant to the Deed of Company Arrangement in the sum of $4,568 when 'neither the company accountant or (the plaintiff) agreed with this figure.' This conduct was said to have deliberately 'undermined the economic viability of the company' and constituted 'a campaign of ... frustrating the director of the company ... by placing unscrupulous, unreasonable and oppressive demands upon him ...'

Recommending to creditors that they vote to wind the company up by reference to inter alia a 'fabricated, false and misleading' statement that the company had sustained further operating losses of $1,900 a month.

In October 1997 the liquidators reported to creditors that they could expect to receive a dividend of 90 cents should the company be liquidated immediately. In fact no dividend at all was paid. The report was a fraudulent misrepresentation to induce the creditors to support a winding up. The basis for the prediction was that according to the company's books of account the plaintiff owed $73,000 with respect to shares issued to him. Had this unpaid capital been called up and paid the dividend would have been of the magnitude advised. The entry in the books was erroneous and the plaintiff did not owe the $73,000. The defendants were aware of the error but nonetheless gave the book entry as a basis for their prediction.

[19] Although the statement of claim makes frequent reference to fraud, deceit and dishonesty, no facts are asserted which might possibly justify such serious allegations. Nor are facts pleaded which might arguably support a claim based on breach of contractual promise, or professional negligence, or fraud, or breach of fiduciary duty, whether as a trustee or otherwise.

[20] Because of these deficiencies in the statement of claim and because the plaintiff is claiming losses which are patently not his, the defendants brought an application for summary judgment pursuant to Uniform Civil Procedure Rules 1999 r 293. When the application came before the Northern Judge the plaintiff indicated that he would amend his pleading and would seek to have the company revived so that it could be joined as plaintiff. An order was made that the plaintiff deliver proposed amended pleadings so that the nature of his adumbrated action would be revealed when the Court considered the application to reinstate the company. The hearing of the application was adjourned to allow that course to be followed. The plaintiff has subsequently delivered two further statements of claim.

[21] The defendants have again applied for judgment or, alternatively, that the claim and statement of claim filed 17 June 2004 and the draft statements of claim be struck out pursuant to UCPR 171 and/or 377 and/or 379.

[22] The plaintiff's application is for an order that ASIC reinstate the company pursuant to s 601AH of the Corporations Act 2001; that the company when reinstated be joined as a plaintiff in the action; and that the plaintiff be allowed to bring the action on behalf of the company pursuant to s 236 and s 237 of the Act.

[23] It is convenient first to consider the plaintiff's application for the reinstatement of the company. Should that application fail the fate of the defendants' application will be straightforward: there was little opposition to it for the reason that

Mr du Boulay is not the proper plaintiff in an action to recover losses suffered by the company.

[24] Section 601AH of the Corporations Act provides that the Court may make an order that ASIC reinstate the registration of a company if application is made by a person aggrieved by the deregistration and the Court is satisfied that it is just that the company's registration be reinstated.

[25] It is not clear that the plaintiff is a person aggrieved by the deregistration. It is not obvious that should the company be reinstated and prosecute its proposed actions successfully, that he as shareholder will see any benefit. There is no evidence that any monies recovered would not all be consumed in satisfying creditors' claims. Mr Freeburn SC who appeared for the defendants did not take the point which was not the subject of argument. I will, therefore, assume that the plaintiff is aggrieved by the deregistration.

[26] Before making the order sought the Court must be satisfied that it is just that the company's registration be reinstated. This calls for a consideration of the circumstances in which the company came to be deregistered; what good would come from reinstatement and whether reinstatement would be prejudicial to, in this case, the defendants.

[27] The lapse of time between deregistration and the application for reinstatement is also relevant. In this case almost 10 years have elapsed. It is true the application was filed more than a year ago, on 12 April 2007, but the plaintiff has been extraordinarily dilatory in pressing his application. It is more than four years since the plaintiff commenced his misconceived action seeking to recover monies which on his own pleading did not represent losses he suffered.

[28] There is nothing in the circumstances in which the company was deregistered which suggests that that course should not have occurred, or should be reversed. The company carried on business in a small way, providing electrical contracting services and secretarial assistance to other businesses. It was insolvent and had minimal assets. Its creditors received no dividend. It was entirely appropriate that having been wound up it be deregistered.

[29] Whether any good will come from the company's reinstatement depends upon:

Whether it has a good arguable cause of action against the defendants;

The likelihood that the cause of action will be prosecuted to judgment;

[30] The relevant statement of claim is the third one. It is that which the plaintiff proposes the company should bring if reinstated. That pleading has been the subject of detailed analysis and criticism by Mr Freeburn SC in his comprehensive and helpful submissions. I accept the criticisms but do not intend to discuss or analyse the proposed statement of claim at any length. It is apparent from even a cursory examination that it is completely lacking in allegations of material fact so as to support any cause of action. It is a very long document, 104 pages, but is none the better for that. Both the company and Mr du Boulay are described as plaintiffs. The defendants are Messrs Worrell, Khatri and Lane as well as the partnership of which they are said to be members.

[31] The draft pleading contains some allegations of fact more or less relevant to the background of the case against the defendants, interspersed with disjointed and unconnected statements of law and argumentative conclusions of fact. The pleading contains many allegations of the commission of offences against provisions of the Criminal Code. These are obviously embarrassing, if not scandalous, and irrelevant to the claim the company appears to want to make out against the defendants.

[32] The concept of a 'fraudulent breach of trust' looms large in the pleading. Paragraph 9 described 'the dispute' in these terms:

'It is alleged that between 24 December 1996 and 4 December 1997 the defendants engaged in a series of intentional dishonest acts and omissions including those of a criminal nature which were designed to bring about the liquidation of (the company). The synergistic effect of the defendants' alleged acts and omissions amounted to a fraudulent breach of trust against the second plaintiff, its creditors and its shareholders.

The allegation of a fraudulent breach of trust must be examined from the broad perspective of determining whether or not in the overall course of events there appears to be an intention on the part of the defendants that was not favourable for the company or its creditors.

When considering the sum total of the defendants' individual acts and omissions there appeared to be a clear purpose of accomplishing or carrying into effect a ... sinister object ... in the sense of its going beyond the purpose and intent of the power entrusted to them. In other words their acts were done in bad faith, irresponsibly and mischievously without giving real or genuine consideration to the exercise of their power.

On all accounts there is a serious lack of probity on the part of the defendants. And as will be demonstrated by making reference to all the individual acts and omissions, the sinister object of the defendants can be revealed on an objective basis of what ordinary honest people would observe.'

[33] These are serious allegations, if colourfully expressed. One would expect to see a recital of factual detail to support them. Instead one gets a 'summary of argument' which contains more allegations and conclusions but no statements of primary fact. For example the 'first act in a series of illegal acts amounting to a fraudulent breach of trust' is followed by eight references to statutory provisions which (by and large) impose a duty of carefulness or honesty on persons in particular circumstances, but which are not related to the facts. A 'first set of particulars' does recite some facts but in terms of conclusions. The facts do not provide the building blocks for a case of deliberate dishonesty.

[34] The format of the pleading is that several 'series of illegal acts amounting to a fraudulent breach of trust' are described by reference to statutory provisions and 'particulars' which include some assertions of fact and some legal submission, not all which seem to relate to the facts or the law pertaining to a case of fraudulent breach of trust. The gravamen of the first set of particulars appears to be that the administrators did not accept the plaintiff's proposal that 10 per cent of the company's turnover be allocated to the plaintiff's creditors but proposed a higher figure to which the plaintiff agreed. This brings an assertion, 'undue influence made out', followed by the dogmatic statement that 'the company was liquidated and a benefit realised by the defendants at the expense of the company, its creditors and shareholders. The administrators were supposed to be working in the best interests of the company ...'. After further treatises on the law of undue influence the pleading progresses to a new section under the heading 'Potential of establishing conspiracy to defraud' and some more disjointed statements of legal principle.

[35] Under the heading 'Actual fraud made out' there is reference to s 408C, s 438, s 441 and s 442D of the Criminal Code as well as to Derry v Peek (1880) 14 App Cas 337 and an authority on innocent misrepresentation amounting to a contravention of s 52 of the Trade Practices Act 1974. This part of the statement of claim makes no allegation of fact and does not refer to any other part of the statement of claim in which facts are pleaded.

[36] Enough has been said about the statement of claim to show its unsatisfactory nature. One has to look at the whole document to understand how inadequate it is as a means of pleading a case of dishonesty. It is impossible to know what, if any, case there might be against the defendants. What facts can be gleaned from the congested and prolix document suggest there is no such case. The complaints seem to come down to no more than the defendants did not share Mr du Boulay's optimism that the company was viable and would be profitable if allowed to trade on, and communicated their views that the company should be wound up to the creditors.

[37] An applicant for the reinstatement of a deregistered company must satisfy the Court that the reinstatement is just. In a case such as the present where reinstatement is sought for the sole purpose of allowing the company to prosecute proceedings it is incumbent upon the applicant to demonstrate convincingly that there is an arguable cause of action which is likely to produce something of value to the company. The statement of claim in the present case falls well short of that requirement. It is not just that the cause of action is embroidered with unnecessary and embarrassing allegations. The pleading is legally unintelligible. Despite the repetitious use of pejorative terms connoting grave misconduct by the defendants, no facts are set out which would justify the asserted conclusions.

[38] The applicant has not shown that any good would come from reinstating the company to allow it to prosecute its proposed action.

[39] There is another difficulty. Even if reinstated there is no demonstrated likelihood that the action would actually proceed. On the contrary there are substantial reasons for thinking that the liquidators would not prosecute it. Of course if reinstated the company would revert to the state it enjoyed immediately prior to deregistration. In that state it was controlled by the liquidators, Messrs Worrell and Khatri. It is unlikely that they would cause the company to commence an action against themselves. To overcome that problem the plaintiff proposes that Ms Fordyce and Mr Helen, chartered accountants, be appointed liquidators to replace Messrs Worrell and Khatri, and they have given their consent to the appointment. If the reinstatement were otherwise appropriate that proposed replacement would also be appropriate. But on the presupposition that the company were reinstated with new liquidators, there is still no reasonable prospect that the action would commence. The company would have no money. There are no assets with which the new liquidators could instruct solicitors and/or counsel to prepare a proper pleading and prosecute the action. Mr du Boulay is without means and cannot himself fund the action.

[40] To say the least there is a risk that the action would fail and the company would be liable in costs to the successful defendants. In those circumstances the liquidators would themselves be liable for the costs. It is inconceivable that they would commence an action with that attendant risk without a worthwhile indemnity from the plaintiff or the company's creditors. The plaintiff cannot provide it and there is no evidence that the creditors will do so.

[41] It is also obvious that any prosecution of the action would result in an immediate request for security for costs. These have been estimated by the defendants' solicitors as amounting to about $300,000. It is an obvious case in which security would be ordered. There is no-one to provide it.

[42] On the evidence there is no prospect that any good would come from the company's reinstatement.

[43] There is next the question of prejudice to the defendants should the reinstatement occur. Mr Worrell has deposed that the books and records of the company collected and stored during the administration and liquidation were kept for five years following the deregistration of the company, as required by s 542(2) of the Act, but were then destroyed. At that time the defendants had not been given notice of any claim against them arising out of their liquidation. The only documents left to the defendants are those lodged with ASIC during the course of the administration and liquidation and their own computer generated diary notes and reports. The company's records including its invoices and accounting records no longer exist.

[44] Similarly, a number of the defendants' employees who were engaged in the administration and liquidation, Messrs Pietzner, Stimpson and Rissman no longer work for the defendants and are not available to assist in preparing any defence to the claim.

[45] The defendants would be at a particular disadvantage in their efforts to defend any action brought against them because of the loss of evidence, and the lapse of time since the events complained of.

[46] The lapse of time is itself a reason for refusing the plaintiff's application. He waited over six years from the liquidation of his company before commencing proceedings. In the meantime he made no complaint to the defendants or to ASIC about their conduct. He did not seek a review in the Supreme Court of the liquidator's decisions at a time when they might more easily have been overturned. The delay in commencing proceedings has caused the prejudice to the defendants which I have identified.

[47] When proceedings were commenced the wrong plaintiff was chosen. As the plaintiff himself accepts in his affidavit of 12 April 2007, 'I commenced the ... action (somewhat incorrectly) in my own name ...' and it was 'necessary to make application ... to have my former company join me in the proceedings.' The action was, from inception, misconceived. The plaintiff realised that no later than

April 2007 but has allowed another 16 months to elapse before acting on the realisation. Almost nothing happened in the action between the delivery of a defence on 6 August 2004 and the defendants' application for summary judgment brought in February 2007.

[48] Given this chronology one cannot have any confidence that even if there were an arguable cause of action, and funds to prosecute it, it would proceed with any celerity, or in compliance with the time limits set down by the rules. It is an additional prejudice to the defendants that they be exposed to potential liability at the suit of a hesitant plaintiff who intends to litigate at his leisure, over years.

[49] The third factor to consider is what recompense the action might bring to the company. The plaintiff's case is that the company should have been allowed to trade on and return to profitability with the assistance of the three year moratorium on its debts. The measure of the loss occasioned by the liquidation will thus be the difference between its value then and its value as a profitable company some years thence. The best indication of that hypothesis is what actually happened to the businesses which the plaintiff conducted with the company's assets bought from the liquidators. There is no explicit evidence on the point but I was told that the plaintiff had failed to make a profit. There is thus little basis for confidence that if it succeeded on all other points the plaintiff would recover any or any substantial damages.

[50] There is an associated point. The company's assets were sold to the plaintiff, as I mentioned, for $4,500. On the plaintiff's case the assets had potentially a much higher value. The price realised was a 'fire sale' value. But the plaintiff does not challenge the sale which, on his case, he must have known was an improper disposition of the company's assets and a product of the defendants' fraud. If the plaintiff were genuine in his complaints one would expect him to offer recompense from the improper gains he made at the company's expense.

[51] The plaintiff's application for reinstatement must be dismissed. His claim and statement of claim insofar as they seeks redress for the company's wrongs cannot proceed and there should be judgment for the defendants on their application.

[52] The only outstanding claim is one brought by the plaintiff himself. These claims are identified only in perfunctory terms:

'6. Anxiety and suffering endured by the plaintiff.

[53] The plaintiff was unable to identify any legal basis on which he personally might be entitled to such damages. Mr Freeburn said he was unable to suggest any legal principle which might justify such an award and I know of none. The circumstances in which a plaintiff may recover damages for hurt feelings, or distress or anxiety, as opposed to personal injuries of a psychiatric or psychological kind are very limited and do not extend to cases such as the present, whatever it is.

[54] I order that the plaintiff's application of 12 April 2007 be dismissed. I give judgment on the defendants' application filed by leave on 21 July 2008 that they have judgment against the plaintiff pursuant to UCPR 293. The plaintiff should pay the defendants' costs of both applications to be assessed on the indemnity basis.

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Judgment (76 paragraphs)

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