Elm Financial Services Pty Ltd v MacDougal

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1659/04 - ELM FINANCIAL SERVICES PTY LTD v SALLY JOAN MACDOUGAL

1 The plaintiff operates a financial advisory business and is a licensed securities dealer. The late Iain MacDougal was retained by the plaintiff to advise clients as to their financial needs and to assist them with their investments. He spent two periods with the plaintiff. The first was from 4 January 1995 to 29 November 1995 and the second was from 2 December 1999 to his death which occurred in December 2001. During the interval between November 1995 and December 1999, Mr MacDougal was associated with another financial advisory business. 2 After Mr MacDougal's death, his widow, the present defendant, as his executrix, became party to a deed with the plaintiff. The deed effected what was in essence a commutation of trailing commissions payable to Mr MacDougal. The estate, in effect, accepted a promise to pay $121,973.28 in satisfaction of such trailing commissions and the plaintiff covenanted to pay that sum to the defendant in two instalments. The first, being $60,986.64, was expressed to be payable on execution of the deed and the second, also of $60,986.64, was expressed to be payable on the first anniversary of the date of the deed. The deed was dated 4 September 2002. 3 On or about 6 February 2004 the defendant served on the plaintiff a statutory demand under s.459E of the Corporations Act 2001 (Cth) relating to a debt of $60,986.64 described as "The amount due and payable by the Company to the Creditor on 4 September 2003 pursuant to the terms of a deed between the Company and the Creditor dated 4 September 2002". Clearly enough, this is the second instalment under the deed, it being accepted, as I understand it, that the first instalment was duly paid, except apparently as to $986.64. 4 By its originating process filed on 26 February 2004, the plaintiff claims an order under s.459G setting aside the statutory demand. As outlined in the opening of the plaintiff's case before me this morning, the plaintiff seeks to rely on both branches of s.459H. In other words, it says that there is a genuine dispute as to the existence or amount of the debt (s.459H(1)(a)) and that it has an offsetting claim (s.459H(1)(b)). 5 The genuine dispute aspect of the plaintiff's case, very briefly and generally stated, is that misrepresentation and lack of disclosure on the defendant's part at the time of the making of the deed of 4 September 2002 renders the deed susceptible to be set aside, so that the existence of the debt arising from the covenant in the deed as to the second instalment is called into question by way of genuine dispute. The offsetting claim aspect of the plaintiff's case is to the effect that Mr MacDougal, while a representative of the plaintiff, received sums in cash and by cheque from clients of the plaintiff in circumstances where he incurred an obligation to account to the plaintiff and that he failed so to account. 6 It was submitted on behalf of the defendant that, having regard to the so called "Graywinter principle", neither avenue of attack is open to the plaintiff since neither is sufficiently raised by the supporting affidavit of 26 February 2004 that accompanied the application to set aside the statutory demand. 7 The Graywinter principle derives from the judgment of Sundberg J in Graywinter Properties Pty Ltd v Gas and Fuel Superannuation Fund (1996) 70 FCR 452 and may be regarded as now firmly established: see the most recent survey of the authorities in Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd [2004] NSWSC 527 (21 June 2004, White J). What it means is that the application for an order setting aside the statutory demand and the affidavit in support of that application, both filed and served within the 21 day period stipulated in s.459G(3), must fairly alert the claimant to the nature of the case the company will seek to make in seeking to have the statutory demand set aside. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by ss.459H and 459J for setting aside statutory demands. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period. 8 In this case, it is s.459H that is relevant and the affidavit in question is Mr Terracini's affidavit of 26 February 2004. That affidavit begins by providing background information and annexing documents. Among the annexures, as annexure C, is a letter from the plaintiff to the defendant's solicitors dated 20 December 2002 making complaint about Mr MacDougal's conduct in relation to a client of the plaintiff's named Mrs Toyer. One complaint is that Mr MacDougal invoiced Mrs Toyer for fees under the plaintiff's letterhead without disclosing those fees to the plaintiff. There is a statement of an assumption that Mrs Toyer's case was not an isolated example. The annexure C letter concluded by saying that until the plaintiff received a full account of the matters raised in that letter, it would no longer regard itself bound by the deed. 9 In the defendant's solicitor's reply of 30 January 2003 it was said that the plaintiff could not unilaterally rescind or terminate the deed on the basis of the matters raised. 10 Going back to the body of Mr Terracini's affidavit, that is the supporting affidavit under s.459G(3), we find a concluding paragraph as follows: "If any sum remains payable under the deed, the plaintiff will be seeking a reduction in that sum to reflect, amongst other things, disruption to its business caused by the conduct of Mrs MacDougal and moneys received by Mr MacDougal which were not passed on to the plaintiff."

The plaintiff says that this paragraph 20 sufficiently identifies and delineates both a genuine dispute as to the existence of the debt and an offsetting claim to satisfy the Graywinter principle. 11 I am satisfied that this is so as to offsetting claim, but not as to genuine dispute. The opening words of paragraph 20, "If any sum remains payable under the deed", raise the possibility that the debt may no longer exist. But those words do nothing to indicate the basis on which that possibility is advanced or the reasons behind the contention. Nor, it seems to me, does any annexure to the affidavit remedy that deficiency. As I see it, nothing in the affidavit and its annexures even hints at a claim to have the deed set aside for misrepresentation or the like. On that basis the Graywinter principle is not satisfied, so far as the pursuit by the plaintiff of a genuine dispute claim on that basis is concerned. 12 On the other hand, clause 20 of Mr Terracini's affidavit of 26 February 2004 and the annexure C do sufficiently indicate the basis of a case as to the offsetting claim that the plaintiff now seeks to advance. There is specific reference to the allegation, said to be sourced in information from Mrs Toyer, that Mr MacDougal charged fees by invoices on the plaintiff's letterhead and did not disclose these to the plaintiff; also that Mrs Toyer's case should be taken not to be an isolated example. There is, in paragraph 20 of the affidavit, a statement referring to any sum remaining payable under the deed and saying that the plaintiff would be seeking a reduction in that sum to reflect various things, including "moneys received by Mr MacDougal which were not passed on to the plaintiff". These are unmistakable words of offsetting claim directly referable to the case the plaintiff now seeks to make under that heading. 13 I therefore proceed to the merits of the offsetting claim case. The test to be applied in determining whether there exists a genuine offsetting claim of the kind contemplated by s.459.H(1)(b) was stated by Palmer J in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 1088: "In my opinion, a genuine offsetting claim for the purposes of CA s459H(1) and s459H(2) means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. 'Good faith' means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s459H."

14 The plaintiff's case is that the general allegation made on the basis of Mrs Toyer's case is supported by documentary evidence of receipt by Mr MacDougal, from various clients, of sums described as being for "travelling expenses" or "my annual charges" or "annual fees in relation to ongoing management" or "retainer" or simply "fees". A number of documents that came to the plaintiff's notice only in December 2002, that is, after both the death of Mr MacDougal and the execution of the deed with the defendant, are in evidence as annexures to Mr Terracini's second affidavit. That affidavit, in those respects, represents amplification in a manner not contrary to the Graywinter principle of what was outlined and delineated in the supporting affidavit of 26 February 2004. The documents to which I refer show demands upon clients by Mr MacDougal, or his private company, for payments under the designations I have mentioned, and in some cases the making of those payments. These documents cover not only Mr MacDougal's two periods of association with the plaintiff but also the time he was associated with the other financial planning organisation. The total involved in the 15 instances so far identified, and covered by the documents in evidence, is $4,600 on an annual basis, representing an average of slightly more than $300 per client per year. 15 There is evidence that Mr MacDougal serviced between 150 and 200 clients for the plaintiff over a period of 2.8 years. Extrapolating from that and assuming that he treated all clients of the plaintiff in the same way, the plaintiff says that fees Mr MacDougal collected, in the way shown by the documents in evidence, may be taken to be somewhere between $126,000 and $168,000; that is, even on the lower figure, twice the amount of the second payment under the deed. 16 The defendant says that such a case of offsetting claim cannot be advanced because the terms of Mr MacDougal's retainer by the plaintiff are not in evidence and it has not been shown that he was not entitled to charge and keep fees of the kind he appears clearly enough to have charged and kept in the particular instances. The plaintiff's response to this is that the defendant herself has testified that she does not believe that there was any written retainer agreement and that there is nothing to displace the operation of the ordinary incidents of the relationship of principal and agent, including the obligation to account and the obligation not to take any secret profit from the party with whom the agent contracts on behalf of the principal. As a matter of general law, the principal may recover any such secret profits from the agent or, as here, his estate. 17 I accept the plaintiff's submissions in these respects. I am not concerned here to resolve the parties' dispute. I am concerned only to see whether there is an offsetting claim that passes the test of genuineness. A claim to account for alleged secret profits, based on the general law of agency in a principal/agent situation, may be taken to possess the requisite degree of cogency, even without proof of the terms of the agency. 18 There is then, however, the question of quantification. It is necessary, in view of the definition of "offsetting total" in s.459H(2) and its reference to "the amount of that claim", that the party alleging the existence of an offsetting claim, as a basis for an order setting aside a statutory demand, takes steps to quantify it. The matter is dealt with in Jesserson Holdings Pty Ltd v Middle East Trading Consultants (1994) 12 ACLC 490. In No. 96 Factory Bargains Pty Ltd v Kershel Pty Ltd [2003] NSWSC 146, I referred to that necessity in these terms: "The first thing to be said about the way the plaintiff puts its case is that, while the definition of "offsetting claim" in s.459H(5) refers, in general terms, to a claim "by way of counterclaim, set-off or cross-demand", it is clearly contemplated by the section as a whole that the claim must be one capable of being quantified in money terms. It need not be a liquidated claim but it must be one to which a monetary liability can be attached. This is because of the directive in s.459H(2) that the court determine, among other things, "the amount of that claim" or, where there are several claims, "the total of the amounts of those claims". It follows that only claims sounding in debt or damages or other monetary consequences (such as may be available under the Trade Practices Act ) may be taken into account for the purposes of s.459H."

19 Despite this clear need, according to the terms of the legislation, to quantify an offsetting claim in money terms, it is not necessary that the party seeking to have the statutory demand set aside should particularise the amount of the claim to the last dollar and cent. There may be various ways of approaching the issue of assessment at this early stage. It is sufficient that there be, on the evidence, a plausible and coherent basis for asserting a claim to a sum which, despite elements of uncertainty, can be seen to be, in any event, greater than the amount of the debt the subject of the statutory demand. Of course, the narrower the margin between the alleged debt and the plaintiff's estimate or initial quantification, the greater will be the need for particularity in assessing the amount of the offsetting claim. 20 In the present case, the basis for the advancing of a claim by the plaintiff for the recovery of secret profits has been shown to the requisite degree of cogency. The process by which the plaintiff has calculated a sum, by way of possible or potential recovery of at least twice the amount claimed in the statutory demand, has already been referred to. It does not purport to be a fully particularised claim calculated with precision, but it is nevertheless a claim which reflects a sum that can be advanced without descent into the "fanciful", which is the test postulated in the Macleay Nominees case (above). 21 Since the alleged debt referred to in the statutory demand is a $60,986.64 and the offsetting claim is quantified in a non-fanciful way as potentially twice that, the "amount" of the offsetting claim must be regarded as such that the "offsetting total" referred to in s.459H is greater than $60,986.64 so that the "substantiated amount" is less than the "statutory minimum" and, under s.459H(3), the court must set aside the statutory demand. 22 The plaintiff is, accordingly, entitled to order 1 in the originating process filed on 26 February 2004.

[COUNSEL ADDRESSED ON COSTS] 23 This is not a case where there should be any attempt to apportion costs as between different issues. The outcome is that the plaintiff has been successful and costs will follow the event. The defendant must therefore pay the plaintiff's costs of the proceedings. **********

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