Engineered Thermal Systems Pty Limited v Salmon, In the Matter of Salmon & Speck Pty Ltd

The Relevant Rules of Court 9 The present matter is a proceeding under the Corporations Act. For this reason, the Corporations rules apply to the proceeding (see r 1.3(1) of the Corporations rules). However, the general rules apply to the extent that those rules are relevant and not inconsistent with the Corporations rules (see r 1.3(2)(a) of the Corporations rules). 10 Rule 2.9 of the Corporations rules provides that a person who intends to appear before the Court at the hearing of an application under the Corporations Act must, before appearing, file a Notice of Appearance in accordance with Form 4 and otherwise comply with r 2.9 of those rules. It seems clear that the second defendant has never intended to appear before the Court at the hearing of ETS' Originating Process and has, therefore, not breached r 2.9 of the Corporations rules. 11 The Corporations rules are silent in relation to the filing of a Defence by a defendant to a claim made under the Corporations Act. For this reason, the general rules govern the filing of a Defence to a claim under that Act. 12 Part 5 of the general rules deals with the Court's supervision of proceedings generally. Under r 5.01 of the general rules, a party, or the party's lawyer, must attend at Court on the return date fixed in the Originating Application. In addition, a respondent who has been served with an Originating Application must file a Notice of Address for Service, in accordance with Form 10 of the general rules, before the return date fixed in the Originating Application (r 5.02). The respondent must also comply with the requirements of the Civil Dispute Resolution Act 2011 (Cth) (r 5.03). In the present case, the second defendant was obliged to comply with these particular rules contained within the general rules. 13 In circumstances where a proceeding has been commenced by an Originating Application supported by a Statement of Claim, a respondent (or defendant in an application brought under the Corporations Act) must file a Defence, in accordance with Form 33 of the general rules, within 28 days after service of the Statement of Claim (see r 16.31 and r 16.32 of the general rules). For this purpose, the Originating Process filed by ETS in the present case is an "Originating Application". 14 Rule 5.22 and r 5.23 of the general rules are in the following terms: 5.22 When a party is in default A party is in default if the party fails to: (a) do an act required to be done, or to do an act in the time required, by these Rules; or (b) comply with an order of the Court; or (c) attend a hearing in the proceeding; or (d) prosecute or defend the proceeding with due diligence. 5.23 Orders on default (1) If an applicant is in default, a respondent may apply to the Court for an order that: (a) a step in the proceeding be taken within a specified time; or (b) the proceeding be stayed or dismissed for the whole or any part of the relief claimed by the applicant: (i) immediately; or (ii) on conditions specified in the order. (2) If a respondent is in default, an applicant may apply to the Court for: (a) an order that a step in the proceeding be taken within a specified time; or (b) if the claim against the respondent is for a debt or liquidated damages - an order giving judgment against the respondent for: (i) the debt or liquidated damages; and (ii) if appropriate, interest and costs in a sum fixed by the Court or to be taxed; or (c) if the proceeding was started by an originating application supported by a statement of claim, or if the Court has ordered that the proceeding continue on pleadings - an order giving judgment against the respondent for the relief claimed in the statement of claim to which the Court is satisfied that the applicant is entitled; or (d) an order giving judgment against the respondent for damages to be assessed, or any other order; or (e) an order mentioned in paragraph (b), (c) or (d) to take effect if the respondent does not take a step ordered by the Court in the proceeding in the time specified in the order. Note 1 The Court may make any order that the Court considers appropriate in the interests of justice - see rule 1.32. Note 2 An order or judgment under this Division may be set aside or varied.

The Present Case 15 As I have already mentioned, the present proceeding was commenced by the filing of an Originating Process and Statement of Claim on 27 April 2012. That Process was first returned before the Court at 9.15 am on 1 June 2012. 16 As at that date, the second defendant had not been served with the Originating Process and accompanying Statement of Claim. For this reason, on 1 June 2012, no directions were made affecting his position. 17 The proceeding was next listed before the Court on 6 July 2012. On this occasion, the Court granted to the first defendant, Mr Salmon, an extension of the time by which he was to file and serve his Defence. The second defendant was directed to file and serve his Defence by 20 July 2012. As noted earlier (at [6] above), there was no appearance either by or on behalf of the second defendant at the directions hearing held on 6 July 2012. 18 The matter was again listed before the Court on 10 August 2012. As before, there was no appearance either by or on behalf of the second defendant. On this occasion, the Court granted leave to ETS to file and serve any Interlocutory Process which it might be minded to file seeking final relief against the second defendant, such Process, together with all affidavits in support, to be filed by 4 September 2012. The Interlocutory Process filed by ETS on 22 August 2012 was filed pursuant to that leave and was made returnable before the Court on 7 September 2012. 19 The matter was again listed before the Court on 7 September 2012. On this occasion, ETS' application for default judgment against the second defendant was adjourned to 12 October 2012. 20 On 12 October 2012, that application was heard by the Court.

The Evidence in Support of the Plaintiff's Application for Default Judgment 21 In support of its application for default judgment, the plaintiff read and relied upon the following affidavits: (a) The Affidavit of Service sworn by Paul Justin Noonan on 29 June 2012; (b) The affidavit of Eileen Naomi Webb sworn on 6 August 2012; (c) The second affidavit of Eileen Naomi Webb sworn on 21 August 2012; and (d) The third affidavit of Eileen Naomi Webb sworn on 7 September 2012. 22 I am satisfied that, on 27 June 2012, the second defendant was validly served with both the Originating Process and the Statement of Claim filed in this proceeding. These facts were proven by Mr Noonan's affidavit. 23 I am also satisfied that the terms of the Orders which were made by the Court on 6 July 2012 were brought to the attention of the second defendant. In her affidavit sworn on 6 August 2012, Ms Webb deposed to the fact that she had forwarded to the second defendant at Unit 48/1 Juniper Drive, Breakfast Point, NSW, two letters (one dated 10 July 2012 and one dated 25 July 2012) under cover of which was sent in each case a copy of the Orders made by the Court on 6 July 2012. Ms Webb swore that she had obtained that address for the second defendant from the solicitor then acting for the first defendant. She went on to say in her first affidavit that the solicitor for the first defendant had obtained the Breakfast Point address from her client, Mr Salmon, who, in turn, had obtained it directly from Mr Speck. 24 By her affidavit sworn on 21 August 2012, Ms Webb proved that, on 7 August 2012, she sent a letter to the second defendant at the Breakfast Point address. Omitting formal parts, that letter was in the following terms: ENGINEERED THERMAL SYSTEMS PTY. LIMITED - V - SALMON & SPECK We refer to previous correspondence in the above matter. We note we are yet to be served with a sealed Defence filed by you in the Federal Court of Australia in relation to the Originating Process filed in the Federal Court of Australia on 27 April 2012 and personally served on you on 27 June 2012 Please find enclosed by way of service the sealed Affidavit of the writer sworn 6 August 2012 and filed on that day in the Federal Court of Australia. PLEASE NOTE THAT unless you or your legal representative appears in the Federal Court of Australia at Canberra on 10 August 2012 at 9.15am and/or a Defence is filed on your behalf; we have instructions to make an application for Default Judgment against you at that time. 25 By her third affidavit, Ms Webb proved that ETS' Interlocutory Process filed on 22 August 2012 and her affidavit sworn on 21 august 2012 were placed into the unit letterbox referable to the Breakfast Point address on 6 September 2012. An additional copy of each of those documents had been sent by express post to the second defendant at the Breakfast Point address on 22 August 2012. There was some doubt as to whether those items sent in that fashion had ever been delivered to the Breakfast Point address. Ms Webb also proved to my satisfaction that the whole of the contract sum of $290,000 plus GST remained due and owing to ETS.

The Pleaded Case 26 Omitting formal parts, the Statement of Claim filed by ETS is in the following terms: 1. The Applicant claims compensation pursuant to section 588M Corporations Act 2001 for $319,000 being an amount equal to the loss it has suffered, together with costs. 2. At all material times the Applicant has traded as ETS Refrigeration and has conducted a business providing commercial refrigeration goods and services. 3. At all material times the First Respondent was a director of Salmon & Speck Pty Ltd (ACN 124 792 598) ("the Company"). 4. At all material times the Second Respondent was a director of the Company. 5. On 24 November 2010 by resolution of creditors: 5.1. The Company was wound up; and 5.2. John Kukulovski and Sule Arnautovic were appointed as Joint and Several Liquidators of the Company ("the Liquidators"). 6. By letter dated 12 March 2012 the Liquidators consented to the Applicant commencing proceedings pursuant to section 588M Corporations Act 2001 against the First and Second Respondents. The Transaction 7. On or about 7 July 2010, the Applicant and the Company executed a written agreement whereby the parties agreed, inter alia, that: 7.1. The Applicant would supply and install a new coolroom and preparation facility ("the Installation Services") to the Company; and 7.2. The Company would pay the Applicant the sum of $290,000 plus GST ("the Contract Sum"). Particulars The written agreement dated 7 July 2010 signed by the First Respondent on behalf of the Company ("the Agreement"); 8. The Applicant pleads the Agreement as if set out here in full. 9. Between about July 2010 and September 2010, the Applicant provided the Installation Services under the Agreement. 10. It was a term of the Agreement that the Contract Sum was to be paid in full within 30 days of the Applicant providing the Company with an invoice described in the Agreement as a final invoice ("the Final Invoice"). Particulars Pricing Summary of the Agreement 11. On or about 1 October 2010 the Applicant rendered the Final Invoice to the Company for $290,000 plus GST ("the Liquidated Amount"). Particulars Tax Invoice number 38510 from the Applicant dated 1 October 2010 12. No security was provided by the Company to the Applicant in respect of the Liquidated Amount. 13. As date of this Statement of Claim, the Liquidated Amount remains outstanding. Insolvent Trading The Company was insolvent when it entered into the Agreement. Particulars Salmon & Speck Pty Ltd (in Liquidation) Report as to Solvency by RSM Bird Cameron Chartered Accountants dated 5 April 2012, a copy of which has previously been provided to each Respondent. 14. At the time of entering into the Agreement, there were reasonable grounds for suspecting that the Company was insolvent or would so become insolvent. Particulars 14.1. The Applicant refers to and relies upon the matters set out in the Solvency Report including: 14.1.1. The Company overdraft accounts had been fully drawn as at the last day of every month between 30 September 2009 and 30 September 2010 with the exception of one month; 14.1.2. Supplier invoices had remained at 90+ days and essentially outside the ordinary terms of trade to a total value of greater than $500,000 from 1 November 2009 to 20 October 2010; 14.1.3. On 1 November 2009 the total amount owed to unsecured creditors was $2,029,047 and total trade debtors was $533,154; 14.1.4. At 20 October 2010 the total amount owed to unsecured creditors was $2,118,027 and total trade debtors was $233,959; 14.1.5. The National Australia Bank issued no less than 33 notices to the Company advising of dishonoured cheques between 28 January 2010 and 21 September 2010; 14.1.6. The National Australia Bank issued no less than 14 letters to the Company advising of overdue equipment loan payments between 9 April 2010 and 8 October 2010. 15. As a result of the Company's insolvency, the Applicant has suffered loss. Particulars By written report to creditors dated 8 September 2011 the Liquidators advised that all known realisable assets had been realised and that it was unlikely that any dividends would be paid to unsecured creditors. AND THE APPLICANT CLAIMS THE FOLLOWING: A. A declaration that the First Respondent contravened subsection 588(2) Corporations Act 2001 by failing to prevent the Company from incurring a debt to the Applicant at a time when he suspected or ought to have suspected the Company was insolvent; B. A declaration that the Second Respondent contravened subsection 588(2) Corporations Act 2001 by failing to prevent the Company from incurring a debt to the Applicant at a time when he suspected or ought to have suspected the Company was insolvent; C. An amount, by way of compensation from each of the First and Second Respondents, as a debt due, equal to the Liquidated Amount; D. Interest; E. Costs.

Consideration 27 There is no doubt that the second defendant is in default within the meaning of that expression in r 5.22 of the general rules. He has not filed any Notice of Address for Service, has not filed any Defence and has not attended Court on any of the occasions when the matter has been before the Court for directions. Each of these matters constitutes an instance of non-compliance with the general rules. In the case of the second defendant's failure to file any Defence, that omission also constitutes a breach of the Order which I made on 6 July 2012 to the effect that the second defendant should file and serve his Defence by 20 July 2012. 28 Because the second defendant is in default and because ETS has filed its application that judgment be given in its favour against the second defendant by default, the provisions of r 5.23(2) of the general rules are engaged. In the present case, ETS relies upon r 5.23(2)(b) and (c). 29 The cause of action which ETS relies upon against the second defendant is a statutory cause of action authorised by s 588G and s 588M(3) of the Corporations Act. 30 Sections 588G(1) and (2) provide: 588G Director's duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Act. (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. Note: This subsection is a civil penalty provision (see subsection 1317E(1)). 31 Sections 588M(1) and (3) allow a creditor to bring a proceeding against a director of an insolvent company to recover from that director, as a debt due to the creditor, an amount equal to the amount of loss or damage suffered by the creditor as a result of the company continuing to trade while insolvent. Subdivision B of Div 5 of Pt 5.7B of the Corporations Act lays down a procedure whereby a creditor who wishes to avail himself or herself of the provisions of s 588G and s 588M must first seek the consent of the liquidator or otherwise engage the default provisions laid down in that subdivision. In the present case, ETS pleads that it has complied with the requirements of Subdiv B by giving to the liquidator of Salmon & Speck the notice required by s 588S and by subsequently obtaining the consent in writing of the liquidator to bring the present proceeding. 32 In my view, the present claim is a claim for debt or liquidated damages within the meaning of those expressions in r 5.23(2)(b) of the general rules. Section 588M(3) of the Corporations Act characterises the present claim as a claim in debt. That being so, the provisions of r 5.23(2)(b) are engaged. 33 I am satisfied that the Originating Process, Statement of Claim, Interlocutory Process filed on 22 August 2012, affidavit of Ms Webb sworn on 21 August 2012 and the various written notifications of Court listings were all effectively served upon the second defendant and came to his notice. In particular, I am satisfied that the second defendant was informed that, on 7 September 2012, or so soon thereafter as the Court could deal with the matter, ETS would proceed with its application for default judgment against him in the amount of $319,000 plus interest and costs. I am also satisfied that no part of the claimed debt has been paid to ETS. 34 Subject to considering certain matters put to me by the solicitor advocate for the first defendant (Mr Salmon), I am satisfied that I should enter judgment by default pursuant to r 5.23(2)(b). 35 In addition, ETS relies upon r 5.23(2)(c). This rule is based upon rules deployed in the High Court in England and upon O 35A r 3(2)(c) of the Federal Court Rules (Cth) which were repealed in August 2011. 36 In Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227, Flick J discussed the correct interpretation of r 5.23(2)(c) of the general rules at [15]-[26] in his Honour's Reasons for Judgment. At those paragraphs, his Honour collected the more important relevant authorities and summarised the appropriate principles. These principles may be further summarised as follows: (a) The power afforded to the Court is discretionary. The discretion should generally be exercised with caution (at [20]-[21]); (b) The discretionary power to enter a judgment by default is enlivened when an applicant makes application to the Court for an appropriate order. In the absence of such an application, the power cannot be invoked (at [22]); (c) There is a difference in the terms by which the limits of the power conferred by former O 35A r 3(2)(c) are expressed and the wording of the current r 5.23(2)(c). Notwithstanding that difference in language, the requirement imposed is not that an applicant prove by way of evidence the claim which is sought to be advanced. The requirement is that the Court needs to be satisfied on the face of the Statement of Claim that the applicant is entitled to the relief claimed. The facts as alleged in the Statement of Claim are deemed to have been admitted by the respondent who is in default (at [23]); (d) In order to be satisfied that an applicant is entitled to the relief claimed in the Statement of Claim, the Court needs to be satisfied that each element of the relevant civil wrong involved is properly and discretely pleaded in the Statement of Claim (at [24]); and (e) In addition to the facts alleged in the Statement of Claim, the Court may permit recourse to limited further evidence. But it may not admit evidence which would alter the case as pleaded (at [25]). 37 Flick J also referred to the discussion of the evolution of this particular rule undertaken by Kiefel J in Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (2006) 236 ALR 665 at [45]-[50] (pp 677-679). 38 I agree with the exposition of the relevant principles given by Flick J in Speedo Holdings B.V. v Evans (No 2) and therefore propose to apply in the present case those principles as explained by his Honour. 39 In the present case, it is readily apparent that all of the necessary integers of the statutory cause of action relied upon by ETS have been pleaded and thus deemed to have been admitted by the second defendant. 40 In particular, ETS has alleged that: (a) The second defendant was a director of Salmon & Speck at the time when Salmon & Speck entered into the pleaded contract with ETS and thereby incurred an obligation to pay the agreed contract sum; (b) As at that date (viz on or about 7 July 2010) Salmon & Speck was insolvent; (c) At the time the debt was incurred, there were reasonable grounds for suspecting that Salmon & Speck was insolvent, or would become insolvent; (d) At the time the debt was incurred, the second defendant was aware that there were grounds for suspecting or, alternatively, a reasonable person in the position of the second defendant would have been aware that there were grounds for suspecting the company was insolvent; (e) The necessary consent from the liquidator has been obtained; and (f) By reason of the conduct of the second defendant, ETS has suffered loss measured by the non-payment of the contract sum. 41 It is self-evident that the Corporations Act commenced long before the events material to the present case occurred. 42 Again, subject to consideration of certain matters put to me by the solicitor advocate for the first defendant, I am satisfied that the requirements of r 5.23(2)(c) of the general rules have been met in the present case and that ETS is entitled to the relief which it claims. 43 At the hearing of ETS' application for default judgment, the first defendant was represented by his solicitor advocate. At that hearing, she made the following submissions: (a) In the present case, it is inappropriate for the Court to exercise its undoubted discretion to enter judgment by default. The only satisfactory mechanism for summarily disposing of ETS' case against the second defendant is summary judgment. In the event that ETS were compelled to make an application for summary judgment, it would be required to prove its case to the requisite degree by tendering evidence. It should not be permitted to sidestep appropriate scrutiny by the Court by relying upon r 5.22 and r 5.23 of the general rules. (b) The first defendant is defending the claim brought against him by ETS upon the basis that Salmon & Speck did not incur a "debt" within the meaning of s 588G; that no debt is owed by Salmon & Speck to ETS (this was not developed as a separate point); that Salmon & Speck was not insolvent in July 2010 when the relevant transaction was entered into; that the first defendant was not aware that there were grounds for suspecting that Salmon & Speck was insolvent and a reasonable person in his position would not have been so aware; that the true contractual arrangements were different from those alleged in the Statement of Claim; and that, should all else fail, the first defendant should be relieved from liability because he acted honestly and ought fairly be excused (as to which see s 1317S(2) of the Corporations Act). (c) In light of these matters, the Court should exercise its discretion against giving default judgment against the second defendant because granting that relief carries with it "findings" which might be thought to bind the first defendant or which might in fact bind the first defendant and thus hamper or prejudice the various defences which he intends to run at the trial. By way of illustration of this point, it was submitted that, once judgment is entered against the second defendant, the second defendant would have an entitlement to bring a claim for contribution against the first defendant. 44 None of these submissions persuade me that I ought not grant the relief claimed. 45 The ordering of a judgment by default does not involve the making of any "findings". Indeed, it is quite clear that the effect of such an order is constrained by the rules which authorise the making of that order. In effect, the defaulting party in the position of the second defendant is deemed to have admitted the facts in the Statement of Claim. These deemed admissions are not attributed to any other party to the same proceeding and cannot bind any other party. Furthermore, the second defendant could only bring a claim for contribution if he paid more than his fair share of the claimed amount. Even then, if the first defendant has a good defence against the claim made by ETS against him, he would similarly have a good defence against the claim for contribution brought by the second defendant against him. ETS' available remedies for summary disposal are not limited to seeking summary judgment. 46 For all of the above reasons, I propose to grant the relief claimed by ETS in its Interlocutory Process filed on 22 August 2012. 47 I do not propose to make any declarations. A declaration in the present case is not a necessary precursor to the grant of a money judgment and is not required in order to give full effect to the cause of action relied upon. I would also wish to avoid any possible suggestion that, by making a declaration, some of the issues sought to be raised by the first defendant in his Defence have somehow been decided on this application. 48 ETS should have its costs of the proceeding and of its Interlocutory Process filed on 22 August 2012 insofar as the claims made in the proceeding concern the second defendant. 49 There will be orders accordingly. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.