Infocus Tax and Business Advisory Pty Ltd v Andrews

Order for determination of separate question

1. The first defendant has applied for an order under rule 28.2 of the Uniform Civil Procedure Rules 2005 (NSW) that a particular question be determined separately and in advance of the balance of the issues in these proceedings.
2. That application is supported by the third defendant, who appeared on the application with the same representation as the first defendant.
3. The second defendant did not apply for the hearing of a separate question, but, in practical terms, he is in the same position as the first defendant. The second defendant supported the order being made, and submitted that, if it is made, the only practical course would be for the Court to make an order that the same question be determined separately in respect of the second defendant as the first defendant.
4. Additionally, all three defendants have sought orders requiring the plaintiffs to provide security for their costs of the proceedings.
5. The plaintiffs are respectively Infocus Tax & Business Advisory Pty Ltd (Infocus) and Announcer Group Pty Ltd (Announcer).
6. The defendants are Mr Benjamin William John Andrews (Mr Andrews Jr), Mr Kimball John Andrews (Mr Andrews Sr), and Veni Vidi Vixi Pty Ltd as trustee for the Imperium Trust (VVV).
7. The statement of claim was filed by the plaintiffs on 26 September 2019. The statement of claim alleges that Infocus was incorporated on 28 September 2016. Its shares were held equally by Announcer and VVV.
8. At all relevant times Mr Andrews Jr was the sole shareholder, director and officer of VVV.
9. On 1 July 2019, Announcer entered into and completed an agreement to purchase the 50% of the share capital of Infocus held by VVV (the sale agreement).
10. The sale agreement contained the following clause 12: 12. NO LEGAL ACTION 12.1 The Buyer, and the Buyer's Affiliates and the Company agree to undertake no legal action or make any demands in relation to Benjamin William John Andrews and the Retiring Director in relation to their actions and the decisions made by them in their roles as Directors of the Company unless the actions involve fraud or criminal activities. 12.2 For the avoidance of doubt, the Buyer, the Buyer's Affiliates and the Company release and forever discharge Benjamin William John Andrews and the Retiring Director from all Claims which they have, could, would or might at any time have, or have had, including (but not limited to) any Claim arising directly or indirectly out of or in connection with the Company unless the actions involve fraud or criminal activities. 12.3 This clause 12 may be pleaded as a full and complete defence by Benjamin William John Andrews and the Retiring Director in respect of all Claims made by the Buyer, the Buyer's Affiliates or the Company (as referred to in this clause 12).
11. This clause was evidently intended to provide some protection to Mr Andrews Jr, as well as Mr Andrews Sr, who was defined in clause 1.1 as the Retiring Director. The Buyer under the sale agreement was Announcer and the Company was Infocus under a former name.
12. The subject matter of the separate question is whether the effect of clause 12 is to prevent the plaintiffs prosecuting their claim in the statement of claim against Mr Andrews Jr so that the claim against him must be dismissed.
13. If that question is determined favourably to Mr Andrews Jr, then the same result will occur in respect of the claim against Mr Andrews Sr.
14. The statement of claim alleges that Mr Andrews Jr was a director, the company secretary and an employee of Infocus between the date of its incorporation and 30 April 2019 when he resigned. Between 24 April 2019 and 1 July 2019, the date of the sale agreement, Mr Andrews Sr was a director and the secretary of Infocus.
15. The statement of claim further alleges that Mr Andrews Jr remained in fact an officer, a de facto or shadow director and an employee of Infocus between 30 April 2019 and 1 July 2019.
16. The essence of the plaintiffs' claim against Mr Andrews Jr is that, between April and July 2019, in breach of fiduciary and contractual duties that he owed to Infocus, Mr Andrews Jr solicited existing clients of Infocus to sever their relationship with Infocus and a number of clients did so. The statement of claim alleges that Mr Andrews Jr transferred some or all of the lost clients to an entity other than Infocus for his personal benefit.
17. The statement of claim contains an equivalent claim against Mr Andrews Sr but provides no particulars of that claim, saying instead: "To be provided following discovery".
18. The statement of claim makes a claim against VVV for breach of warranties made in the sale agreement. Those warranties included a warranty that the revenue summary in Annexure B of the sale agreement showed a true and fair record of the revenue generated from the clients for the period stated.
19. As the plaintiffs' claim was explained at the hearing, the plaintiffs complain that, after Announcer acquired all of the shares in Infocus, it was discovered that the revenue of that company was about 60% less than the amount warranted, and the substance of the allegation is that the reason for the decrease in revenue is that Mr Andrews Jr enticed a substantial proportion of the lost clients to stop using the services of Infocus and to move to some business associated with Mr Andrews Jr.
20. It will be convenient to note here that Mr Andrews Jr relied upon a disclosure in Annexure C of the sale agreement in the following terms: "The resignation of Benjamin Andrews on 30 April 2019, being a key person of the Company, has and or will have a material impact on the current and or future value of the Company".
21. The statement of claim pleads the effect of clause 12 of the sale agreement in par 30, and in pars 35 to 38 further alleges: 35. Both Ben Andrews and Kim Andrews were not, in their personal capacity, parties to the Sale Agreement. 36. Neither Ben Andrews nor Kim Andrews provided consideration in relation to the promises made in clause 12 of the Sale Agreement. 37. In the premises, neither Ben Andrews nor Kim Andrews can rely on clause 12 of the Sale Agreement in respect of any claim made against them. 38. Further or in the alternative, clause 12 of the Sale Agreement does not incorporate within its scope: a. A release for Ben Andrews in relation to breach of Ben's Employment Duties and/or Ben's Fiduciary Duties; and b. A release for Kim Andrews in relation to breach of Kim's Fiduciary Duties.
22. The statement of claim also alleges claims against all defendants under s 18 of the Competition and Consumer Act 2000 (Cth) Schedule 2 (the Australian Consumer Law). The allegation is to the effect that Mr Andrews Jr and VVV represented to Announcer that the warranties in the sale agreement were correct, which was misleading and deceptive or likely to mislead and deceive.
23. The statement of claim also alleges that Mr Andrews Jr and Mr Andrews Sr were persons involved in the contraventions.
24. Announcer seeks compensation against the defendants for contraventions of s 18 of the Australian Consumer Law and also orders under s 237 and s 243(a) of the Australian Consumer Law that clause 12 of the sale agreement is void or unenforceable by any of the defendants.
25. For completeness, Announcer also seeks an order that clause 7.5 of the sale agreement (which limits the maximum aggregate liability of VVV to the purchase price), and clause 7.6 (which excludes liability for consequential loss) are also void.
26. It is in these circumstances that, on 18 October 2019, Mr Andrews Jr filed a notice of motion in which he sought the following order: 1. An order that paragraphs [35]-[38] and [51] of the Statement of Claim are to be determined separately and ahead of the balance of the Statement of Claim pursuant to rule 28.2 of the Uniform Civil Procedure Rules 2005 (NSW) by way of the following separate question: "Are the Plaintiffs able to prosecute any claim against the First Defendant (being paragraphs 9-16, 18-19, 23-24, 43-44 and 47-48 of the Statement of Claim) in circumstances where it contractually released any such entitlement?"
27. The plaintiffs opposed the Court making the orders sought by Mr Andrews Jr.
28. The plaintiffs say that clause 12 is not enforceable by Mr Andrews Jr because he was not a party to the sale agreement and did not personally provide any consideration for the benefit of clause 12. The plaintiffs also say that clause 12 is not enforceable by any of the defendants because the sale agreement was procured by misleading or deceptive conduct of the defendants or conduct in which they were involved.
29. The plaintiffs submit that the present case is not a suitable case for the determination of the separate question sought by Mr Andrews Jr, as the determination of a separate question will not significantly shorten or make more simple the proceedings and, in fact, is likely to increase costs and complicate and delay the final disposition of the case.
30. The plaintiffs submit that it will be necessary for them to prosecute their claim against VVV in any event, and that the continued presence in the proceedings of the personal defendants will not likely add substantial costs or delay, as the personal defendants were the representatives of VVV in respect of all relevant events. Further, the plaintiffs submit that the effect of their claim for an order avoiding clause 12 of the sale agreement under the Australian Consumer Law will be that a substantial proportion of the evidence in the case that will have to be led against VVV in any event will be relevant to the determination of the separate question.
31. The application for an order for the determination of the separate question was heard before the defendants have filed defences and any cross claims. That is of particular significance to the plaintiffs' claim that the personal defendants cannot enforce clause 12 because they were not parties to the sale agreement and did not provide consideration. VVV is likely to file a cross claim against the plaintiffs seeking orders that give effect to clause 12 of the sale agreement.
32. During the course of the hearing, I became increasingly concerned about the wisdom of the Court determining whether or not the question should be determined separately before all of the issues in the proceedings were precisely defined by pleadings. That concern was particularly significant in relation to the plaintiffs' claim that clause 12 should be ordered to be void and unenforceable by operation of the Australian Consumer Law. The question whether clause 12 should be ordered to be void or unenforceable on that basis is likely to depend upon the precise circumstances in which the plaintiffs entered into the sale agreement. Those circumstances may establish that Announcer took the risk of satisfying itself of the relevant circumstances, and that it bargained for a price that knowingly involved it releasing the personal defendants from any liability in the absence of fraud or criminal activity.
33. During the course of the hearing, Mr Andrews Jr accepted the appropriateness of the Court deferring the determination of whether the separate question should be ordered until after the pleadings were complete.
34. The plaintiffs objected to that course, arguing that Mr Andrews Jr had brought on his notice of motion, and if that was premature, that was a risk that Mr Andrews Jr had taken.
35. I do not accept the validity of the approach taken by the plaintiffs. A decision whether or not to order a separate question is always a problematic one, and the Court should not make that determination until such time as is propitious, and it will often be the case that the decision should not be made until all of the issues are defined as clearly as possible by the pleadings.
36. Further, the motion for the separate question was, in part, brought on early to conform with the defendants' obligation to apply for security for costs as soon as possible in the proceedings.
37. It is to be noted that the statement of claim, in substance, simply alleges that the breaches of warranty involved conduct in contravention of s 18 of the Australian Consumer Law, and that accordingly, clause 12 should be ordered to be void or unenforceable. That is likely to be an oversimplification of the circumstances relevant to whether any misleading or deceptive conduct on the part of the defendants has the result that clause 12, as bargained for by the plaintiffs, is void or unenforceable. The Court will expect that the pleadings, if necessary by means of a reply or the plaintiffs' defence to a cross claim filed by VVV, will define as precisely as possible the issues relevant to whether clause 12 should be ordered to be void or unenforceable.
38. I propose to defer the determination of whether the separate question should be heard and determined in advance of the other issues in the proceedings until after the pleadings are complete. I will then give the parties an opportunity to provide to the Court further written submissions concerning the significance of the pleadings to the issue.
39. In these circumstances, it is premature to deal fully with the issues that arise in respect of whether the question should be determined separately. However, it is appropriate to observe that the subject of the proposed separate question has a characteristic that is not generally present in subjects for proposed separate questions. Generally, the separate question is simply one of the issues raised by the proceedings which, if decided one way, will determine the outcome of the proceedings without the parties and the Court being burdened with the need to determine all of the other issues.
40. The proposed separate question has that characteristic in relation to the claim against Mr Andrews Jr (and also Mr Andrews Sr), but it has the additional characteristic that the effect of clause 12 is that it is an agreement that the plaintiffs will "undertake no legal action or make any demands" against the personal defendants. It also creates a bar to proceedings and a defence, but it is the aspect of clause 12 that constitutes a promise not to prosecute a claim that is of significance.
41. If the Court does not agree to determine the effectiveness of clause 12 as a separate question, but only decides that question in the final judgment in the proceedings, and the personal defendants establish the effectiveness of clause 12, then the personal defendants will as a result have been deprived of the benefit that clause 12 afforded them. On its face, clause 12 gives the personal defendants not just a defence but a right not to be sued in the first place. It may be small comfort for them to be sued nonetheless and to succeed in establishing at the end that they had a right never to be sued at all.
42. The fact that the plaintiffs may prosecute a claim against VVV, and that the personal defendants will be natural witnesses in that claim, does not change this consideration. The Court does not know the circumstances, but common sense establishes that the personal defendants may approach these proceedings quite differently depending upon whether only VVV is at risk rather than themselves as well.

Order for security for costs

1. I will now turn to the issue of whether the plaintiffs should be ordered to provide security for costs as sought by Mr Andrews Jr and VVV by notice of motion filed on 18 October 2019 and by Mr Andrews Sr by notice of motion filed on 29 October 2019.
2. The applications for security for costs are simplified by the following matters.
3. First, the plaintiffs accept that they are impecunious and may not be able to meet any costs orders made against them in favour of the defendants when those costs are due to be paid.
4. The plaintiffs' position is that the reason for their impecuniosity is that Infocus has only enjoyed about 40% of the revenue suggested by Annexure B to the sale agreement while it continues to bear all of the costs of operation. Although that claim was made by the plaintiffs, it was not proved by the evidence in any detail.
5. Secondly, the amount that will be appropriate for security was agreed between the parties. Although, by their notice of motion filed on 18 October 2019, Mr Andrews Jr and VVV sought security in the sum of $45,250, they both agreed at the hearing that amounts of $40,000 in each case would be suitable.
6. The parties also agreed that the amount of $60,000 would be suitable security for Mr Andrews Sr.
7. The question at issue between the parties concerning the provision of security for costs was as follows. Although the plaintiffs could not provide security for the cost of the proceedings, the principal holding company of the group of companies that includes the plaintiff, Infocus Wealth Management Ltd (Infocus Wealth) offered to enter into a deed of indemnity with the defendants in which it would agree to pay the defendants the amount of any adverse costs orders made against the plaintiffs up to the agreed amounts for security for costs.
8. The plaintiffs advised the Court that Infocus Wealth could not pay the agreed amount for security for costs into court or provide bank guarantees as alternative security for costs. Infocus Wealth only initially offered the deed of indemnity to which I have referred.
9. The apparent reason for this stance is that Infocus Wealth's arrangements with its bank contain a covenant, which the plaintiffs suggest imposed a limit of debt to revenue, of which Infocus Wealth is presently in default. The apparent consequence is that Infocus Wealth cannot provide actual security for costs or arrange a bank guarantee without being in further breach of the covenant.
10. There was no evidence of the terms of the covenant or the precise extent to which Infocus Wealth is in default or the extent to which that default would be exacerbated by the actual provision of security for costs.
11. Note 2 to Infocus Wealth's audited financial statements for the year ended 30 June 2019 contained the following statement: "The Group remains in technical breach of its bank covenants at 30 June 2019. However, as the bank is aware of this, has confirmed its intention to continue to support the Group's operations, and has advised that it does not intend to take action as a result of the breach, the bank debt has been classified into current and non-current liabilities…"
12. All defendants argued that, in these circumstances, the proposed deed of indemnity was not sufficiently reliable and that the Court should order that the proceedings be stayed unless proper security for costs is tendered.
13. The plaintiffs responded by referring to Infocus Wealth's audited financial statements for the year to 30 June 2019, which show that the Infocus Wealth Group had total assets of $26,987,000 and liabilities of $14,381,000, giving a total equity of $12,606,000. Infocus Wealth had total revenue of $58,008,000, although it appears that the Group had a cash deficit of $938,000 at the end of the financial year.
14. The financial statements are for the group of companies of which Infocus Wealth is apparently the parent company. That means that the financial statements might not accurately establish the financial capacity of Infocus Wealth to perform its obligations under the proposed deed of indemnity.
15. It is therefore relevant to note that Note 24 to the financial statements purports to contain financial information relevant to the parent. The figures for total assets, liabilities and equity are the same as are set out in relation to the Group in par 55 above. Current assets of $507,000 are exceeded by current liabilities of $5,241,000, apparently in part because of the breach of covenant under the finance facility. The parent company suffered a loss of $325,000 for the year.
16. As against this, it is to be noted that the independent auditor's report dated 25 September 2019 qualified the financial statements by referring to conditions "which give rise to the existence of a material uncertainty that may cast significant doubt about the group's ability to continue as a going concern and therefore the group may be unable to realise its assets and discharge its liabilities in the normal course of business".
17. In response to observations made by the Court during the hearing concerning the reliability of an unsecured deed of indemnity, at the end of the hearing the plaintiffs made an offer that Infocus Wealth would not only enter into the proposed deed of indemnity but that the board of directors would, on behalf of the company, give an undertaking to the Court that Infocus Wealth would honour the deed of indemnity.
18. I take the view that the deed of indemnity, if supported by an undertaking to the Court, will provide substantially more security to the defendants than would the bare deed of indemnity.
19. I have decided that it will be appropriate for the Court to permit the proceedings to continue until the Court determines whether or not to order that the question be determined separately on the basis of the proposed deed of indemnity directly in favour of the defendants supported by an undertaking given by Infocus Wealth to the Court.
20. That decision gives some weight to the appearance that the conduct complained of by the plaintiffs in the statement of claim may have caused the impecuniosity of the plaintiffs. As I understand it, the defendants do not challenge the plaintiffs' claim that the revenue of Infocus dropped by some 60%; instead, the defendants claim that any such drop in revenue was not caused by their wrongful conduct, and in the case of the personal defendants they are protected by clause 12 of the sale agreement.
21. I have also given weight to my judgment that, if the total amount of costs to be secured is $140,000, Infocus Wealth is likely to be able to make that payment notwithstanding its present position in relation to the covenant that it has made in favour of its bank.
22. I have in mind that, if the Court orders that the proposed question should be determined separately, the proceedings may continue on the basis of the proposed deed of indemnity and undertaking to the Court until the separate question is determined. As the amounts agreed covered the whole of the proceedings, the amount of costs at risk for the separate question should be significantly less than the agreed amounts.
23. For the moment, however, the order for the provision for security for costs by means of the proposed deed of indemnity and undertaking to the Court will only continue until the Court determines whether or not to order that the question be determined separately. Thereafter, the defendants may renew their applications for further or different security for costs.
24. I take this view because, from the defendants' perspective, the enforceability of clause 12 will largely be a matter of the construction of the sale agreement, perhaps supported by some limited evidence concerning the circumstances in which the sale agreement was made. There is a risk that the plaintiffs will conduct their attack on the validity of clause 12 under the Australian Consumer Law in a way that is not confined and which attempts to introduce, into the separate question, substantially the whole of the evidence relevant to the complete case.
25. This possibility leaves two questions open. First, the fact that the plaintiffs are not able to provide conventional security for costs may be a strong reason for granting Mr Andrews Jr's application for the determination of the separate question, because that will reduce the risk to the defendants of not recovering their costs by limiting the costs to the determination of the separate question.
26. Secondly, if it turns out that the plaintiffs choose to enlarge the evidentiary ambit of the separate question by seeking to introduce substantially all of the evidence relevant to the proceedings as a whole, that course will increase the risk to the defendants, and may justify the Court in revisiting the issue of the sufficiency of the deed of indemnity supported by the undertaking to the Court.
27. It is to be hoped that these issues will appear more clearly after the pleadings have been completed.
28. It may be appropriate for the Court to give more detailed reasons for its decision concerning the appropriate security for costs regime when it decides whether or not to order the determination of the separate question after the pleadings have been closed and further submissions received concerning the forensic consequences of the issues raised by the pleadings. This is relevant to what will be involved in the determination of the separate question and the continuing sufficiency of the deed of indemnity and the undertaking to the Court.
29. The parties are invited to confer for the purpose of preparing draft short minutes of order to give effect to these reasons for judgment. I will hear the parties on the issue of costs. In the absence of agreement the parties should relist the matter by arrangement with my associate.

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