Leasing Centre (Aust) Pty Ltd v Shepard

JUDGE: ROBERTSON J DATE: 6 MAY 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The substantive issue in this application is whether or not the plaintiff ("TLC") is an unsecured creditor of the third defendant, Frigrite Refrigeration Pty Ltd (In Liquidation) ("Frigrite") in respect of the sum of $110,000 including GST paid by TLC to Frigrite on 28 September 2010 for the supply of 10 new freezers with glass lids and 4 new patch ends ("the goods"). 2 This application is brought under s 1321 of the Corporations Act 2001 (Cth) ("the Act"). That section relevantly provides: (1) A person aggrieved by any act, omission or decision of: (a) a person administering a compromise, arrangement or scheme referred to in Part 5.1; or (b) a receiver, or a receiver and manager, of property of a corporation; or (c) an administrator of a company; or (ca) an administrator of a deed of company arrangement executed by a company; or (d) a liquidator or provisional liquidator of a company; may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit. 3 The first and second defendants were appointed joint and several administrators of Frigrite on 18 January 2011. They are now the liquidators of Frigrite. 4 The first defendant, as administrator by letter dated 2 February 2011, made the following decision: TLC has claimed title in respect of goods of the Company as at the date of my appointment, on the basis that such goods have been fully paid for ("the Goods"). After giving your claim due consideration, I hereby reject your claim on the basis that the Goods the subject of your claim were not manufactured as at the date of my appointment. As Administrator, I am not in a position to discharge debts incurred by the Company prior to the date of my appointment. These debts rank as unsecured claims against the Company. Payment of these amounts is dependent on the outcome of the Administration. 5 By its amended originating process, filed in Court on 28 April 2011, TLC advanced various claims. By the first claim TLC sought a declaration that it was not an ordinary unsecured creditor of Frigrite. Two grounds were advanced. The first was based on what was said to be a fraudulent misrepresentation by Frigrite. The second was that there had been a total failure of consideration and Frigrite was liable to make restitution to TLC. In either of those events, it was said, TLC was not a creditor of Frigrite. 6 It is common ground that the freezers had not been manufactured at any relevant date. It is also common ground that TLC paid Frigrite $110,000 including GST for the goods and did not receive at least the 10 freezers. 7 Four affidavits were read in TLC's case. Two affidavits were by David Mark Moses, Chief Financial Officer of TLC, affirmed on 16 March 2011 and 21 April 2011. There was also an affidavit by each of Deborah Shou-Ai Lim, Legal Counsel at TLC, and Nicholas Joseph Aronson, General Manager of TLC, dated 8 April 2011 and 21 April 2011, respectively. None of the affidavits was by an individual with direct knowledge of the transaction. 8 Three affidavits were read on behalf of the defendants: Craig Peter Shepard, official liquidator and partner of the firm KordaMentha, sworn 4 April 2011; Brittany Lincoln, Chartered Accountant employed by KordaMentha, sworn 14 April 2011; and Rodney Bolt, formerly manufacturing manager of Frigrite, sworn 14 April 2011. I refer below in more detail to Mr Bolt's evidence. 9 No deponent, including Mr Bolt, was required for cross-examination.

Was there fraudulent misrepresentation? 10 The basis of this claim is the invoice issued by Frigrite on 3 August 2010. TLC claims that the invoice was or contained a fraudulent misrepresentation that the freezers the subject of that invoice existed at that date. TLC further alleges that it paid the invoice in reliance on the fraudulent misrepresentation. 11 As submitted by Mr Cutler of counsel, who appeared for TLC, the fact that the invoice included serial numbers of 10 freezers was said to constitute a fraudulent misrepresentation that the freezers actually existed. Further, it was submitted, Mr Aronson's evidence was that it was not TLC's usual practice to pay a supplier in advance of manufacture of equipment. 12 Mr Cutler placed no reliance on the paragraph numbered 3 in a letter dated 24 January 2011 from legal counsel at TLC to Mr Shepard, that paragraph referring to the island freezers having been found to be faulty and being retained by Frigrite for rectification. 13 The sequence of events so far as is disclosed by the evidence was that Renee Patterson, senior relationship manager at TLC, sent an email on 2 August 2010 to Rebbecca Hudson of Frigrite attaching an invoice request which stated how TLC needed the invoice to be addressed. The email said in part: Please find attached an invoice request which states how we need the invoice to be addressed. Could you please prepare a (sic) invoice as follows: 10 x new Island Freezers with Glass Lids - 3750 mm Module 3 deck Serial Numbers: 4 x new Patch ends Serial Numbers: (if not appicable (sic) please state N/A next to serial number) Total Invoice Amount $100k + GST. 14 Ms Hudson of Frigrite on 3 August 2010 sent an email to Ms Patterson at TLC attaching the invoice "as requested". The invoice provided by Ms Hudson to Ms Patterson incorporated the requirements identified by Ms Patterson and included a list of numbers under the heading "Serial No:". Ms Patterson did not give evidence. 15 I do not draw the inference that the invoice constituted a fraudulent misrepresentation. This is particularly so in the absence of any cross-examination of Mr Bolt. His unchallenged evidence, which I accept, was that Frigrite manufactured goods in accordance with design specifications and used an ordering system called SyteLine. SyteLine allocated a unique number to goods when each order was raised. A unique number was allocated by SyteLine upon receipt of each order regardless of whether the goods had yet to be manufactured. This allocated number would remain with the item during the manufacturing process until completion for tracking purposes. Mr Bolt then referred to the relevant invoice and concluded by saying that the allocation of the tracking numbers to the freezers in the invoice was consistent with the Frigrite's ordinary business practices. 16 Bearing in mind the seriousness of the allegation and the assessment required by Briginshaw v Briginshaw (1938) 60 CLR 336 at 362, I reject the submission that the invoice was or contained a fraudulent misrepresentation. I adopt as presently apposite Dixon J's reference in Briginshaw to "inexact proofs, indefinite testimony, or indirect inferences". As I have said, no-one involved in the transaction gave evidence for TLC and Mr Bolt was not cross-examined on his affidavit. Briginshaw was cited in a context similar to the present in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [170], 17 Thus the first limb of TLC's case fails.

Was there a total failure of consideration and, if so, what are the relevant consequences of such a failure? 18 The first issue here is one of fact, that is, whether TLC has failed to establish that the 4 new "Patch ends" were not received by it such that there was not a failure of consideration which was total. 19 In my view it is sufficiently clear that all of the goods referred to in the invoice were paid for. Also the patch ends were dealt with by TLC and Frigrite as part of the invoiced goods which constituted, in the main part, the 10 freezers. There is no separate treatment in the correspondence of the patch ends and I infer, as their name suggests, that once installed they would be attached to the freezers. 20 Thus, although the evidence is unsatisfactory, I conclude that none of the invoiced goods, including the patch ends, was delivered and that there was a total failure of consideration. One of the examples of total failure of consideration referred to in the judgment of Gleeson CJ, Gaudron and Hayne JJ in Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at [20] is where there has been a prepayment for goods which are never delivered. In that case the duty to make restitution is clear. 21 I therefore reject the submission put by Mr Shearer of counsel, who appeared for the defendants, that on the facts there had been no total failure of consideration. 22 I note that 'consideration' in this context does not have its technical meaning but a colloquial one akin to benefit received under the contract: Martin v Sitwell (1691) 1 Show KB 156 at 157; 89 ER 509 at 510 per Holt CJ; Stoljar SJ A History of Contract at Common Law (Australian National University Press, 1975) at page 182; and Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350-351. 23 Where this part of TLC's case meets an insuperable obstacle is in respect of the consequences of the total failure of consideration. 24 Mr Cutler, as I understood his submissions, accepted that restitution was a personal right and was not a proprietary remedy. 25 I was referred by Mr Shearer to Mason K, Carter JW, Tolhurst GJ Mason and Carter's Restitution Law in Australia (2nd ed, LexisNexis Butterworths, 2008) p 237 and to Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637. Those references support the conclusion that a total failure of consideration does not support the relief sought by TLC in the present case. 26 Mason, et al (2008) at p 237 state that restitutionary claims deriving from the common money counts, such as money had and received, result in a personal remedy in the form of an order to pay money. See also Australian and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673. 27 In Ausintel, the New South Wales Court of Appeal considered whether the company's obligation to Mrs Lam was a fiduciary duty in reliance on Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. The argument was that the company, having notionally received Mrs Lam's money, held it as trustee for the sole purpose for which it was advanced, viz, the allotment of shares. Quistclose depends however on a mutual intention that the money advanced should not become part of the assets of the payee but should be used exclusively for a specific purpose. Meagher JA, with whom Gleeson CJ agreed, said at 647G-648C that there was no agreement, express or implied, as to how the money should be treated if no allotment of shares took place, nor was there any evidence of a mutual intention that the moneys should not become part of the company's general funds. In the absence of some special arrangement, where money has been paid to a company for the purpose of obtaining an allotment of shares the payment is made on the basis that the money becomes part of the company's general assets. See also the consideration of this issue by Mahoney JA at 641 B-641E. 28 In my opinion, similar considerations apply here. A striking feature of the present case is that there was no evidence of any written agreement between TLC, on the one hand, and Frigrite, on the other, nor any other specific evidence as to the terms on which the sum of $110,000 in dispute was paid to Frigrite. No doubt there was a promise to supply the goods specified on the invoice but there is an absence of evidence as to any other terms. In respect of goods such as the present, I am not prepared to infer or assume that it was common ground between the parties that the freezers were already in existence. It may or may not be that commercial freezers are made to order, either generally or in this case. Far less am I prepared to infer that there were any special arrangements in relation to the payment of the $110,000 by TLC to Frigrite. 29 Mr Cutler relied wholly on two decisions of White J of the Supreme Court of New South Wales: Orix Australia Corporation Ltd v Moody Kiddell and Partners Pty Ltd [2005] NSWSC 1209 and Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589; 63 ACSR 429. In my view those decisions do not support the relief claimed in the present case under this head. 30 As to Orix, there was a finding of fact in that case that the funds in question had been obtained through fraud. It was in that context that White J held at [155]-[156] that the purchase moneys paid were held on trust. Since I have found, on the present facts, that there was no fraudulent representation the decision in Orix is of no assistance to TLC. As to Wambo, that was a case where the payments were made by mistake and for no consideration. Since no claim of mistake was advanced before me by TLC, the decision in Wambo is of no assistance to it. 31 In my opinion, therefore, there is no basis for the claimed relief flowing from the total failure of consideration and any consequent claim for non-performance of the contract. 32 Indeed, the reasoning of White J at [156] in Orix and at [41] and [43] in Wambo support the view that the remedy requires that there be both fraud and a total failure of consideration and that the claims by TLC are not truly claims in the alternative, as the matter was argued on its behalf. 33 I thus reject the two heads under which the plaintiff claimed relief. It follows that the claims in the Amended Originating Process fail.

Procedural Issues 34 I turn next to consider what were referred to by the parties as three procedural issues. Those issues were: (1) whether the claim had been sufficiently particularised under r 14.1(1) of the Federal Court (Corporations) Rules 2000 ("the Corporations Rules"); (2) whether the Court should allow further time under r 14.1(2) of the Corporations Rules; and (3) whether leave to proceed against Frigrite was necessary and, if so, whether the Court should grant such leave under s 500(2) of the Act. 35 As to the first of these matters, r 14.1(1) provides that all appeals to the Court authorised by the Act must be commenced by an originating process, or interlocutory process, stating: (a) the act, omission or decision complained of; and (b) in the case of an appeal against a decision --whether the whole or part only and, if part only, which part of the decision it is complained of; and (c) the grounds on which the complaint is based. 36 The originating process in this matter, in its original form, seems to have been drawn by reference to form 5 of the Federal Court Rules rather than with an eye to the requirements of r 14.1(1). Thus, as originally filed the originating process did not state whether the whole or part only of the decision was complained of (compare r 14.1(1)(b)) and neither did it set out the grounds upon which the complaint was based (compare r 14.1(1)(c)). Instead it referred to "the facts stated in the supporting affidavits" which is closer to the language of form 5. 37 No complaint was made about the failure to specify whether the whole or part of the decision was complained of. 38 In relation to r 14.1(1)(c) that defect was remedied by the amended originating process filed in Court to which I have referred. 39 I need say no more, therefore, about r 14.1(1). 40 Rule 14.1(2) founds the second procedural issue. Under this provision the originating process must be filed within 21 days after the date of the decision appealed against or within any further time allowed by the Court. By r 14.1(3) the Court may extend the time for filing the originating process either before or after the time for filing expires and whether or not the application for extension is made before the time expires. 41 In the present case it was common ground that the 21 days expired on 23 February 2011 but that the originating process was not filed until 22 March 2011. 42 Little was said on behalf of TLC in support of any application to extend the time for filing the originating process. Reference was made to the affidavit of Ms Lim made on 8 April 2011 but that affidavit sets out a chronology to events without endeavouring to explain the reasons for the delay. 43 Although it is not a prerequisite to the allowance of further time that there be an explanation for the delay but the absence of such an explanation makes it difficult for the Court to judge whether or not an extension of time conforms with the justice of the case. 44 Doing the best I can with the limited material put before me on behalf of TLC, I take into account that during the month of February 2011 TLC sought to agitate or re-agitate the correctness of the underlying decision; that the period for which further time is required is a relatively short one; and that no prejudice is asserted by the defendants by reason of the delay. 45 Taking these matters into account, acting under r 14.1(2)(b), I allow until 22 March 2011 as further time within which the originating process must be filed. 22 March 2011 is the date on which the originating process was in fact filed. 46 Nothing that I have said should encourage other plaintiffs making appeals to the Court authorised by the Act to take the risk-filled course in relation to the time limit specified in r 14.1(2) taken by the present plaintiff, TLC. 47 The third procedural issue is the question of leave of the Court to proceed with the application against the Company under s 500(2) of the Act. In this respect Mr Cutler's submission for TLC was that no leave had been sought because the liquidator's decision to treat TLC as a creditor was wrong and TLC was not a creditor. It was also submitted that no leave was necessary because no relief was sought against Frigrite directly. In the alternative, leave under s 500(2) was sought and it was contended that leave should be granted because if TLC was not a creditor then the $110,000 was not property of Frigrite. 48 In my view, merely to say that the relevant decision is wrong is an insufficient basis on which to conclude that leave is unnecessary. On that basis leave would never be necessary. Further, the terms of the amended originating process make leave under s 500(2) necessary. For example, claim 2 is for a declaration that Frigrite holds the sum of $110,000 on trust for TLC. Also, I am not convinced that claim 3, which seeks an order that the first and second defendants cause the third defendant to pay the sum of $110,000 to Frigrite, is not an action or other civil proceeding against the company within the meaning of s 500(2). It is also to be noted that Frigrite is the third defendant. For these reasons, as I have said, in my view leave is necessary. 49 The remaining question is whether leave should be granted. 50 Relevant principles according to which the discretion conferred upon the court under s 500(2) of the Corporations Act is to be exercised were briefly set out by Hammerschlag J of the Supreme Court of New South Wales in Global Partners Fund Ltd v Babcock & Brown (in liq) (2010) 267 ALR 144 at 179 [169]: (a) The purpose of the prohibition against commencing proceedings against a company in liquidation is to avoid a multiplicity of proceedings when the appropriate procedure is to lodge a verified proof of debt with the liquidator. (b) The onus is on the claimant to demonstrate why leave should be granted. (c) The plaintiff must satisfy the court that its claim has a solid foundation and gives rise to a serious dispute (sometimes termed a serious issue to be tried). (d) Factors relevant to the exercise of the discretion may include but are not limited to: (i) the degree of complexity of the legal and factual issues involved; (ii) the prospects that a proof of debt will be rejected; and (iii) the stage to which the proceedings, if already commenced may have progressed. 51 The court referred to Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314 at 317-318 and to Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550. See also on appeal Global Partners Fund Ltd v Babcock & Brown (in liq) [2010] NSWCA 196; 79 ACSR 383 at [47] and [93]. 52 I take into account these factors, in particular the shortness of the matters involved and the stage to which the proceedings have progressed. I also take into account the nature of the claim, being in effect that the sum of $110,000 was not available to creditors. As Barrett J said in Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [40]: The claim is proprietary and cannot be accommodated within the proof of debt regime. Leave should therefore be granted. On appeal no issue arose with respect to that grant of leave: Chahwan v Euphoric Pty Ltd (2008) 245 ALR 780 at [8]. 53 It was not suggested that the claim by TLC was made other than in good faith. 54 For these reasons I grant leave under s 500(2). 55 As to whether any terms should be imposed under s 500(2) it was submitted on behalf of the defendants that, if leave were granted, the relevant term should be that there be no order as to costs as sought by TLC. I am unpersuaded that this is an appropriate condition. In my view, given the proprietary nature of the claim, the stage which these proceedings have reached and the point at which the question of leave has arisen, no term should be imposed and costs should follow the event.

Objections to Affidavit Evidence 56 I indicated in the course of the hearing that I would deal, in my reasons, with certain objections to the affidavit evidence and I now do so. 57 One affidavit read on behalf of TLC was made by Nicholas Aronson. 58 I admit paragraphs 5 and 6 on the basis that they disclose the negative results of the deponent's search and review and are therefore not hearsay. 59 Paragraph 7 of Mr Aronson's affidavit I rejected on the basis that it was hearsay. 60 Paragraphs 8 and 9 were also objected to on the ground of relevance. It was common ground that the deponent, Mr Aronson, was not involved in the present transaction. 61 As to paragraph 8, I admit it, although I regard it as of little ultimate relevance. It says no more than what Mr Aronson's experience is of TLC's usual practice. It does not bear directly on the transaction in issue. 62 As to paragraph 9, it is not in dispute that TLC paid the full amount of the invoice to Frigrite on 28 September 2010. Since it was common ground that Mr Aronson was not involved in the present transaction, the balance of paragraph 9, consistently with my ruling on paragraph 7, can only relate to the state of the business records Mr Aronson searched and reviewed. On that basis I will admit the balance of paragraph 9. 63 I note as well that there is no reason why the word "thereafter" which the deponent has used should be notionally omitted, as Mr Cutler submitted it should be. The paragraph makes sense with the word "thereafter" included. The result is that the balance of paragraph 9 has nothing to say about communications on or preceding 28 September 2010 which is when TLC alleges the fraudulent misrepresentation was made. 64 As to paragraph 10, I admit the first sentence as referable to the results of the search and review which Mr Aronson conducted. Thus it is admitted on the limited basis that it is a statement of what Mr Aronson did not find. Similarly, in relation to the second sentence in paragraph 10, I admit it as limited to the results of Mr Aronson's search and review. Otherwise it would seek to be evidence of other undisclosed communications with other undisclosed members of TLC. 65 The other outstanding matter of evidence is the objection made to paragraph 6 of the affidavit sworn by Rodney Bolt on 14 April 2011. 66 I admitted the first part of paragraph 6 down to and including the word "practices". This was on the basis that I was satisfied that, as the manufacturing manager of Frigrite, Mr Bolt was qualified to speak about the ordinary business practices of Frigrite in respect of the allocation of tracking numbers to the freezers in the invoice. As to the second part of paragraph 6, I reject it on the basis that the deponent fails to state any of the primary facts on which the conclusory statement made in that part of paragraph 6 is based. I should indicate as well that whether or not, in the circumstances of this case, Frigrite had had previous dealings with TLC is of no ultimate relevance. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson.