MGM Bailey Enterprises v Austin Australia [2002] NSWSC 259 | Case summary

1948/02 MGM BAILEY ENTERPRISES PTY LTD v AUSTIN AUSTRALIA PTY LTD JUDGMENT 1 HIS HONOUR: On 13 December 2001 the plaintiff served a creditor's statutory demand on the defendant company under s 459E of the Corporations Act 2001 (Cth). According to s 459G, a company may apply to the Court for an order setting aside a statutory demand served on it, but only if the application is made within 21 days after the demand has been served. An application is made in accordance with the section only if, within those 21 days, an affidavit supporting the application is filed with the Court and a copy of the application and of the supporting affidavit are served on the person who served the demand on the company. 2 In David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, the High Court held that s 459G defines the jurisdiction of the Court by requiring that the application be made within 21 days, as an essential condition to the right to apply to set aside the statutory demand. Consequently failure to make the application within the 21 day period is not a procedural irregularity open to be cured under s 1322. 3 The only exception to the mandatory and exclusive nature of s 459G is where it transpires that "a winding up application in respect of a solvent company is threatened or made for an improper purpose which amounts to an abuse of process in the technical sense of that term": at 279, per Gummow J. However, there is no abuse of process simply because a creditor seeks a winding up order after the debtor company has inadvertently overlooked the 21 day time limit for an application to set aside the demand, unless a collateral purpose is established. It has been said recently that such a case would be "extremely rare": Redlove Holdings Pty Ltd v GNE & Associates Pty Ltd [2001] NSWSC 867 (Palmer J); Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171 (Barrett J); State Bank of New South Wales v Tela Pty Ltd [2002] NSWSC 20 (Barrett J). Abuse of process is not alleged in the present case. 4 On 21 December 2001 the defendant's solicitor (Mr Kermond) wrote to the plaintiff's solicitor (Mr Taylor) claiming that his client genuinely disputed that the plaintiff was entitled to the money claimed. If there is a genuine dispute in respect of the whole of the debt claimed, the Court must set the demand aside under s 459H (3). Mr Kermond's letter said that unless the plaintiff withdrew the statutory demand in writing by 28 December 2001, the defendant would commence proceedings in this Court seeking to set aside the demand. 5 The second paragraph of the letter was a single sentence, thus: "We note that the 21 days expires on 8 January 2001" [obviously meaning 8 January 2002]. That is incorrect. The parties now agree that the 21 day period expired on 3 January 2002. 6 Mr Taylor replied on 24 December 2001. He said that he had instructions that there was no genuine dispute about the existence of the debt, and asked for the factual details about the alleged dispute that would be included in the defendant's affidavit, so that he could obtain instructions. The second paragraph of his letter said: "Concerning paragraph 2, on our reckoning, our client's statutory demand expires on 4 January 2002. In this regard I refer you to s105 of the Corporations Act. If your client ultimately intends to proceed with its application to set aside, it will need to be filed and served before the end of 4 January 2002." 7 Section 105 states (in part) that in calculating how many days an act or event is after another act or event, the day of the first-mentioned act or event is to be counted but not the day of the other act or event. I am not sure that s 105 applies for the purposes of s 459G (2), which requires calculation of whether an act or event (the application) has been made "within 21 days after" another act or event (service of the demand), rather than calculation of how many days the application is after service of the demand. But it is unnecessary to decide that point, since s 459G would have the effect of requiring filing and service of the application and affidavit by no later than 3 January 2002, whether or not s 105 applied. 8 Mr Kermond's evidence, which was unchallenged at the hearing before me, is that he unreservedly relied upon what he regarded as the representations contained in paragraph 2 of the letter dated 24 December 2001. On 3 January 2002 he wrote to Mr Taylor saying that the plaintiff's refusal to withdraw its statutory demand left the defendant with no alternative than to commence Supreme Court proceedings to set aside the demand. He asked whether Mr Taylor had instructions to accept service of the originating process. 9 Mr Taylor wrote two letters to Mr Kermond on 4 January 2002. In one, he continued the debate as to whether there was a genuine dispute about the debt, and reiterated his request for details of the defendant's claim. In the other he confirmed that he had instructions to accept service. An originating process for an order under s 459P setting aside the statutory demand was filed on 3 January 2002, and served on Mr Taylor's firm on 4 January 2002. 10 The originating process was made returnable on 26 February 2002. It appears that both Mr Kermond and Mr Taylor became aware on 25 February 2002 that the 21 day period had expired the day before the application was served. The application was adjourned, and I was informed from the bar table that it has now been dismissed. Mr Kermond continued to press for withdrawal of the statutory demand during February and March and there were some attempts at negotiations, which were effectively brought to an end by the letters of Mr Taylor and Mr Kermond, respectively, dated 4 and 19 March 2002. 11 The plaintiff filed the originating process in the present proceedings on 19 March 2002, seeking an order that the defendant be wound up on the ground of insolvency, relying for that purpose on the defendant's failure to comply with the statutory demand. By its interlocutory process first filed in Court on 22 March 2002, the defendant sought an order that the plaintiff's application for winding up be stayed, and an order that, pending determination of its claim for a stay, the plaintiff be restrained from advertising its winding up application. Young CJ in Eq made the restraining order by consent on 22 March 2002, and stood over the application for a stay until 26 March 2002, when the application was heard by me. 12 The defendant bases its claim to relief on the terms of paragraph 2 of Mr Taylor's letter of 24 December 2001. At the hearing the defendant did not contend that the plaintiff was estopped by paragraph 2 from asserting that the application to set aside the demand was out of time or from later relying on the demand. That may have been because, as the plaintiff pointed out in written submissions, an estoppel argument would be difficult to maintain, for the following reasons. 13 In Roach v Bickle (1915) 20 CLR 663, 671-2, Isaacs and Gavan Duffy JJ said: "In any case, when an act of Parliament lays down a rule of public policy it is impossible for private individuals to abrogate it at will … . Where that rule of public policy takes the form of express declaration of invalidity no Court can permit personal relations to affect the virtual repeal of the enactment." 14 Those observations were applied by Hulme J in Pacific Rim Developments Pty Ltd v Anketell [1999] NSWSC 304 (9 April 1999), where his Honour discerned a general public policy underlying some provisions of the Conveyancing Act 1919 (NSW) and concluded that "the existence of such a policy behind a statutory provision is inconsistent with any estoppel being allowed to operate to defeat it" (paragraph 17). 15 There is a general public policy underlying s 459G and Part 5.4 of the Corporations Act, of which it is part. It was explained by the High Court in the David Grant case. Having referred to various examples where it might be thought that, if the 21 day period was regarded as an essential condition to the right to apply to set aside a statutory demand, Part 5.4 might operate harshly, Gummow J said (279): "No doubt, in some circumstances, the new Part 5.4 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the pre-existing procedure in relation to notices of demand." 16 To allow an estoppel to operate in the circumstances of the present case would be inconsistent with this legislative policy. 17 Faced with this difficulty about estoppel, the defendant raises two other contentions, relating to misleading conduct and to innocent misrepresentation. 18 First, the defendant says that paragraph 2 of Mr Taylor's letter of 24 December 2001 was misleading. His conduct in writing it was therefore misleading conduct for the purposes of s 52 of the Trade Practices Act 1974 (Cth), engaged in on behalf of his client. Alternatively, it was misleading conduct on the part of Mr Taylor himself for the purposes of s 42 of the Fair Trading Act 1987 (NSW). That being so, the defendant contends that s 87 of the Trade Practices Act, or s 72 of the Fair Trading Act (as the case may be), gives the Court jurisdiction to make an order for the stay of the winding up proceedings which rely on the statutory demand. In the remainder of these reasons for judgment, I shall refer, for convenience, only to the provisions of the Trade Practices Act. What I say applies, mutatis mutandis, to the equivalent provisions of the Fair Trading Act. 19 I was at first inclined to the view that paragraph 2 of Mr Taylor's letter is not misleading. The first two sentences of the paragraph express Mr Taylor's reckoning of the correct date and refer Mr Kermond to s 105. Taken in isolation, they would do no more than invite the reader, a solicitor, to review the matter and make his own assessment of the correct position. It would not be misleading to do so, even though the letter expresses a view that is incorrect. 20 However, I have decided on balance that the paragraph as a whole is misleading. The third sentence expressly asserts that if the defendant intends to proceed with its application, the application needs to be filed and served before the end of 4 January 2002. That is incorrect. To assert it in a letter to the solicitor for the party proposing to make the application is to engage in conduct that is in fact misleading. When the three sentences are read together, the paragraph cannot be seen as merely an invitation to the reader to review the matter and make his own assessment. 21 Conduct is misleading for the purposes of s 52 if it induces or is capable of inducing error: Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1673, at paragraph 63 (Full Federal Court) and cases there cited. In the present case the uncontradicted evidence is that Mr Kermond relied on paragraph 2 in causing the application to set aside the demand to be served on 4 January, one day outside the mandatory 21 day period. Therefore Mr Taylor's conduct in writing and sending a letter containing paragraph 2, assuming it to be conduct attributable to his client as principal, was misleading conduct for the purposes of s 52. 22 There is a further ground supporting this conclusion. Conduct in the nature of giving advice is misleading for the purposes of s 52 if the person engaging in it fails to attach appropriate qualifications to the advice that is supplied, or fails to disclose that the advice is based on less than reasonable grounds: Sweetman v Bradfield Management Services Pty Ltd (1994) ATPR 41-290, at 41,910. In Sweetman's case the defendant failed to disclose that no investigation had been undertaken to assess the reliability of a promoter's forecast. If paragraph 2 is taken as the provision by Mr Taylor of advice, it was advice expressed in unqualified terms and was in fact not based on any reasonable grounds. 23 My conclusion that paragraph 2 amounted to misleading conduct is not affected by the fact that Mr Kermond made a numerically greater error in calculating the 21 day period in his letter of 21 December 2001. The issue is not whether Mr Kermond engaged in misleading conduct but whether Mr Taylor did so. Nor is my conclusion affected by the fact that Mr Kermond, a solicitor with nearly 20 years experience after admission, had a duty to his client to form his own considered opinion as to the correct date and appears to have negligently failed to discharge that duty. It is not a defence to a claim under s 52 that the applicant itself was negligent in failing to check the accuracy of any representations made to it, or that its adviser was negligent in this respect: Sutton v A J Thompson Pty Ltd (987) 73 ALR 233, 241 (Full Federal Court); Trade Practices Commission v Optus Communications Pty Ltd (1996) 34 IPR 176, 191 (Tamberlin J); Hill v Tooth & Co Ltd (1998) ATPR 41-649, at 41,219 (Einfeld J). 24 In my opinion, however, having crossed the "misleading conduct" threshold, the defendant nevertheless fails in its trade practices claim. For present purposes I am prepared to assume (although a different picture may emerge if the matter is fully contested) that the defendant has suffered or is likely to suffer loss or damage by the plaintiff's misleading conduct, and specifically that causation can be established (as to causation, see Sweetman's case at 41,910). However, it is quite another thing to say that misleading conduct of the kind in question here should give rise to an entitlement, on the defendant's part, for a stay of the plaintiff's winding up proceedings, either permanent or temporary. Section 87 may well be wide enough to confer jurisdiction on the Court to make such an order in an appropriate case. But the relief available under the section is discretionary. 25 In my opinion, there are good discretionary grounds for declining relief of the kind sought by the defendant under s 87. Here the misleading conduct arose between solicitor and solicitor. There is nothing in the evidence to suggest that Mr Taylor intended to mislead, and I agree with the plaintiff that it is appropriate to assume for the purposes of the present application that there was no such intention. As the defendant's solicitor, Mr Kermond had (as I have said) a duty to his client to ascertain for himself when the 21 day period expired, and to ensure that the application he was instructed to make was made within that period. While I accept (in the absence of other evidence) that he in fact relied on paragraph 2 of Mr Taylor's letter, I regard it as unreasonable for him to have done so. 26 The evidence shows that his own prior calculation was grossly wrong. When his mistake was drawn to his attention by Mr Taylor, he should have carefully checked his own calculation. Moreover, as I have said, Mr Kermond was an experienced solicitor, having been admitted to practise in 1983. Acting, as he was, with respect to a statutory demand, he should have been aware of the terms of s 459G and the strict way that the section had been interpreted in the David Grant case. This should have made him particularly careful in calculating the 21 day period. 27 I also accept that the Corporations Act must be read together with the Trade Practices Act, and that it is inappropriate to give priority to the public policy of one enactment over the policy underlying the other. However, where the Trade Practices Act gives me a discretion as to whether I should make the order sought by the defendant, I am able to take into account that an order staying the winding up proceedings would tend to undermine the public policy of Part 5.4 as identified by Gummow J in the David Grant case. Apart from the general policy of Part 5.4, there is a specific public policy identified by s 459R, that an application for winding up should be determined with expedition and normally within six months after it is made. A stay for any longer period, on the ground advanced by the defendant, would be contrary to that public policy. 28 I therefore reject the claim to relief based on the Trade Practices Act. 29 Secondly, the defendant seeks to invoke the equitable considerations underlying cases such as Redgrave v Hurd (1881) 20 Ch D 1, which it relies on for the proposition that equity will not allow a person to take unconscientious advantage of his own false representation. Redgrave v Hurd is, of course, regarded as a principal authority for the proposition that a contract induced by innocent misrepresentation may be rescinded in equity. But Sir George Jessel MR expressed the basis for equitable intervention more widely. His Lordship said (at 12-13): "According to the decisions of Courts of Equity it was not necessary, in order to set aside a contract obtained by material false representation, to prove that the party who obtained it knew at the time when the representation was made that it was false. It was put in two ways either of which was sufficient. One way of putting the case was: "A man is not to be allowed to get a benefit from a statement which he now admits to be false. He is not to be allowed to say, for the purpose of civil jurisdiction, that when he made it he did not know it to be false; he ought to have found that out before he made it." The other way of putting it was this: "Even assuming that moral fraud must be shown in order to set aside a contract, you have it where a man, having obtained a beneficial contract by a statement which he now knows to be false, insists upon keeping that contract. To do so is a moral delinquency: no man ought to seek to take advantage of his own false statements." The rule in equity was settled, and it does not matter on which of the two grounds it was rested." 30 As the learned authors of Meagher, Gummow and Lehane's Equity Doctrines and Remedies (3rd ed, 1992, para 1303) remark, "it is no answer for the plaintiff to say that the defendant has the means of discovering and may with reasonable diligence have discovered the untruth of the plaintiff's representations". 31 The submission based on Redgrave v Hurd was rather speculative, and was not fully developed in argument. First, no cases were cited to take the equitable principle outside the realm of rescission of contracts. That may well not be an insuperable obstacle. One would expect the fundamental equitable principle to have applications outside the field of representations inducing contracts. Secondly, the principle relied upon would need to be carefully distinguished from equitable estoppel, and it would need to be shown that the principle was available notwithstanding the legislative policy underlying Part 5.4, to which I have referred. Thirdly, some exploration would be needed of the concept of unconscientiously taking advantage of false statements. Fourthly, it would be necessary to show, in a fully developed submission, that the principle warranted the kind of order that the defendant now seeks, that is, an order staying winding up proceedings. 32 For present purposes, it is sufficient in my view to take up the third and fourth of these points. It is true that the plaintiff now seeks to rely on its legal right to the benefit of the presumption of insolvency in winding up proceedings, even though a false representation has been made on its behalf, upon which the defendant has relied in failing to challenge the demand within the time limit. However, I am far from persuaded that equity would regard the circumstances as amounting to an unconscientious taking of advantage of false representations. I say this taking into account the matters referred to above, as discretionary considerations militating against the making of an order under s 87 of the Trade Practices Act. I see nothing unfair in the plaintiff's conduct considered as a whole. 33 For the same reasons, I would not exercise the discretion as to remedies which a court of equity has where the principle is invoked, in all the circumstances of this case. In particular, I would see in the circumstances no ground for justifying an order for a permanent or temporary stay of the winding up proceedings. 34 My conclusion is that the defendant has advanced no adequate grounds for the relief sought in the interlocutory process. I shall dissolve the order made by Young CJ in Eq on 22 March 2002, and dismiss the interlocutory process. I shall hear the parties on the question of costs. **********

MGM Bailey Enterprises v Austin Australia

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (9)

Cited By (2)