Uniform Civil Procedure Rules (Qld), R 292 and 298

Cases: Australia and New Zealand Banking Group Ltd v Barry [1992] 2 Qd R 12

BBC Hardware v GT Homes Pty Ltd [1996] QSC 273; (1997) 15 ACLC 431

Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314

Counsel: R Bain & with him D Atkinson for the plaintiffs

[1] This is an application by the plaintiffs as liquidators of a solicitor's nominee company Lex Nominees Pty Ltd ("Lex") which was part of a contributory mortgage business conducted by a solicitor Paul Triscott ("Triscott") for summary judgment against the defendant ("Romano") as guarantor of a debtor of Lex.

[2] By order of Chesterman J on 20 March 2001 it was declared that the scheme was an "unregistered managed investment scheme operating in contravention of sub section 601ED(5) of the Corporations Law".

[3] On that ground the nominee company was wound up pursuant to s 601ED(1) of the Corporations Law and the plaintiffs were appointed as liquidators of the company. Lex was removed as trustee of monies contributed under the contributory mortgage scheme by a large number of lenders. The liquidators were then appointed as new trustees in substitution for Lex for the purpose of facilitating the winding up of Lex and the protection to the extent possible of the beneficial interests held by various lenders under the contributory mortgage scheme implemented by Triscott.

[4] One of the borrowers of a large sum of money from Lex under the scheme was Prebble Investments Pty Ltd ("Prebble") which on 11 November 1999 borrowed $3.6 M.

[5] Prebble, was at all material times a $2 company of which Romano was the sole director and secretary. It owned land about 4km south-west of Maryborough much of which was unimproved but part of which did contain improvements of various sorts that had been added to or refurbished over the years with monies apparently borrowed by Prebble from Westpac Banking Corporation and secured by mortgage over the land and by the guarantee of Romano.

[6] In October 1999 Prebble agreed to refinance it's borrowing from Westpac with Lex which took a transfer of the mortgage Westpac held over Prebble's land as security for the sum of $3.6 M advanced to secure other obligations under the "private loan facility" Lex made available to Prebble in substitution for that previously made available by Westpac.

[7] Romano, who had guaranteed performance of Prebble's obligation under the mortgage held by Westpac prior to the refinancing exercise, was also required to guarantee performance by Prebble of its obligations under the loan facility made available by Lex. The monies advanced under that facility together with interest became payable on 5 November 2000.

[8] Within a couple of months of the loan facility being provided by Lex to Prebble, there was a disastrous fire on Prebble's land which destroyed the most valuable part of newly erected and/or refurbished improvements. More importantly the loss of those improvements resulted in the substantial destruction of Prebble's capacity to produce income upon which it relied to meet its obligations to Lex under the loan facility made available only a few months earlier. For all practical purposes the mortgaged property was unable to produce sufficient income to meet any of Prebble's obligations under Lex's loan facility. It appears clearly enough on the material that Romano did not have funds available to meet his obligations under the guarantee he gave to Lex.

[9] On 9 March 2000 Prebble made a claim under its insurance policy which gave it a cover for fire damage of up to $5 M and as well a cover for loss of income of up to $1 M per year for a period of two years.

[10] Loss Assessors investigated the fire; this was apparently hindered by the destruction in the fire of many of the financial records of the business activities conducted on the land.

[11] In any event, on 9 March 2000 Prebble made its formal claim under its insurance policies. Further information was provided by Prebble in support of its claim.

[12] Prebble retained forensic accountants to prepare information sought by the insurer. By this time Prebble suspected that the insurer might prove unwilling to meet its claim and the forensic accountants were also retained to prepare evidence for any litigation that might result from the insurer's failure to indemnify it against loss to which its insurance policies related.

[13] Between February and May 2000, Romano, as director of Prebble, had numerous discussions and meeting with Triscott as director of Lex. Problems that Prebble was having with its insurer were discussed.

[14] In about May 2000 Romano informed Triscott that he believed that Prebble's insurer would not voluntarily meet its claim under its policies and that this would result in litigation.

[15] According to Romano, he stopped further work by various experts that had been retained by Prebble to prepare for litigation with its insurer until he - as director of Prebble and/or as guarantor of its obligations to Lex - "could resolve the matter with Lex Nominees and Triscott".

[16] Upon this application Romano says that he was aware that Lex had a charge over Prebble's assets and undertaking and could exercise its rights under that charge to conduct negotiations with and litigation against Prebble's insurer with respect to damage suffered by Prebble as the result of the fire on 14 February 2000.

[17] He says that he was "concerned that if Lex took possession of the insurance claim, the progress of that claim will come to an end because Lex would consider it too difficult or expensive to pursue." He said that he "therefore did not want to be in a position where I (and/or Prebble) reached a point of spending a large sum of money or devoting a considerable amount of time and energy in pursuing the insurance claim only to have Lex Nominees intervene and stop the progress of the claim."

[18] Although Romano was not cross-examined on his affidavit (para 25), I find this explanation for his and/or Prebble's decision to stop preparation of a claim against its insurer for the reasons stated, unpersuasive and indeed improbable. Although Romano suggests that the estimated costs for successfully (or perhaps unsuccessfully) pursuing Prebble's insurer for up to $7 M due under the policies dissuaded him from incurring further costs, I have difficulty in understanding why he would assume that if Prebble or he were preparing and pursuing a claim against Prebble's insurer, which would ultimately be for the benefit of Lex because it would put Prebble in funds more than adequate to satisfy its obligations to Lex under the bill facility, he should have had any fear that Lex would put receivers into the property for the purpose only of discontinuing any claim Prebble, at its own cost, was trying to enforce against the insurer - and particularly so since Lex had not incurred any expenses up to that time in preparing for litigation with the insurer.

[19] In paragraph 26 of his affidavit Romano says that - "From June to November/December 2000, negotiations took place between myself and Triscott with a view to formulating an agreed course of action in respect of the insurance claim and the Loan." There is no evidence as to the content of those negotiations although one might readily infer that they included the prospects of success of the pursuit of such a claim and by whom the legal costs should be borne.

[20] According to Romano, in or about June or July 2000 Triscott told him that he had informed the police and Prebble's insurer that it was Romano who had caused the fire damaging some of Prebble's structural improvements on the land. He swears that Triscott told him he had done this in order to put pressure on Prebble and Romano in respect of the loan.

[21] It emerges from the material that Triscott has denied that any such discussion took place. The improbability of Triscott who upon the evidence, seems to have had no personal knowledge of the cause of the fire, saying such a thing to either the police or the insurer when receipt by Prebble of its entitlement under the insurance policies it held with the insurer was almost certainly essential to permit Prebble to meet its obligations under the loan facility is striking. Triscott of course was a lawyer who must have been aware of the effect that such a communication with police officers or Prebble's insurer would have on that insurer meeting any prima facie obligations under the insurance policies. I find it difficult to imagine what conceivable benefit Lex would achieve by its director taking such a course when the lenders under his mortgage brokering scheme relied upon the security of the fire damaged property to recover $3.5 M advanced to Prebble only a few months earlier.

[22] There is no evidence however, that Triscott did not so inform police officers and Prebble's insurer to this effect. As a consequence of investigation by ASIC and presumably of complaints made by various lenders in his mortgage broking scheme, Triscott apparently was restrained from leaving the country shortly before liquidators were appointed to wind up Lex. Subsequently, it emerges from the material, Triscott suffered from severe depression in respect of which he was detained in hospital prior to this application and indeed was still so detained at the time of this application. It is the plaintiffs' case that he has denied emphatically this version of events by Romano and indeed, the plaintiffs' pleadings reflect this. However, there is no evidence from Triscott that has been led by the plaintiffs. Presumably, if there were a significant conflict of evidence on this issue or other issues between Romano and Triscott, an application of this sort would not be the occasion in which to resolve that conflict. Such conflict, if it related to a matter that would raise a triable issue in the action, would simply result in summary judgment being refused. Counsel for the plaintiffs concedes this to be the situation.

[23] However, the real factual matter raised by way of defence by Romano is an alleged conversation that took place between him and Triscott in November/December 2000, which "resulted in a concluded agreement being reached". Romano paraphrases the conversation leading to a "concluded agreement" in these terms -

(a) Romano told Triscott that his false statements to the police and QBE Mercantile Mutual had caused him substantial loss and that he was going to commence an action against Triscott and Lex to recover damages in respect of that loss.

(c) Romano told Triscott that he believed that he and Lex were liable and his statements (presumably to the police and to Prebble's insurer) "had inflamed the dispute".

(d) Triscott said that "we should deal with the issue of the insurance claim and its impact on the Loan."

(e) Romano told Triscott that the fire damage to "Kelly's Colonial Inn" was so substantial that Prebble had not been in a position to earn any income since the fire" (which had occurred about nine months previously).

(f) As a consequence Romano "told Triscott that Prebble was not in a position to fund the work required to progress the insurance claim against QBE Mercantile Mutual".

(g) Romano told Triscott that his solicitor had informed him that -

(i) It was difficult to estimate the costs of the anticipated litigation with Prebble's insurer;

(ii) However, if the matter was litigated to trial the costs would be substantial and not less than $300,000. This estimate was based on the necessity for extensive forensic accounting work to be undertaken, the retainer of counsel and fire experts.

(h) Romano says that he told Triscott that because Prebble and Romano were in dispute with Lex "the anticipated litigation against" Prebble's insurer had been placed in abeyance.

(i) Romano told Triscott that he considered this to be a disadvantage to Prebble, himself and to Lex. He said that he told Triscott that the only way that Lex could be protected and recover its money from Prebble was for the insurance claim to be progressed. He said that he told Triscott that otherwise everybody including Prebble, himself and Lex would suffer substantial losses. He said he told Triscott that if the insurance claim was successful then no loss would be suffered by Lex, Prebble or himself and that this was the only commercial solution available and that this would only occur if litigation was commenced.

(j) Romano asked Triscott if he or Lex were prepared to fund the work required to progress the insurance claim including litigation.

(k) Triscott said that neither he nor Lex was prepared to fund such litigation because of the substantial costs involved.

(l) Romano told Triscott that if the insurance claim were not pursued then Lex would suffer a substantial shortfall on its loan because neither Prebble nor Romano had sufficient funds to repay the loan.

(m) Triscott told Romano that he understood this but that Lex could not fund the insurance claim litigation because of the enormous costs involved.

(n) Romano told Triscott that it had always been his desire to rebuild "Kelly's Colonial Inn" which would have the effect of substantially improving the value of the property and thus restore Prebble's ability to borrow funds to pay out Lex or alternatively to refinance the loan with Lex.

(o) Romano told Triscott that neither he nor Prebble could do this unless Triscott and Lex "gave a commitment that they would not call up the loan or call up my Guarantee and that Prebble would not be required to pay the interest and fees up to the finalisation of the insurance claim". Otherwise, Romano could not afford to fund the insurance claim which was needed to avoid a substantial shortfall for Lex, Prebble and himself.

(p) Romano said that Triscott said that he could see the sense of what was being proposed and that he understood that if Lex enforced the securities against Prebble and him, then Lex would not recover anything except the value of the land and the motel building, and the fixtures and fittings in the motel. He said that Triscott acknowledged that the best way to avoid a loss by Lex was by pursuit of the insurance claim.

(q) Triscott then said that Lex agreed not to enforce the loan agreement, the securities and the guarantee and indemnity "until the finalisation of the insurance claim".

(r) Triscott then said that Prebble would not be required to pay interest for the period "up to finalisation of the insurance claim".

(i) had to pursue the insurance claim, by litigation if necessary, and meet the costs of doing so and that the proceeds of the insurance claim would be provided to Lex.

(ii) had to agree to release and discharge Lex and Triscott from any claims that Prebble may have against Lex and Triscott in respect of their conduct in their dealings with the police and Prebble's insurer and in particular alleged defamatory statements made against Prebble and Romano.

(t) Romano then informed Triscott that he and Prebble "agreed to these terms".

[24] Although Romano was not cross-examined on this affidavit and his evidence stands unchallenged, I find this version of events so factually improbable as to raise doubts whether it is designed merely to achieve a delay in the determination of this action.

[25] In paragraph 10(d) of his defence Romano admits that Prebble did not, on 5 November 2000, repay to Lex, $3.6 M. In para 10(c) Romano admits that Prebble has not, from 3 June 2000, paid interest to Lex. However, it is pleaded that by reason of the matters to which I have referred concerning the alleged agreement reached between Romano and Triscott and/or representations made by Romano to Triscott in November/December 2000, Prebble is not in default in failing pay the principal and interest in accord with the bill facility and that Romano as guarantor, at this stage is not obliged to pay anything under the guarantee executed in favour of Lex.

[26] It is pleaded that "it is unconscionable for the plaintiffs to depart from the representations made by the company (ie by Triscott) and they are estopped from doing so." In para 5(c) of the defence, the effect of the alleged "agreement" made between Romano and Triscott in November/December 2000 or in the alternative the alleged "representations" made by Triscott to Romano on that occasion, is pleaded in these terms -

(i) "the Company [ie Lex] agreed not to enforce the Loan Agreement, Securities and the Guarantee and Indemnity until the finalisation of the insurance claim;

(ii) Prebble would not be required to pay interest for the period up to finalisation of the insurance claim;

(iii) Prebble and [Romano] ...would pursue the insurance claim, by litigation if necessary, and meet the costs of doing so and the proceeds of the insurance claim would be provided to the Company."

[27] Para 6 of the defence then pleads that both Prebble and Romano borrowed some funds (although not to the extent of $300,000) and engaged experts to enable them to proceed with the insurance claim.

[28] It emerges however from the evidence generally, that neither Prebble nor Romano have or ever did have sufficient funds to proceed to litigation against Prebble's insurer. Indeed, the affidavit material suggests that monies spent "preparing for litigation" since the alleged "agreement" or "representations" in November/December 2000 do not exceed $12,000.

[29] In my view, the improbability of such an agreement as alleged being reached or representations being made as alleged by an experienced solicitor as director of a trustee company obliged to maintain the investment of the sum of $3.5 M, for the benefit of hundreds of beneficiaries for a period of 12 months with interest payable on that sum by Prebble at the rate of 14%, without making any contact with the beneficiaries, is such as to tempt rejection even if Romano's affidavit evidence be uncontradicted and untested by cross-examination. Such conduct on the part of Triscott would clearly amount to a breach of trust, which would almost certainly render him personally liable to the lender-beneficiaries of the trust fund for any damages they suffered as a consequence.

[30] The only reservation I have about summarily rejecting this version of events is that it is a matter of factual dispute which arguably at least, should be resolved upon a trial of this action rather than upon an application for summary judgment.

[31] In any event, in May 2001 the plaintiffs, as liquidators of and substituted trustees for Lex, exercised their powers as such to appoint receivers of the business of Prebble under the powers Lex was given by the security instruments Prebble gave it to secure Prebble's compliance with obligations imposed under the bill facility executed in October 1999.

[32] On 23 April 2001 the plaintiffs served a notice of default upon Prebble demanding payment of the monies it owed to Lex. Shortly after this service Romano requested the first plaintiff not to enforce the guarantee until Prebble had resolved its insurance claim. He made no mention of any agreement or representation made by Triscott in November/December 2000 as he now alleges.

[33] On 3 July 2001 the plaintiffs as liquidators of Lex and thus entitled to enforce the charge Lex held over Prebble's property, appointed an administrator of Prebble pursuant to s 436C of the Corporations Law.

[34] The administrator did not initially embark upon the institution of proceedings on behalf of Prebble against its insurer in respect of the loss it suffered in the fire of 14 February 2000. However, subsequently it appears that Prebble's administrator/liquidator (there being some dispute as to the effectiveness of steps taken at the creditor's meeting to put Prebble into liquidation) has taken steps to recover an indemnity against Prebble's insurer with respect to damage suffered in the fire. This action was commenced on 9 August 2001.

[35] On 28 September 2001 a meeting of Prebble's creditors was called, which led to a vote that Prebble be wound up and its administrator be appointed as liquidator.

[36] By defence filed 30 August 2001, Romano denied that he was "indebted to the plaintiff as alleged or at all". By an amended defence dated 24 September 2001, he admitted in essence all material allegations in the plaintiffs' statement of claim save that he raised the alleged agreement - representation by Triscott in November/December 2000 that Lex would not enforce Prebble's obligation under the loan facility or Romano's obligation under his guarantee "until the finalisation of the insurance claim" to be pursued by Prebble/Romano.

[37] This action against Romano on his guarantee of performance of Prebble's obligation, was commenced without the leave of the court required by s 440(J) of the Corporations Law.

[38] That is a matter which is raised upon this application and perhaps by implication in the defence delivered by Romano on 24 September 2001.

[39] It was on 28 September 2001 that Prebble went into liquidation. At least it is the case for the plaintiffs that Prebble went into liquidation on that date as a consequence of a creditor's meeting called by its administrators. It is contended for the defendant however, that the vote taken was not properly carried at that meeting. This is a matter which seems to be in dispute, although Romano has taken no steps under s 482 to stay or terminate the winding up. However in my view, it amounts to an effort to mount a very technical defence. It is similar to the complaint that leave to commence the action against Romano during the administration of the company was not obtained as required under s 440(J)(1) of the Corporations Law. Undoubtedly Prebble is currently insolvent and will remain so unless the action instituted by its administrator against its insurer succeeds. At the moment it is indebted to Lex in a sum exceeding $4.3 M.

[40] For the plaintiffs it is argued that this is a case in which leave can now be given ex post facto to commence the pending action in which this application is made. In my view, on the facts of this case, an order nunc pro tunc giving leave to the plaintiffs to institute the current proceedings against Romano would be appropriate. In this respect I refer to Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314. BBC Hardware v GT Homes Pty Ltd [1996] QSC 273; (1997) 15 ACLC 431 is authority for the proposition that accrual of interest on a mortgage debt to the disadvantage of all parties involved in this case constitutes a special circumstance which justifies the grant of leave to the plaintiffs to institutes proceedings against Prebble. A further special circumstance is the fact that the lenders of money to Lex include many retired persons who are suffering hardship as a consequence of the failure of Prebble and/or Romano for nearly eighteen months to meet their obligations under the loan facility and guarantee.

[41] Under R 87(7) of Queensland Law Society Rules 1987 relating to solicitors' contributory mortgagee schemes, Triscott was obliged to obtain the written authority of every lender of monies for use in his scheme to the effect of the form in Part A of the Schedule to those rules before any monies were provided to a borrower under his contributory mortgage scheme.

[42] Reference to that mortgage investment authority form indicates clearly that the term of the loan in months or years is specified, and as well the interest rate per annum payable and the periods in respect of which and when it is payable are specified. In my view, the content of this form indicates in clearest terms that Triscott would have been acting in gross breach of this duties as director controller of the Lex Trust Fund had he made the agreement and/or representations alleged by Romano. That does not mean of course, that he did not make such an agreement and/or representations. After all, he did fail to register the investment scheme as required by s 601ED(5) of the Corporations Law.

[43] Under UCPR R 292 the plaintiffs may recover judgment against Romano for all or part of their claim if they show "that -

(a) the defendant has no real prospect of successfully defending all or part of the plaintiff's claim; and

(b) there is no need for a trial of the claim or part of the claim".

[44] Under R 298, if an application of this kind is dismissed, a court may give direction and impose conditions about the future conduct of the proceedings.

[45] The onus is really on the plaintiffs in this case to show that there is no real question to be tried in spite of the issue raised in Romano's pleading. In this respect I refer to Australia and New Zealand Banking Group Ltd v Barry [1992] 2 Qd R 12. The plaintiffs' evidence, in my view on its face, is very strong. If the facts pleaded by Romano are established, then the legal consequences will be sufficiently arguable (although in my view only just sufficiently arguable) to warrant a determination upon trial rather than upon an application for summary judgment. The real question to be determined is whether the issue raised of promissory estoppel resulting from the alleged representations and/or the "agreement" not to proceed against Romano until "finalisation" of Prebble's insurance claim demonstrates a "real question" to be tried rather than merely raising matters in respect of which there is no real prospect of success with a view only to postponing judgment which ultimately is unavoidable.

[46] I incline to the view in this case, that in truth there is no "real question" to be tried as to Romano's liability to the plaintiffs and to the extent that there is any question it is only faintly arguable, and advanced principally in the defendant's pleading and upon this application to postpone a trial which almost certainly will result in judgment for the plaintiffs.

[47] However, courts must be careful not to deprive a defendant of the opportunity to canvass matters in defence of a plaintiff's claim merely on the ground that success is not likely because factual matters raised by a defendant seem highly improbable and unlikely to be established upon trial. Theoretically if Romano succeeds upon the factual issues he raises he may arguably, however slightly, have a defence to the otherwise admitted claim by the plaintiffs.

[48] Under UCPR R 298 I may give directions as to the future conduct of this action.

[49] The only issue raised by way of defence is within a very narrow compass. In my view, having regard to the state of the pleadings the onus will be on Romano to establish the only issue upon which he relies to avoid judgment. If he fails to succeed upon that issue then there is no dispute that the plaintiff will recover against the defendant judgment for the whole of the indebtedness of Prebble to Lex, which will include all monies advanced less monies paid by Prebble together with interest thereon. There is no real dispute between the parties, in my view, as to the quantum of the amount for which the defendant will be liable if he does not succeed upon the only issue he raises essentially by way of confession and avoidance (or perhaps more accurately postponement).

[50] Upon the evidence there seems little prospect of Romano in the foreseeable future, obtaining enough money to pursue any rights which Prebble may have against its insurer in respect of loss and damage it suffered as a result of the fire that occurred more than 18 months ago. At the moment, neither Prebble nor Romano has any right to take such proceedings. Only the plaintiffs as receivers of Prebble appointed by Lex have such a right. It was not suggested on behalf of Romano how any person other than a receiver appointed by Lex as Prebble's debenture holder could lawfully institute proceedings against Prebble's insurer to enforce its rights under the Insurance policy. I have no reason to doubt that to the extent that Prebble's claim to an indemnity under its policies is maintainable, the plaintiffs will take all reasonable steps to recover under those policies because, of course, such recovery would mean that Lex would in effect recover the whole of the monies advanced to Prebble together with interest thereon, rather than only about one quarter of that sum or perhaps less if the assets (apart from its insurance claim), the subject of the debenture are sold for their current market value.

[51] Although I have significant reservations for the reasons I have outlined about whether Romano does have any real prospect of success in maintaining the only defence he has raised to the plaintiffs' claim, I think the preferable course to adopt is to ensure that the only matter raised on the pleadings by way of defence is determined as soon as possible so that further loss and hardship suffered by the lenders to Triscott's contributory mortgage scheme may be alleviated as soon as possible.

[52] I give leave to the plaintiffs to commence this action nunc pro tunc and to bring this application for judgment.

[53] I dismiss the plaintiffs' application for judgment. I direct that the only issues on the pleadings raised in Romano's defence be determined upon trial forthwith. Those issues are pleaded in paras 5(e), 6 and 7 of the amended defence and counterclaim filed 25 September 2001 and in para 4 of the plaintiffs' reply filed 6 November 2001.

[54] I direct that disclosure of documents relevant to the issues joined in the paragraphs of the pleadings to which I have referred be made within fourteen days.

[55] I direct that those matters in issue upon the pleadings be set down for trial forthwith.

[57] I reserve the costs of this application to the trial judge.