Quadrant Constructions Pty Ltd v HSBC Bank Australia Ltd, in the matter of Quadrant Constructions Pty Ltd

REASONS FOR JUDGMENT 1 The Companies Act 1862 (UK) 25 & 26 Vic c89, gave a creditor who could not get paid the right to present a petition to have the debtor company wound up on the ground of insolvency. Proof of insolvency could be established by the company's failure to comply with a so-called "statutory notice". Not long afterwards the courts laid down the rule that a winding up proceeding should not be used to recover a disputed debt: Re Catholic Publishing and Bookselling Co (1864) 2 DJ & S 116; 46 ER 319; In re Gold Hill Mines (1882) 23 Ch D 210. The proper course was to bring an action for the debt: New Travellers' Chambers Ltd v Cheese and Green (1894) 70 LT 271. If in breach of the rule a petition was presented it would be either stood over or dismissed to prevent an abuse of the court's process (Cercle Restaurant Castiglione Co v Lavery (1881) 18 Ch D 555; In re Rhodesian Properties Ltd [1901] WN 130) except in special circumstances such as where the creditor was without remedy if denied the right to proceed and where no other creditors of the company were prejudiced: In re Russian and English Bank [1932] 1 Ch 663. If a petition was threatened its presentation could be enjoined to prevent an abuse of process: Cadiz Waterworks Co v Barnett (1874) LR 19 Eq 182. 2 All this was well-known by the end of the 19th century. Of course, there were occasions when the rule was ignored. Sometimes a person claiming to be a creditor would present a petition, or threaten to do so, to put pressure on the company to acknowledge a debt or compromise a claim. But, as the law reports indicate, the occasions on which this occurred were few. 3 In 1988 the Law Reform Commission published its Report No. 45 (the so-called "Harmer Report", named after the Commissioner-in-charge, Mr R W Harmer) entitled "General Insolvency Inquiry" following its review of the law and practice relating to insolvency. One matter considered by the Commission was the winding up of insolvent companies. The Commission recommended that there be no change to the procedure of using a statutory notice to prove insolvency: Harmer Report, vol 1, at par [141]. Despite opposition from a number of representative bodies, the Commission also recommended a legislative change to allow a company to apply to set aside a statutory notice before the time for its compliance had expired: Harmer Report, vol 1, at par [149]. The reason given was that the "procedure in relation to notices of demand too often produces disputes about the debt at the hearing of a winding up application": Harmer Report, vol 1, at par [148]. 4 According to the new provisions (enacted as Divisions 2 and 3 of Part 5.4 of the Corporations Law and now to be found in the same divisions in the current legislation) a statutory demand (as it is now called) can be set aside in the case of a genuinely disputed debt, where there is an "offsetting claim" (defined to include a counterclaim and cross demand) which can be set-off against an admitted debt, if the demand itself is defective or for some other good reason. All a company has to show in respect of the first two grounds is a bona fide dispute about the debt or the existence of an offsetting claim. While the nature of the dispute must be exposed the court will not deal with the merits. That is, nothing of substance is decided. 5 The legislation had an immediate effect. Winding up applications were no longer founded on disputed debts. In this regard the legislation achieved its object. It got rid of the handful of cases which transgressed the old rule. On the other hand, the legislation has had (so it seems to me) an unintended effect. The law reports are now replete with applications to have statutory demands set aside. The cases are not confined to deciding whether there is a genuinely disputed debt or an offsetting claim. They raise all manner of procedural arguments, ranging from disputes about the form of the demand, the description of the debt, the service of multiple statutory demands, how the demand must be signed, the manner in which it must be served and the correct address for service, to complaints about the absence of or deficiencies in the requisite accompanying affidavit. The costs expended on these disputes must be enormous. The disputes certainly take up an inordinate amount of court time. The corresponding advantage over the old rule seems negligible or non-existent. It brings to mind the slaying of the Hydra. Perhaps the time has come for Parliament to reconsider the wisdom of the changes. 6 The present case comes up way of an application under s 35A(5) of the Federal Court of Australia Act 1976 (Cth) and r 16.1(2) of the Federal Court (Corporations) Rules 2000 to review the decision of a Registrar. The application is to set aside a statutory demand by which the defendant bank demands payment of $669,864.21. The affidavit accompanying the demand explains that the debt represents the balance outstanding "pursuant to certain financial accommodation provided by the [bank] to the [plaintiff]." The financial accommodation took the form of a facility for $800,000. The plaintiff concedes that $669,864.21 is due under the facility. But, it says that arguably it is not required to repay that sum for reasons which require some understanding of the background facts. 7 The plaintiff traded in the share market through its broker Thonemann Robertson Thompson Pty Ltd. In 1995 the broker suggested the plaintiff begin trading in options on the ASX Options Market. The plaintiff followed the broker's advice. The next year the plaintiff obtained the facility to purchase shares. It then deposited those shares with Options Clearing House Pty Ltd (OCH), a subsidiary of the Australian Stock Exchange Ltd, to be used as collateral to cover the plaintiff's margin obligations in its options trading. 8 A letter of offer dated 12 June 1997 records the terms upon which the facility was provided. The letter of offer states that the facility would not be made available until the plaintiff provided satisfactory evidence of title to "[s]hares to a minimum value of AUD1,600,000". The letter of offer required the plaintiff to provide security for the facility by way of: (1) a "Charge Over Securities", the "Securities" being share holdings "held only by Thonemann Robertson Thompson Pty Ltd with a minimum value at all times of twice the Facility Limit"; and (2) a "Commercial Bill Power of Attorney". The letter also provided that if the value of the share portfolio fell below the minimum value, the bank was entitled to do any or all of the following: (1) reduce the "Facility Limit"; (2) request the plaintiff "to deposit sufficient funds, or additional security acceptable to the [b]ank; (3) "sell the share holding in accordance with the terms of the Charge Over Securities"; (4) require a "[d]etailed signed Statement of Financial Position (to be provided annually)"; and (5) require the "[p]rovision of Balance Sheet and Profit and Loss Statements for [the plaintiff]…on an annual basis". 9 The plaintiff executed a "Charge Over Securities" on 16 June 1997. By cl 2.01 the plaintiff "charg[ed] to the Bank, by way of the first fixed charge, all the right [sic], title and interest of the [plaintiff] in and to the Securities as a continuing security for the obligations of the [plaintiff] in respect of the Secured Moneys". The "Secured Moneys" were defined to include the $800,000 facility. The "Securities" were defined to mean, among other securities, "all equity and debt instruments and other instruments commonly known as securities owned by the [plaintiff] which, at any time and for any reason, are in the possession or control of the Bank, an [sic] nominee of the Bank or a Depositary". According to the Schedule the "Depositary" was the broker. 10 It should be noted that neither the letter of offer nor the Charge Over Securities contained a mechanism by which the bank would be informed of the value of the securities held by the plaintiff. This was remedied by an undertaking given by the broker by letter mistakenly dated 9 December 1995 but written on 9 December 1996. According to the letter the broker undertook "to maintain a cover of AUD1,600,000 at all times and [to] inform [the bank] immediately if such ratio [was] breached." 11 The plaintiff traded in options until mid 2003. It proved to be a disastrous venture. In short order, the plaintiff lost approximately $3 million. The shares lodged with the OCH as security were sold to meet the losses. Now the plaintiff has only $20,000 worth of shares left. 12 Mr Francis, a stockbroker, has examined the plaintiff's options trading. He was surprised about the volume and frequency of the transactions. He said the volume was appropriate for an institutional investor but not for a retail investor. He said "it was almost inevitable that the portfolio was going to make a substantial loss or wors[e] be totally wiped out." Mr Francis laid the blame at the feet of the broker. He was of opinion that the broker adopted a "purely speculative" and dangerous trading strategy. Whether his opinion is correct must be left for another day. The immediate question is whether the bank should be allowed to proceed on its statutory demand. 13 This brings me to the first ground upon which the plaintiff relies to set aside the statutory demand. Mr Walker is the plaintiff's sole director and probably its principal shareholder. Mr Walker said that when the plaintiff obtained the facility from the bank the broker told him it was obligated to inform the bank if the market value of the plaintiff's share portfolio fell below $1.6 million. He said he was also told that the broker was required to send monthly reports to the bank advising it of the market value of the plaintiff's shares. 14 Mr Walker claims that until mid 2003 he had not been informed that the value of the plaintiff's shares had fallen below $1.6 million. I will not go behind this statement for the purposes of this application, though I doubt its accuracy. The plaintiff is a trading concern. It is required to lodge annual income tax returns and prepare annual accounts. The accounts and returns (which Mr Walker must have seen) would have disclosed the plaintiff's losses. Moreover, well before July 2003, the bank required the plaintiff to reduce the facility by approximately $200,000. Surely at that time Mr Walker would have discovered that the shares were losing value. 15 At any rate Mr Walker says that, in view of the broker's reporting requirements, he "always assumed and believed that [he] would be told by the [bank]…if the market value of the plaintiff's share portfolio dipped below the $1.6 million trigger and that the market value of the shares owned by the plaintiff was sufficient to enable the [bank] to be repaid from the proceeds of sale of those shares, if need be". It follows, so the argument went, that "the defendant is estopped from claiming any sum or any more than the value of the shares at the date of the demand 18 June 2003, about $20,000.00". 16 As I have been at pains to point out, all the plaintiff must show in this type of proceeding is that there is a genuine dispute about the recoverability of the debt. It is clear to my mind that the plaintiff cannot surmount even this relatively low hurdle as regards the alleged estoppel. 17 The plaintiff's case seems to be that that there is an estoppel by convention. This type of estoppel is founded "on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying": Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, 244; Spencer Bower, Estoppel by Representation (4th ed), 2004 at 180. As the High Court pointed out there will be no estoppel by convention "unless it can be shown that the alleged assumption has in fact been adopted by the parties as the conventional basis of their relationship": Con-Stan (supra) at 244. And here there is not the slightest suggestion that the bank laboured under the assumption which Mr Walker says he adopted. 18 There is, in any event, another problem which the plaintiff cannot overcome. Traditionally, an estoppel by convention required the assumed state of affairs to be an assumed state of fact: Grear v Kettle [1938] AC 156, 170; Con-Stan (supra) at 244-245; Caboche v Ramsay (1993) 119 ALR 215, 239. The plaintiff does not rely upon an assumed state of fact but on an assumed promise. The traditional view may have been overtaken: see for example Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Foran v Wight (1989) 168 CLR 385; Commonwealth v Verwayen (1990) 170 CLR 394; Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70; Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2003] NSWSC 851. Now it may be that estoppel by convention is not confined to an assumed state of fact and could extend to an assumed promise. But even if there can be a common assumption concerning a promise, the bank was under no such assumption. 19 The plaintiff also suggested that it might be saved by an estoppel by representation. Such an argument does not get off the ground. In the first place it is firmly established that to found a valid estoppel by representation, the representation must be clear and unambiguous. In Low v Bouverie [1891] 3 Ch 82, 106 Bowen LJ said: "Now, an estoppel, that is to say, the language upon which the estoppel is founded, must be precise and unambiguous. That does not necessarily mean that the language must be such that it cannot possibly be open to different constructions, but that it must be such as will be reasonably understood in a particular sense by the person to whom it is addressed." See also Woodhouse A.C. Israel Cocoa Ltd S.A. v Nigerian Produce Marketing Co Ltd [1972] AC 741, 756. There is nothing that can be attributed to the bank which amounts to a clear statement that it would inform the plaintiff if the value of its shares fell below $1.6 million. To the contrary, it would have been obvious to the plaintiff that the reason for the broker's undertaking to furnish the bank with periodic reports about the value of the shares was simply to enable the bank to decide whether, in the event the value of the shares fell below $1.6 million, it should take any of the steps it was entitled to take under the letter of offer. 20 In the second place there must be an intention, actual or presumed, on the part of the representor to induce the representee to act upon the representation. This requirement has been stated in many cases. For example in Waltons Stores v Maher (supra) at 413 Brennan J said: "The nature of an estoppel in pais is well established in this country. A party who induces another to make an assumption that a state of affairs exists, knowing or intending the other to act on that assumption, is estopped from asserting the existence of a different state of affairs as the foundation of their respective rights and liabilities if the other has acted in reliance on the assumption and would suffer detriment if the assumption were not adhered to." In support of this proposition Brennan J referred to a number of decisions including those of Dixon J in Thompson v Palmer (1933) 49 CLR 507, 547 and Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641, 674-676. Here there is no evidence that the bank intended the plaintiff to act on the basis that the bank would take responsibility for providing the plaintiff with advice about its share and options trading activities. And I refuse to make the assumption that it had that intention. 21 The second basis on which the plaintiff resists liability for the debt is an alleged breach of contract by the bank said to give rise to a set-off. Clause 8.01 of the Charge of Securities provides: "The Bank shall not be liable to the [plaintiff] for any act, delay or failure to act, on the part of the Bank, in respect of the Securities unless due to the negligence or wilful default of the Bank, or its nominees or any of their respective officers of employees." The plaintiff says that by this provision the parties agreed that the bank would be liable to the plaintiff for any act, delay or failure to act on the bank's part, in respect of the "Securities" and due to the "negligence or wilful default" of the bank. 22 This argument must be rejected. The only function of cl 8.01 is to place a limitation upon the bank's contractual liability (if any) under the Charge Of Securities. It does not impose a positive obligation. 23 Clause 8.01 does, however, contemplate that the bank may, in an appropriate case, be liable to the plaintiff for "negligence or wilful default" (whatever "wilful default" may mean in this context). The plaintiff says that it does have an arguable case in negligence against the bank which it puts in the following way. First, the bank knew that it advanced $800,000 to the plaintiff to enable it to purchase shares to be used as collateral for options trading. (The evidence does not go so far but, for present purposes, I will assume that the allegation could be established). Second, the options trading involved was extremely high risk. (Again, I will assume that the bank knew this to be so, although there is no evidence to suggest that it did). Third, in acknowledgment of the risk involved, the bank required monthly reports which set out the value of the plaintiff's share portfolio. It also sought an undertaking from the broker that the broker would inform it if the value of the portfolio dropped below $1.6 million. The plaintiff says that, on the basis of these "facts", the bank's alleged negligence can be "characterised" in two ways. First, it negligently permitted the securities to diminish in value from over $3 million to about $20,000. Second, it negligently failed to notify the plaintiff that the value of its securities had fallen below the $1.6 million threshold. 24 In my opinion, the claim in negligence is nigh on hopeless. First, it proceeds upon the false premise that the bank permitted the securities to diminish in value. In fact the securities were put up as collateral and they "diminished" in value as and when they were sold to cover the plaintiff's options trading losses. There is no causal link between any (allegedly negligent) act of the bank and the sale of the securities. The true cause of the diminution of the share portfolio is the plaintiff's imprudent trading activities. There is, in any event, a further flaw in the plaintiff's reasoning. In my view the bank was under no duty to prevent the plaintiff from engaging in high risk trading in the options market. The manner in which the plaintiff traded in that market was determined by the plaintiff and its broker. Their decisions were simply not the bank's concern. Moreover, the substance of the plaintiff's complaint is that the bank failed to pass on information which the bank had received from the plaintiff's own broker. I do not understand how it could be said that a reasonably prudent banker would pass on to its customer information provided to the banker by the customer's broker. That is especially so in this case where the bank had no way of knowing that the customer was not privy to that information. It is all the more so when the reason for the bank's request for information from the broker was to protect its own security. 25 The plaintiff's final claim by way of set-off is that the bank was under an equitable duty not to sacrifice or impair, or allow to be lost or diminished, the value of the shares which stood as security for the facility. It may be accepted that such an obligation is imposed upon a mortgagee in possession: Fisher and Lightwood's Law of Mortgage (10th ed), 1988, 370-371. It will be imposed in such a situation because only then is the mortgagee in a position where it might sacrifice or impair the security or allow it to be lost or diminished. Here, of course, the bank was never in possession of the shares. The reason it was not in possession of shares is that the plaintiff had lodged its shares with OCH. So it did not fall under the alleged duty. In any event, no conduct of the bank caused the loss of the securities. The plaintiff put up the shares as collateral and they were sold to cover the losses on the options trading. As I said in connection with the negligence claim, there was nothing that the bank could or was required to do to stop that taking place. 26 It follows that the plaintiff's motion be dismissed with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.