Rocklea Spinning Mills Pty Ltd v Bonds Industries Pty Ltd

By an agreement between Rocklea and Bonds, Rocklea and Bonds agreed that Rocklea would record in its books, and invoice to Bonds each month as receivables, a claim for a potential shortfall owing under the Supply Agreement, although those amounts were not then receivables and may never have become payable.

In accordance with the agreement pleaded in paragraph 16, between May 2003 and October 2003, Rocklea generated the following false invoices, and issued statements of indebtedness to Bonds which listed the false invoices (False Invoices):

Date Transaction Reference Original Amount Unpaid Balance (a) 22 May 2003 Invoice 265229 143,908.00 143,908.00 (b) 30 June 2003 Invoice 265397 173,964.00 173,964.00 (c) 3 July 2003 Invoice 265406 216,380.00 216,380.00 (d) 21 August 2003 Invoice 265573 252,962.00 252,962.00 (e) 12 September 2003 Invoice 265675 289,742.00 289,742.00 (f) 17 October 2003 Invoice 265829 331,706.00 331,706.00

From the period June 2003 to October 2003, in accordance with the agreement pleaded in paragraph 16. Rocklea reversed each of the False Invoices and replaced it with a False Invoice for a larger amount reflecting the forecast Shortfall then potentially owing under the Supply Agreement, and issued a statement to Bonds showing the reversed False Invoice and the replacement False Invoice.

A copy of the statements issued by Rocklea to Bonds evincing the reversal is available for inspection at the offices of the Applicants' solicitors by appointment during normal business hours.

In accordance with the agreement pleaded in paragraph 16 or otherwise, in each of the months June 2003 to October 2003, Bonds issued a false remittance advice purporting to pay all receivables then due and payable and claim all credits to which it was entitled (False Remittance Advice). The False Remittance Advices excluded payment for the False Invoices, and did not claim a credit for the False Invoices.

By the issue and acceptance of the False Invoices and the False Remittance Advices, Rocklea and Bonds were able to raise a false account as between themselves (False Account).

The conduct engaged in by Rocklea and Bonds, pleaded in paragraphs 16 to 20, was false and misleading or likely to be false and misleading within the meaning of:

(b) S 12 DA of the Australian Securities and Investments Commission Act.

in that a False Account was created between Rocklea and Bonds.

(a) Bonds knew that the agreement pleaded in paragraph 16 and the conduct pleaded in paragraphs 17 to 19 would give rise to the False Account.

By reason of the matters pleaded in paragraphs 16 to 20 and 22 Bonds:

(a) Aided or abetted a contravention of S 52 of the Trade Practices Act within the meaning of S 75B(a) of the Act; and / or

(b) Was knowingly concerned in or a party to a contravention of S 52 within the meaning of S 75B(c) of the Act."

14 The effect of the misleading conduct on GE is pleaded in [24] to [33]. The essence of the pleading is that GE, which agreed to provide debt financing or factoring to Rocklea under a Facility Agreement, relied upon the alleged false account as conveyed in drawdown requests and certificates of debtors submitted to the respondent by Rocklea. That is to say, the respondent is alleged to have made advances, which were not eligible advances under the Facility Agreement, in reliance upon Rocklea's requests which were based upon the so-called false account. 15 A number of attacks are made on this part of the pleading. One is that GE is not and could not be said to have relied on any representation made by the respondent. This is because the drawdown requests and certificates were delivered by Rocklea to GE. They were not delivered by the respondent. 16 Paragraphs 24 - 33 are as follows:-

By an express written agreement dated 30 June 2000 between Rocklea and GE, GE agreed to provide finance to Rocklea (Facility Agreement).

The Facility Agreement is wholly in writing. A copy of the Facility Agreement is available for inspection at the offices of the Applicants' solicitors by appointment during normal business hours.

It was an express written term of the Facility Agreement that advances were limited to 85% of eligible accounts of Rocklea and 60% of inventory (less reserves), as those terms are defined in the Facility Agreement.

Under the terms of the Facility Agreement, eligible accounts were accounts of Rocklea which GE in its reasonable judgment determined to be eligible accounts excluding the following accounts:

(a) An account which the right to receive payment was not absolute or was contingent;

(b) An account that was not a true and correct statement of bona fide indebtedness incurred in the amount of the accounts for goods sold and accepted by the applicable account debtor;.

(c) An account with respect to which an invoice had not been sent to the applicable account debtor; and

(d)An account that is not paid within 30 days of the due date for those debts which were payable 90 days after the invoice date and that is not paid within 60 days after the due date for all other debts;

On 30 September 2003, Rocklea submitted to GE a certificate (September BBC) attaching Rocklea's debtors ledger, showing that Bonds was indebted to Rocklea in the sum of $640,395.25.

The September BBC included an amount of $289,742.00 as an eligible account (as defined in the Facility Agreement).

The amount of $289,742.00 was included as an eligible account because of the conduct pleaded in paragraphs 16 to 20.

In the period 1 October 2003 to 20 October 2003, Rocklea submitted to GE various drawdown requests (October Drawdown Requests), which purported to certify to GE the eligible accounts (as defined in the Facility Agreement):

PARTICULARS Date: id: 1 October 2003 g746 g 2 October 2003 g 747 3 October 2003 g 748 6 October 2003 g 749 7 October 2003 g 750 8 October 2003 g 751 9 October 2003 g 752 10 October 2003 g 753 13 October 2003 g 754 14 October 2003 g 755 15 October 2003 g 756 16 October 2003 g 757 17 October 2003 g 758 20 October 2003 g 759

The October Drawdown Requests included an amount of $331,706.00 as an eligible account (as defined in the Facility Agreement).

The amount of $331,706.00 was included as an eligible account because of the conduct pleaded in paragraphs 16 to 20.

GE relied on the False Accounts as conveyed in the September BBC and the October Drawdown Requests to make the advances to Rocklea under the Facility Agreement:

PARTICULARS OF ADVANCES Date: Amount: 1 October 2003 $0.00 2 October 2003 $43,000.00 3 October 2003 $219,000.00 6 October 2003 $0.00 7 October 2003 $103,000.00 8 October 2003 $93,000.00 9 October 2003 $426,000.00 10 October 2003 $104,000.00 13 October 2003 $235,000.00 14 October 2003 $100,000.00 15 October 2003 $0.00 16 October 2003 $0.00 17 October 2003 $144,000.00 20 October 2003 $248,000.00

17 The claims against Mr Gordon and Mr Lomax are pleaded in [37] to [41]. They were, respectively, at various times the CFO of Rocklea. Each is said to have had knowledge that the drawdown requests included the so called false account. 18 Paragraphs 38 to 41 are as follows:-

"Misleading and Deceptive Conduct - Lomax and Gordan

38. Lomax and Gordon signed; and / or authorized: and or submitted to GE the September BBC and the October Drawdown Requests, which included the False Accounts.

39. Lomax and Gordon intended to sign and have sent to GE the September BBC and the October Drawdown Requests, which included the False Accounts.

40. Lomax and Gordon knew the September BBC and the October Drawdown Request included the False Accounts as eligible accounts when they were in fact not eligible accounts, under the Facility Agreement.

41. By reason of the matters pleaded in paragraphs 37 to 40:

(a) Lomax and Gordon were persons involved in a contravention of S 52 of the Trade Practices Act within the meaning of S 75B(a) and (c); and

(b) Lomax and Gordon engaged in misleading and deceptive conduct within the meaning of S 9 of the Fair Trading Act 1999 (VIC)."

19 Paragraphs 45 and 46 plead clams for relief. In paragraph 45, Rocklea claims the sum of $613,128 for the shortfall. 20 Paragraph 46 is as follows:-

"46. The Second Applicant claims against the Respondents:

(a) Damages in the sum of $331,706.00 pursuant to S 82 of the Trade Practices Act or S 12GF of the Australian Securities and Investments Commission Act as against Bonds.

(b) Damages in the sum of $331,706.00 pursuant to S 82 of the Trade Practices Act of S 159 of the Fair Trading Act 1999 (Vic) as against Lomax and Gordon.

21 Paragraph 16 is the linchpin on which the pleading of the false account is based. However, it seems to me that this paragraph is fundamentally flawed for the reasons given by Mr Dick. First, it is a pleading of a very serious allegation, which is effectively a pleading of fraud. The authorities make it clear that it is not necessary for a pleading to actually use the word fraud, for it to be so regarded. The allegation in this paragraph is entirely devoid of any particulars as required by O 12 r 2. Whether the agreement was express or implied, who made it, and the other ordinary particulars are entirely lacking. 22 The paragraph pleads what apparently amounts to a side agreement which would have had the effect that the parties were not adhering to the terms of the supply agreement which required the potential shortfall to be determined only after the end of the contract year. This is not stated in [16] but it is implicit in what is said. Nevertheless, what is meant is unclear because the paragraph uses the words "although those amounts were not then receivables and may never have become payable." Precisely what the parties had agreed to do and who on their behalf had agreed to do it is not stated. 23 There are numerous authorities on the need to clearly and properly plead and particularise a claim of fraud; see eg Banque Commerciale SA, En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279. 24 Even if the pleading is not a claim of fraud, as is apparently said by Mr Coles QC, counsel for the applicant, it is nevertheless a very serious allegation which is not supported by any particulars. Nor was any evidence tendered to support this allegation. 25 I gave an opportunity for counsel the on 8 September 2004 to adduce evidence in support of the pleading. However, this opportunity was not taken up and counsel for the applicant indicated that he was happy to proceed on that day without seeking to adduce any evidence in support of the allegations made in the application for leave to amend. 26 In the course of argument on 8 September 2004, counsel said that he understood that there was a notation of the meeting but no evidence was filed. Nor was any evidence led when the matter came before me again this morning. It seems to me that even if I am wrong in what I have said about the pleading being one of fraud, it is open to me in the exercise of my discretion to refuse leave to amend to make the serious allegation contained in [16] in the absence not only of particulars but of any evidence to support the making of the allegation. In any event it seems to me that [16] is an embarrassing pleading and for that reason alone it is sufficient for me to refuse to permit the applicants to plead the claim in this way. 27 It follows that the cornerstone of the pleading of misleading and deceptive conduct and indeed of knowing involvement must fall with [16], but there are numerous other defects in the first part of the claim which I will refer to below. 28 Paragraph 17 pleads that pursuant to the fraudulent agreement, Rocklea generated false invoices and issued statements of indebtedness. It is not clear from this paragraph that the invoices were actually issued to the respondent. 29 The paragraph draws a distinction between generating false invoices and issuing statements of indebtedness, thus there is no pleading of the communication of the false invoices to the respondent. Paragraph 17 must be read with [18] but the result is that both paragraphs would be liable to be struck out as embarrassing. 30 What is alleged in [18] is that Rocklea reversed each of the false invoices as defined in [17] and replaced them with other false invoices for different amounts. However, it is not possible to tell from [18] what invoices have been replaced with what other ones. Nor is it possible to determine whether the statement which is said to have been issued to the respondent is the one referred to in [17] or some different statement. 31 Paragraph 19 contains a serious logical flaw. It pleads that the respondent issued false remittance advices but those invoices are said to have excluded payment for the false invoices. The "false" remittance advices would therefore appear not to have been false. Alternatively, if it is said they were false, the paragraph does not plead how it is that fraudulent remittance advices were issued. 32 Paragraph 20 pleads the false account. It is a combination of what are said to be false invoices and the so-called false remittance advices. But the so-called false remittance advices were not, on the face of the pleading, false documents. Nothing in [16] to [19] gives rise to a proper basis for the pleading in [20] of a false account. 33 However the pleading of a false account underlies the whole of the TPA claims. There is therefore no basis laid out in the pleading for the claim in [21(a)] that the conduct engaged in by Rocklea and the respondent was misleading within s 52 of the TPA. 34 Nor, for the same reason, is there any basis for the pleading of contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). 35 Furthermore, the pleading of misleading and deceptive conduct is really an allegation that Rocklea and the respondent engaged between themselves in such conduct. In order to give rise to any cause of action it would ordinarily be necessary to allege that a third party relied on the conduct. I will refer later to Mr Coles' submission that all that need be pleaded is causation. If it is alleged, as is sought to be done in the pleading, that the respondent was knowingly involved in misleading conduct of Rocklea, knowledge of the essential ingredients must be properly pleaded in accordance with Yorke v Lucas. 36 Paragraph 22 pleads knowledge of intention on the part of the respondent but the paragraph is devoid of any particularity. 37 Paragraph 23 attempts to build on inadequately pleaded material in the earlier paragraphs to make an allegation of aiding and abetting and knowing involvement under s 75B of the TPA. 38 Mr Coles submitted that this is sufficient. However, quite apart from the absence of particularity, it is my opinion that it is not. This is because even if there was knowledge of an agreement to create a false account, that of itself is insufficient. The claim is for damages under s 82 of the TPA. In order to satisfy the requirements stated in Yorke v Lucas, it would be necessary for the applicants to allege that the respondent knew that the false account would be relied upon by a third party, namely GE. This was not alleged. 39 As I have said earlier, [24] to [33] plead the effect of what is said to be misleading conduct on GE. However, there is no allegation that the respondent itself submitted any misleading material to GE. The so-called September BBC and the October drawdown requests are expressly alleged in [27], [30] and [33] to have been conveyed by Rocklea to GE. 40 The allegation in [33] of reliance on the false accounts is an allegation that GE relied on those accounts "as conveyed in the September BBC and the October Drawdown Requests." That is to say, GE is said to have relied on documents submitted by Rocklea, not the respondent. 41 Mr Coles submitted that it is not necessary for an applicant to prove that it relied upon the misleading conduct. He drew attention to the decision of Lockhart J in Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 in particular at pages 529-530. The relevant passage was referred to with approval by Gummow J in Marks v GIO (1996) 196 CLR 494 at [101]. I will set the paragraph out in full. "In Janssen-Cilag Pty Limited v Pfizer Pty Limited, Lockhart J said: 'Section 82 is the vehicle for the recovery of loss or damage for multifarious forms of contravention of the provisions of Pts IV and V of the [TP] Act. It is important that rules laid down by the courts to govern entitlement to damages under s 82 are not unduly rigid, since the ambit of activities that may cause contravention of the diverse provisions of Pts IV and V is large and the circumstances in which damage therefrom may arise will vary considerably from case to case. What emerges from an analysis of the cases (and there are many of them) is that they do not impose some general requirement that damage can be recovered only where the applicant himself relies upon the conduct of the respondent constituting the contravention of the relevant provision. Also, a perusal of the provisions of Pts IV and V, the contravention of which gives rise to an entitlement to an applicant for compensation for loss or damage, points to the conclusion that applicants may claim compensation when the contravener's conduct caused other persons to act in a way that led to loss or damage to the applicant. 42 Mr Coles also drew attention to the language of section 82 of the TPA, in particular to the words "by conduct". This, of course, was considered by the High Court in Wardley Australia Limited v Western Australia (1992) 175 CLR 514 at 525 (per Mason CJ, Dawson, Gaudron and McHugh JJ). 43 However, the short answer to Mr Coles' submissions is that the pleading is not drawn in the way in which Mr Coles has put the case. 44 Paragraph 33 expressly pleads reliance. It is the cornerstone of, and the link to, the claim for damages under s 82. But there is no linkage between the false account and the documents which were apparently sent to GE by Rocklea with the conduct of the respondent. As I have already said, there is no pleading of knowledge by the respondent that Rocklea would submit false information to GE. 45 If it is to be alleged, as seems implicit in the pleading, that the respondent was aware that Rocklea intended to obtain advances from GE on debts that were not eligible accounts under the Facility Agreement, that is not stated anywhere in the pleading. 46 Indeed, the pleading does not even allege that the respondent had knowledge of the Facility Agreement to which, of course, the respondent was not a party. 47 It seems to me, therefore, that the whole of [24] to [33] are flawed and cannot stand. The pleading of knowing involvement by Mr Gordon and Mr Lomax in [38] to [41] must therefore fall with it. 48 Accordingly, the claims for damages under s 82 of the TPA pleaded in [46] of the pleading do not have any basis in what is alleged in the statement of claim. 49 I therefore propose to refuse leave to amend. However, an issue arose as to whether I ought to grant the applicants leave to re-plead the claim. Mr Dick pointed to the fact that issues such as those which are central to today's argument were touched upon at the first directions hearing on 17 June 2004. He also pointed to the fact that the applicants have not sought to adduce any evidence or indeed any particulars to support the serious allegations made in the statement of claim despite ample opportunity to do so. 50 Nevertheless, it does seem to me that I ought to give the applicants one further opportunity to try to plead the case, if indeed there is one. I am mindful of what the High Court said in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 that a claim should not be struck out unless it is absolutely hopeless; see especially 129-130 per Barwick CJ. Whilst it seems to me that the present pleading is hopeless for the reasons that I have mentioned, it may, notwithstanding the history of the proceeding, be possible for the applicants to plead an arguable case. 51 It seems to me, therefore, that I ought to make leave conditional upon the applicants filing and serving with any proposed amended statement of claim, all of their evidence in support of all claims (including the contract claim). See Trade Practices Commission v Australian Iron & Steel Pty Limited (1990) 92 ALR 395 at 413. 52 In my opinion it is imperative in this case that the Court be satisfied that there really are facts which can be proved and which support the serious allegations which underlie this claim. 53 There is a further reason why it is appropriate to impose this condition upon the applicants. The respondent seeks in its notice of motion to have the whole of the proceedings dismissed in the event that I should refuse leave to plead the TPA claims. This would raise the question of the Court's jurisdiction to hear the contract claim if the TPA claim is struck out, or if leave is not granted to plead it. There is a real question of the relationship between the contract claim and the TPA claims. 54 Also, it is possible that an issue may arise as to whether the TPA is "colourable" within the meaning of the authorities that bear upon the issue of the court's jurisdiction to hear a non-federal matter where the associated claim has been struck out; see Petrotimor Companhia de Petreleos SARL v Commonwealth (2003) 126 FCR 354; Petrotimor Companhia de Petreleos SARL v Commonwealth (2003) 128 FCR 507; Telstra Corporation Ltd Hurstville City Council (2000) 105 FCR 322 at 378 [223] per Wilcox J; Australian Nursing Federation v Alcheringa Hostel Inc [2004] FCA 375 per Ryan J at [51] to [53]. 55 The orders that I will make therefore are that the applicant's amended notice of motion filed in court on 27 September 2004 is dismissed. 56 Mr Dick sought costs of the motion on an indemnity basis. He pointed out that notice had been given to the applicants on two occasions prior to the hearing of the motion that indemnity costs would be sought. He submitted that serious allegations which amount to fraud were made but were not able to be maintained and this attracts the exercise of the discretion of the court referred to in the well known authority of Sheppard J in Colgate Palmolive Co v Cussons Pty Limited (1993) 118 ALR 248. 57 That decision was followed recently by Austin J in Redowood Pty Limited v Goldstein Technology Pty Limited [2004] NSWSC 515 especially at [33] to [34]. I think there is some force in Mr Dick's submissions and I do not consider that the discretion to order indemnity costs is enlivened only upon a final hearing. Nevertheless, it does seem to me that the outcome of this application turned upon the hopelessness of the pleading in its present form, coupled, it is true, with the absence of any attempt by the applicants to support the serious allegations by particulars or evidence. 58 Since I have given leave to replead the claim, it does not seem to me to be appropriate in the exercise of my discretion, to order indemnity costs. Accordingly I will order that the applicants pay the respondent's costs of and incidental to the motion filed 27 September 2004 on a party-party basis. 59 I also order the applicants to pay the costs of Mr Gordon and Mr Lomax of and incidental to the motion to join them as a party to these proceedings as contained in the notice of motion filed today. In addition, I order the applicants to pay the costs of Mr Gordon and Mr Lomax of the motion filed on 13 August 2004. I reserved the costs of that motion on the last occasion. 60 I direct the applicants as a condition of any application for leave to file an amended statement of claim to file the whole of their evidence in support of the claim on or before 15 November 2004 and I will list the matter for directions on Thursday 25 November 2004. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Counsel for the Applicant: Mr Coles QC (27 September 2004 only) Mr D Allen

Solicitor for the Applicant: Middletons Lawyers

Counsel for the 1st Respondent: Mr R Dick with Mr J Watson

Solicitor for the 1st Respondent: Freehills

Counsel for the proposed 2nd & 3rd Respondents: Mr P Khandhar

Solicitor for the proposed 2nd & 3rd Respondents: Isakow Lawyers

Date of Hearing: 8 and 27 September 2004

Date of Judgment: 27 September 2004