Sebastian v Strongwall International Limited

Federal Court of Australia|2012-05-08|Before: McKerracher J

INTRODUCTION 1 The second respondent (Mr Hanna) and the third respondent (Remex) apply to strike out pleaded representations in the applicants' statement of claim. They contend that the representation pleadings are likely to cause prejudice, embarrassment or delay in the proceeding and that they fail to disclose a reasonable cause of action.

BACKGROUND 2 The broad nature of the applicants' case is to the following effect: (a) The first respondent (Strongwall) was incorporated on 2 March 1999. It was deregistered on 25 July 2010. The deregistration was due to non-compliance with the Corporations Act 2001 (Cth) (CA). Returns were not filed. The company was moribund for several years. (b) Remex was incorporated on 20 February 1992. On 10 July 2011 it also became deregistered, presumably for much the same reasons. Prior to that time and during the period from February 1992, Mr Hanna was director and shareholder of it. (c) As at 20 July 2000, the issued share capital of Strongwall was 8.8 million ordinary $1 shares with 1.2 million issued options convertible to ordinary shares. In the period from 27 April 2001 to 24 July 2010, the issued share capital of Strongwall was 10 million ordinary $1 shares. (d) The shareholders of Strongwall, at the outset (as at 20 July 2000) were: the first and second applicants (Mr and Mrs Sebastian) - 100,000 shares; the third applicant (Mr Lim) - 100,000 shares; the fourth applicant (Ms Leow) - 100,000 shares; and Mr Hanna - 8.5 million shares. (e) After this preliminary period, between 27 April 2001 and 24 July 2010, the shareholders of Strongwall were: Mr and Mrs Sebastian - 500,000 shares; Mr Lim - 500,000 shares; Ms Leow - 500,000 shares; and Mr Hanna - 8.5 million shares. (f) On or about 3 March 2005, Remex acquired ordinary shares in Strongwall without payment. As at the date of deregistration, having transferred 400,000 share to others between acquisition and deregistration, Remex held 8.1 million ordinary shares in Strongwall. (g) By 20 July 2000, Mr Hanna had developed a specific method of construction of house (and presumably other) walls. He applied under the Patent Cooperation Treaty (PCT) by PCT application number PCT/AU 98/00652 in various countries for the grant of patents based on this method which was known as the Strongwall Construction System (the Strongwall System). Patents were applied for and granted over a period from the late 1990s to mid-2000 in Australia, several Asian countries, the United States and South Africa (the Patents). (h) At the early stages of commercial development of the company in 2000 and 2001, the applicants paid $1 for each $1 share in Strongwall's share capital to a total of $1.5 million. (i) The original Share Offer made by Mr Hanna to the applicants on 25 May 2000 (the Share Offer), was, relevantly, in these terms: Strongwall owns the Intellectual Property of the Strongwall Construction System which is a New invention for the modular construction of load bearing and non load bearing walls of the type used in the building industry in general and the housing industry in particular. SIL intends to develop in stages and commercialize this new technology by raising seed funds to fund Phase 2 of this project. THE SIL SHARE OFFER SIL is inviting offers for the purchase of up to 1,500,000 subscribers (sic subscribers') shares as per terms and conditions of the Constitution of Strongwall International Limited. This amount of subscribers' shares on offer shall represent 15% of the issued Capital Share of SIL. The offer applies to Australian and overseas Investors Each application shall be limited to a maximum of 500,000 subscriber shares. (j) By agreement reached between the parties, the consideration payable by Mr Hanna for his 8.5 million ordinary shares in the share capital of Strongwall (85% of the company) was to be $1 plus the transfer and assignment to Strongwall of all his rights, title and interest in the Strongwall System including the patents. Although he paid the $1 as consideration for the 8.5 million ordinary shares, it is common ground that he did not transfer and assign any of the legal rights, title and interest in the Strongwall System or patents to Strongwall. (k) The applicants assert that Mr Hanna has in fact retained all of his rights, title and interest in the Strongwall System including his right, title and interest in the Strongwall patents. He has done so notwithstanding the deregistration of Strongwall on 25 July 2010. As will be seen, however, Mr Hanna does acknowledge that Strongwall is the true owner and that he is holding the interests on behalf of Strongwall. (l) The applicants say that their investment was induced by representations made by Mr Hanna to the applicants (in trade and commerce) in order to induce them to purchase the shares, to induce Mr Sebastian to become a director to represent the interests of the other applicants, for the applicants to maintain their share ownership and for Mr Lim to lend moneys or to cause moneys to be lent to Strongwall and Mr Hanna. (m) The case for the applicants is that the ownership representation, the patents value representation, the Deloitte representation and the commercialisation representation (each as defined in [3] below) were in the nature of continuing representations which were reiterated (at non-specific dates) by Mr Hanna during the period between 20 July 2000 and 25 July 2010 when Strongwall was deregistered (the continuing representations). The applicants contend that in reliance on the continuing representations they continued to maintain the ownership of their shares in Strongwall until 24 July 2010 and Mr Sebastian during the period from 20 July 2000 to 1 August 2007 continued to act as a director of Strongwall representing the interests of the other applicants. (n) The representations, on the applicants' case, were false. As at 20 July 2000 the ownership representation was false and incorrect as Mr Hanna had not transferred any of his rights, title and interest in the Strongwall System or the patents to Strongwall, the patent value representation was false as they were not worth $10 million and the Deloitte representation was false as Deloitte had not valued the patents at $10 million or at all. (o) The applicants also contend that as at the same date, insofar as the ownership representation, the patents value representation, the commercialisation representation and the market representation involved future representations as to future matters, they were false and incorrect as they were made by Mr Hanna without reasonable grounds. The falsity of the continuing representations was not at any time corrected by Mr Hanna during the period up until the deregistration of Strongwall. In particular, at no time were the rights under the Strongwall System or the patents transferred. Further, Mr Hanna was unable to commercialise the Strongwall System, did not bring houses made with the Strongwall System to market and did not advise the applicants that during the relevant period Deloitte had not valued the patents at $10 million or at all. 3 The representations are set out in para 17 of the statement of claim which is in the following terms: 17. In order to induce: (a) the applicants to purchase the said shares in Strongwall; (b) Mr Sebastian to become a director of Strongwall to represent the interests of the applicants as shareholders in Strongwall; (c) the applicants to maintain their ownership of shares in Strongwall; (d) Mr Sebastian to continue to act as a director of Strongwall; (e) Mr Lim to lend monies, or cause monies to be loaned, to Strongwall and Mr Hanna - Mr Hanna represented in trade or commerce to the applicants that: (i) Strongwall owned the Strongwall Construction System and the Strongwall patents (the ownership representation); PARTICULARS The ownership representation was partly oral and partly in writing. Insofar as the same was oral, Mr Hanna said words to the effect alleged to Mr Sebastian on a number of occasions at Mr Sebastian's office in Perth during the period March to April 2000, which Mr Sebastian re-stated to the other applicants, as Mr Hanna intended, and to each of the applicants at meetings at Mr Hanna's home in or about early March and late April 2000 (the March and April 2000 meetings). Insofar as the same was in writing, it was contained in a Share Offer dated 25 May 2000 provided by Mr Hanna to the applicants on or about that date (the Share Offer). (ii) the Strongwall patents were worth at least $10 million (the patents value representation): PARTICULARS The patents value representation was partly oral, partly in writing and partly to be implied. Insofar as the same was oral, Mr Hanna said words to the effect alleged to Mr Sebastian on a number of occasions at Mr Sebastian's office in Perth during the period March to April 2000, which Mr Sebastian re-stated to the other applicants, as Mr Hanna intended, and to each of the applicants at the March and April 2000 meetings, and at Deloitte Touche Tohmatsu's office in Perth on 20 July 2000. Insofar as the a same was in writing and implied, it was implied from the ownership representation, taken together with the contents of the Share Offer which stated that for an investment of $1.5 million, the applicants would receive $1.5 million $1 ordinary shares in the share capital of Strongwall, being 15 per cent of the issued shares in Strongwall and from Mr Hanna receiving 85 per cent of the issued shares in Strongwall in consideration of the transfer by him to Strongwall of all his right, title and interest in the Strongwall Construction System, including the Strongwall patents. (iii) Deloitte Touche Tohmatsu had valued the Strongwall patents at $10 million (the Deloitte representation). PARTICULARS The Deloittes (sic) representation was oral, Mr Hanna said words to the effect alleged to Mr Sebastian on a number of occasions at Mr Sebastian's office in Perth during the period March to April 2000, which Mr Sebastian re-stated to the other applicants, as Mr Hanna intended, and to each of the applicants at the March and April 2000 meetings and at the Perth office of Deloitte Touche Tohmatsu on 20 July 2000. (iv) Mr Hanna at Strongwall would commercialise the Strongwall Construction System and bring houses made with that system to market (the commercialisation representation); PARTICULARS The commercialisation representation was partly oral, partly in writing and partly implied. Insofar as it was oral, Mr Hanna said words to the effect alleged to Mr Sebastian on a number of occasions at Mr Sebastian's office in Perth during the period March to April 2000, which Mr Sebastian re-stated to the other applicants, as Mr Hanna intended, and to each of the applicants at the March and April 2000 meetings, and at Deloitte Touche Tohmatsu's office in Perth on 20 July 2000. Insofar as the a same was in writing and implied, it was implied from the ownership representation, taken together with the contents of the Share Offer which stated that for an investment of $1.5 million, the applicants would receive $1.5 million $1 ordinary shares in the share capital of Strongwall, being 15 per cent of the issued shares in Strongwall and from Mr Hanna receiving 85 per cent of the issued shares in Strongwall in consideration of the transfer by him to Strongwall of all his right, title and interest in the Strongwall Construction System, including the Strongwall (3) patents. It was also implied by the contents of the Share Offer and an exchange of facsimile transmissions between Mr Lim, Mr Sebastian and Mr Hanna on or about 13 and 14 April 2000. (v) Mr Hanna at Strongwall would commercialise the Strongwall Construction System and bring houses made with that system to market, within approximately 9 months (the market representation). PARTICULARS The market representation was partly oral, partly in writing and partly implied. Insofar as it was oral, Mr Hanna said words to the effect alleged to Mr Sebastian on a number of occasions at Mr Sebastian's office in Perth during the period March to April 2000, which Mr Sebastian re-stated to the other applicants, as Mr Hanna intended, and to each of the applicants at the March and April 2000 meetings. Insofar as it was in writing and implied, it was implied by the contents of the Share Offer and an exchange of facsimile transmissions between Mr Lim, Mr Sebastian and Mr Hanna on or about 14 April 2000. 4 Paragraph 19 of the pleading also pleads what are described as the 'continuing representations'. Paragraph 19 is in these terms: 19. Further: (a) the ownership representation; (b) the patents value representation; (c) the Deloitte representation; and (d) the commercialisation representation - were in the nature of continuing representations which were re-iterated by Mr Hanna during the period 20 July 2000 to 25 July 2010, when Strongwall was de-registered (the continuing representations).

THE RESPONDENTS' ARGUMENTS 5 The respondents contend that the various representations should be struck out for the following reasons:

Paragraph 17(i) - ownership representation (a) Paragraphs 12, 13 and 14 of the and 14 of the statement of claim refer to Mr Hanna receiving 8.5 million ordinary shares in Strongwall for a consideration of $1 plus the transfer and assignment of all of his right title and interest in the Strongwall Construction System, including the Strongwall patents. The defence at para 5 and para 6 acknowledges that Mr Hanna has transferred and assigned all of his right, title and interest in the international patents. (b) The contract for the transfer of assets by Offer and Acceptance dated 18 July 2000 records Mr Hanna's agreement to transfer and assign his title in the patents to the company. (c) The share offer dated 25 May 2000 acknowledges that the company owns the intellectual property in the Strongwall Construction System. It was this share offer that was given to the applicants prior to their investments in the company. (d) Mr Hanna has acknowledged to the Court in the proceeding that, Strongwall is the true owner of the legal rights, title and interest in the Strongwall System of patents to Strongwall (see [16] and [17] of Sebastian v Strongwall International Limited (Deregistered) [2011] FCA 1045 (Sebastian No 1)) and that to the extent that it may be necessary he will do all things necessary to effect a transfer of the patents and intellectual property to the company (once it is re-instated). (e) No damage has been suffered by the applicants in circumstances where Mr Hanna acknowledges that the patents and intellectual property in the Strongwall Construction System have at all material times belonged to Strongwall. (f) Enforceable undertakings in relation to the patents disposes of this cause of action (see [84] of Sebastian No 1).

Paragraph 17(ii) - the patents value representation 6 It is argued that the patents value representation should be struck out for the following reasons: (a) the Share Offer is incapable of constituting the patents value representation; and (b) the applicants' sworn position is that 'Mr Hanna said words to the effect that he had been advised by Deloitte Tohmatsu Limited who had valued the company at $10M' (para 10 of the affidavit of Stanislaus Sebastian sworn 27 June 2011). See also [78] of Sebastian No 1).

Paragraph 17(iii) - the Deloitte representation 7 It is argued that the Deloitte representation should be struck out for the following reasons: (a) the affidavit of Mr Sebastian (para 10 of his affidavit of 27 June 2011) deposes that Mr Hanna simply said that he had been advised by Deloitte who had valued the company at $10 million; (b) without it being pleaded that Mr Hanna personally adopted the Deloitte representation, this misrepresentation must fail (see [78] of Sebastian No 1); and (c) the cause of action as presently put forward by the applicants would be against Deloitte and not Mr Hanna.

Paragraph 17(iv) - the commercialisation representation 8 It is argued that the commercialisation representation should be struck out for the following reasons: (a) In the absence of an allegation of the time within which Mr Hanna is alleged to have represented that Strongwall would commercialise the Strongwall Construction System and bring houses made with the system to market, the representation is meaningless. (b) Without a time period alleged there cannot be a breach and there cannot be a cause of action. (c) Without a time period being alleged damages cannot arise to complete a cause of action. (d) The commercialisation representation is in identical terms to the market representation in paragraph 17(v) save that a time of 9 months is included in the market representation.

Paragraph 17(v) - the market representation 9 It is argued that this market representation should be struck out for the following reasons: (a) The market representation is alleged to have been made at various times in March to April 2000, in April 2000 meetings, by implication by the contents of the Share Offer (which was dated 25 May 2000) and by an exchange of facsimile transmissions on or about 14 April 2000. The latest date for the representation is therefore, on the applicants' case, 25 May 2000. (b) All monies paid by the applicants had been paid by 27 April 2001 (see para 11 of the statement of claim). (c) Mr Sebastian was a director of the company from 20 July 2000 to 1 August 2007 and must have been aware that the houses made with the Strongwall Construction System had not been brought to the market within approximately 9 months (para 21 of Mr Sebastian's affidavit sworn 27 June 2011). (d) The 9 month period referred to in the representation must have expired by 2002 at the latest and the statute of limitation period must have expired by 2008, prior to the commencement of these proceedings (see [77] of Sebastian No 1). (e) The market representation is therefore statute barred and should be struck out.

Paragraph 19 - The continuing representations 10 It is argued that this paragraph should be struck out for the following reasons: (a) It is embarrassing in that it simply asserts, without giving any particulars, that the representations were 'reiterated' by Mr Hanna during the period 20 July 2000 to 25 July 2010. (b) The respondents are entitled to know the case they are required to meet. (c) The respondents are entitled to have pleadings which specify the gist of the words spoken, the persons by whom the words were spoken, the persons who received the spoken words and the dates and places where the words are alleged to have been said which constitute the misrepresentation. (d) See Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1, also Watson v Foxman [1995] 49 NSWLR 315, McClelland CJ in Equity said (at 318): Where, in civil proceedings, a party alleges the conduct of another was misleading or deceptive, or likely to mislead or deceive (which I will compendiously describe as "misleading") within the meaning of section 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), it is ordinarily necessary for that party to provide to the reasonable satisfaction of the Court: (1) What the alleged conduct was; and (2) Circumstances which rendered the conduct misleading. Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a reasonable degree of precision sufficient to enable the Court to be reasonably satisfied that they were in fact misleading in the proved circumstances. 11 The continuing representations are wholly deficient, are embarrassing and should be struck out.

General principles 12 Rule 16.21 of the Federal Court Rules 2011 provides as follows: 16.21 Application to strike out pleadings (1) A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading: (a) contains scandalous material; or (b) contains frivolous or vexatious material; or (c) is evasive or ambiguous; or (d) is likely to cause prejudice, embarrassment or delay in the proceeding; or (e) fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or (f) is otherwise an abuse of the process of the Court. (2) A party may apply for an order that the pleading be removed from the Court file if the pleading contains material of a kind mentioned in paragraph (1) (a), (b) or (c) or is otherwise an abuse of the process of the Court. 13 In my view, the appropriate principles to apply in pleading applications are those I referred to in Christou v Stantons International Pty Ltd [2010] FCA 1150 (at [3]-[5]): 3 In Wright Rubber Products Pty Ltd v Bayer AG [2008] ATPR 42-258, Tracey J (at [5]) said: 5 The principles governing the exercise of the Court's power summarily to dismiss a claim on the ground that it discloses no reasonable cause of action, the principles which govern pleadings in this Court and the relevant authorities are conveniently summarised by Weinberg J in McKellar v Container Terminal Management Services Ltd (1999) 165 ALR 409 at 415-421. It is not necessary to restate, at length, his Honour's exposition of the relevant rules and the statements of principle which emerge from the cases to which he refers. It is sufficient, for present purposes, to note that: • The power to dismiss a claim because it discloses no reasonable cause of action will not lightly be exercised: see Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 128-130; Webster v Lampard (1993) 177 CLR 598 at 602-603. • The purpose of pleadings is to define the issues with sufficient clarity such that respondents understand, and have the opportunity to meet, the case made against them: see Dare v Pulham (1982) 148 CLR 658 at 664; Mitanis v Pioneer Concrete (Vic) Pty Ltd [1997] ATPR 41-591 at 44, 151ff. • A statement of claim must plead all the material facts necessary for the purpose of formulating a complete cause of action. If it does not it is liable to be struck out: Mitanis; Bruce v Odhams Press Ltd [1936] 1 KB 697 at 712-713. • It is not sufficient for the pleader to state conclusions drawn from unstated facts: see Trade Practices Commission v David Jones (Australia) Pty Ltd (1985) 7 FCR 109 at 114-5. • There will be cases in which the power to strike out pleadings will not be exercised notwithstanding a failure to plead all material facts. Such restraint will be appropriate where the deficiency causes no confusion and does not raise issues of substantive principle (HECEC Australia Pty Ltd v Hydro-Electric Corp [1999] FCA 822 at [59]), and where deficiencies can be overcome by ordering the provision of particulars or the furnishing of affidavits (State of Queensland v Pioneer Concrete (Qld) Pty Ltd [1999] ATPR 41-691 at 42,828-9). ... 4 In Sun Earth Homes Pty Ltd v Australian Broadcasting Corporation (1990) 98 ALR 101, Burchett J pointed out that courts have repeatedly emphasised that the power under the rule should be exercised with caution and only where clearly appropriate. That is a principle which has been evident for many years from authorities such as General Steel ... 5 In order to disclose a reasonable cause of action, the statement of claim must contain all the relevant facts to support any allegation made: H 1976 Nominees Pty Ltd v Galli (1979) 40 FLR 242. ...

The ownership representation 14 The primary point emphasised by counsel for the respondents was that Mr Hanna has recognised for a substantial period of time that the relevant patents are owned by and should be transferred to the registered company and that the patents are held on trust. It is argued that on that basis there is no triable issue. 15 I cannot accept the respondents' submission in relation to the ownership representation. While I have expressed concern previously that there must be ways of resolving this dispute which do not involve expensive and protracted litigation, nevertheless, the ownership issue does remain live in my view. While the admissions as referred to by the respondents may have been made, that still leaves at large the question of what should happen as a consequence of the potential breaches pleaded and that, in particular, will depend upon whether or not the company is to be reinstated. At this stage, none of these matters is yet to be determined.

The patents value representation 16 The essential complaint is that at no stage has it been pleaded that Mr Hanna personally represented that Strongwall had a value of $10 million. The respondents point to evidence previously given by Mr Hanna that it was Deloitte rather than him personally, who came up with the figure of $10 million. As a matter of evidence, it may well be the case ultimately that Mr Hanna did not adopt the $10 million valuation he says that Deloitte placed on the patents to be owned by Strongwall but that does not mean, in my view, that the patents value representation should be struck out. 17 More importantly, taking the pleading as a whole, all of the elements of paras 17(i), (ii) and (iii) taken together are capable of conveying the fact that Mr Hanna adopted and made the representation as to value suggested by Deloitte. Put rhetorically, why else would he have made the point as to the Deloitte valuation? It may be that this could be pleaded differently but it certainly should not be struck out as being unarguable.

The commercialisation representation 18 As to the commercialisation representation, this complaint is valid in my view. Without any time period being pleaded, there remains open an argument that there cannot be a breach. It could be, for example, that, hypothetically, the product would be commercialised within 50 years. The date by which the product was to be commercialised should be pleaded as a material fact, not a particular, if it can be pleaded. If it cannot be pleaded, it should not be maintained.

The market representation 19 As to the market representation, the pleading is that the nine month period expressly referred to in the representation must have expired by 2002 at the latest. In consequence of that, the limitation period must have expired by 2008 prior to commencement of the proceeding (see [77] of Sebastian No 1). 20 The applicants' response to this is that their pleading contends that loss was sustained when by reason of the 2010 deregistration of Strongwall, the shares acquired by the applicants became worthless. The deregistration was necessary because of the failure of the representations. The respondents appear to say that this is an artificial device, a contrivance to deal with the circumstances in which representations made in 2000 were clearly stale by the time the proceedings were issued. There is some force in this complaint in my view. There is nothing raised in the pleading to link the breaches with the deregistration if the loss was first sustained at the time of deregistration. 21 I consider that the market representation suffers from a similar difficulty to the commercialisation representation. The events of which complaint is raised occurred well outside the limitation period. The loss it would seem, must have been first suffered long before the proceeding was instituted. It is difficult to see how reliance on the 2010 deregistration can overcome this fact when there is no pleaded or otherwise obvious nexus between the pleaded breaches and that event. As the respondents complain, these difficulties must have been known to the applicants eight years ago and the time to issue proceedings has passed. As against that, there have been regular reminders that limitation points should rarely be dealt with in a summary way before the evidence is available and addressed. With all that said, I can not see how the pleading can survive in the current form without there being a demonstrated nexus between the breach and the deregistration as the first time loss was suffered from the breach. It is necessary in my view for that linkage to be articulated. To that end the market representation should be re-pleaded.

The continuing representation 22 On the continuing representation the major complaint is that there are no specific dates when the representation was repeated on a continuing basis. In oral argument senior counsel explained that what the pleading was intended to convey was the failure on a constant basis to correct the incorrectness of representations made in circumstances where there was an obligation to correct and earlier misrepresentation. In other words, the continuing representation is a misrepresentation by silence which continued until such point that it was clear the applicants had suffered loss and damage on deregistration of Strongwall. 23 If that is the intention of the plea, it should be amended. There are material facts which must be clearly articulated. That may cure the plea but if those facts cannot be pleaded, the plea should not be maintained.

CONCLUSION 24 Paragraphs 17(iv), 17(v) and 19 of the applicants' statement of claim filed on 22 August 2011 will be struck out with liberty to re-plead within 28 days. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Trade Practices Act 1974(Cth)

At a glance

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Judgment (16 paragraphs)

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Legislation Cited (2)

Cases Cited (11)