Skalkos v Smiles and Ors

Skalkos v Smiles and Ors - [2006] NSWSC 192 - NSWSC 2006 case summary — Zoe

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Relevant Legal Principles 5 I approach the application upon the basis that a very clear case is required before summary dismissal is granted and that the power to make such an order should be sparingly employed: Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125 at 129; Webster v Lampard (1993) 177 CLR 598 at 602-3. The test is not whether the Plaintiff would probably fail in his action against the First Defendant, it is whether the material before the Court demonstrates that the action should not be permitted to go to trial in the ordinary way because it is apparent that it must fail: Webster v Lampard at 602. Where the Court is asked to summarily dismiss a plaintiff's case, the fundamental principle is that prima facie a plaintiff is entitled to have his case come to trial and that an application to deprive him of that right will succeed only in the clearest of cases: Brimson v Rocla Concrete Pipes Limited (1982) 2 NSWLR 937 at 944. Usually, a party is not to be denied the opportunity to place his case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. For a summary dismissal application to succeed, a high degree of certainty is required about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way: Agar v Hyde (2000) 201 CLR 552 at 575-6. 6 By bringing an application for summary dismissal, the First Defendant undertakes the burden of establishing that there is no triable issue: Wickstead v Browne (1992) 30 NSWLR 1 at 11. The General Steel test remains the primary touchstone for such an application. The mere fact (if it be the case) that a plaintiff's prospects of success might be characterised as slim would not be enough to strike out a pleading: Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1995-1997) 188 CLR 241 at 271; Preston v Star City Pty Limited [1999] NSWSC 1273 at paragraph 31. The question for determination is whether a reasonable cause of action is disclosed, that is a cause of action which has some chance of success, or which could conceivably give the Plaintiff a right to relief, or which, although weak, is properly debatable, and has some apparent legitimate basis, if the facts upon which it is alleged to be based are made good: Preston v Star City Pty Limited at paragraph 37. 7 So far as the First Defendant's application goes to matters of form in relation to the clarity or particularity with which the Plaintiff's claim is pleaded, the essential test is one of intelligibility - a test that turns upon the question whether the nature of the case that the Plaintiff wishes to make has been stated with sufficient clarity so as to allow the First Defendant to know what it is that he must meet: Banque Commerciale SA In Liquidation v Ahkil Holdings Limited (1990) 169 CLR 279 at 286. So far as any deficiency might arise in relation to the particularisation of the matters alleged, that is a matter appropriately left for subsequent amendment rather than a strike out of the pleading, so long as what is alleged sufficiently identifies a reasonable cause of action: Jingellic Minerals NL v Abigroup Limited (1992) 7 WAR 566; Co-Ownership Land Development Pty Limited v Queensland Estates Pty Limited (1973) 47 ALJR 519 at 521; Preston v Star City Pty Limited at paragraph 41.

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Nature of the Plaintiff's Case 10 It is necessary to place the present application in a factual context. No evidence was adduced at the hearing of the application. The argument proceeded by reference to the contents of the FASC and the agreed fact that the First Defendant had entered into a Part X composition with his creditors on 1 May 1996, which was completed on 17 November 1998. 11 The FASC alleges that the First Defendant conducted an accounting practice under the name "JJ Smiles & Co" between 1978 and 1988 (paragraph 1, FASC). The First Defendant and the Second Defendant, Archibald George Poulos, are alleged to have conducted an accountancy practice in partnership under the name "Smiles Poulos and Associates" between 1988 and 1995 (paragraph 2, FASC). It is alleged that from 17 July 1991, the First and Second Defendants conducted tax agency services using the Fourth Defendant, Taxcare Pty Limited, as a service company and that, at all material times, the Plaintiff was a client of the Fourth Defendant (paragraph 6, FASC). It is alleged that from 21 September 1993, the First and Second Defendants conducted an accountancy practice using the Third Defendant, Smiles Poulos Pty Limited, as a service company and that, at all material times, the Plaintiff was a client of the Third Defendant (paragraph 7, FASC). It is alleged that, at all material times, the First and Second Defendants were directors of the Third and Fourth Defendants and were controllers of those corporations (paragraph 8, FASC). 12 The Plaintiff's written submissions summarised the factual matters alleged in the FASC in the following way. The Plaintiff retained the First Defendant as his accountant and financial advisor in 1978 (paragraph 9, FASC). During the period 1978 to 1990, the First Defendant, in his capacity as the Plaintiff's accountant, prepared the Plaintiff's taxation returns, gave general taxation advice and assisted the Plaintiff with his financial affairs generally (paragraph 9, FASC). In early August 1987, the Plaintiff requested the First Defendant to provide him with financial advice in relation to the investment of the sum of $113,000.00 (paragraph 14, FASC). The First Defendant agreed to give financial investment advice to the Plaintiff (paragraph 15, FASC). 13 In the course of giving investment advice to the Plaintiff, it is alleged that the First Defendant represented to the Plaintiff that advancing the sum of $113,000.00 to a joint venture in which the First Defendant held an interest was, inter alia, a "prudent investment", "astute and sound" and that the Plaintiff's "moneys were safe" (paragraph 16, FASC). In reliance upon these and other representations, the Plaintiff alleges that he entered into a loan agreement and advanced the sum of $113,000.00 to the First Defendant and the First Defendant's joint venturer, Geoff Kotsakis, the Sixth Defendant. 14 On 1 November 1989, the Plaintiff agreed to extend the term of the loan (paragraph 33, FASC). During a period following execution of the agreement on 1 November 1989 to the end of 1994, it is alleged that the First Defendant gave further financial advice to the Plaintiff and made further representations to the Plaintiff in connection with the loan of $113,000.00 (paragraphs 36, 44 FASC). 15 In about August 1990, it is alleged that the First Defendant suggested to the Plaintiff that the Plaintiff advance a further sum of $85,000.00 (paragraph 36, FASC). It is alleged that the First Defendant represented to the Plaintiff that a further advance of $85,000.00 would guarantee and secure repayment of the sum of $113,000.00 which had been advanced in 1987 (paragraph 36(d), FASC). In reliance upon these representations, it is alleged that the Plaintiff advanced a further sum of $85,000.00 to the First Defendant (paragraph 41, FASC). 16 It is alleged that, in May 1992, the First Defendant made further representations to the Plaintiff regarding the First and Sixth Defendants' ability to repay the Plaintiff's advances. It is alleged that the First Defendant represented that neither he nor the Sixth Defendant were able to repay the loan and that the loan had to be restructured to accommodate the First and Sixth Defendants (paragraph 44, FASC). In reliance upon these representations, it is alleged that the Plaintiff entered into further agreements on 21 May 1992 and 21 May 1993 (paragraphs 49, 61, FASC). 17 It is alleged, that in late 1992 or early 1993, the Plaintiff requested the First Defendant to provide further financial investment advice in relation to the investment of the sum of $170,000.00 (paragraph 54, FASC). It is alleged that the First Defendant advised the Plaintiff that he should invest the sum of $170,000.00 in a Vodafone outlet as mobile phones were "big business" and the Plaintiff would "make a lot of money" (paragraph 54, FASC). It is alleged that the First Defendant advised the Plaintiff that the sum of $170,000.00 could be advanced through the First and Second Defendants' accountancy practice. It is alleged that the First Defendant made further representations to the Plaintiff that he (the Plaintiff) should make the further advance of $170,000.00 to an incorporated body in which the First Defendant held an interest, that the other advances of $113,000.00 and $85,000.00 would be repaid by the end of 1994, that advancing the sum of $170,000.00 was "prudent" and that the further advance of $170,000.00 would be secured by a charge upon the assets and undertaking of the First and Second Defendants' accounting practice (paragraph 54, FASC). It is alleged that, on 27 January 1993, in reliance upon these representations, the Plaintiff advanced the sum of $170,000.00 to the Fifth Defendant, Svelte Corporation Pty Limited (paragraph 54, FASC). The Fifth Defendant is now in liquidation and the Plaintiff does not press his claim against that party. 18 The advances made by the Plaintiff have not been repaid. The Plaintiff's Claims in the FASC 19 It is appropriate to refer to the Plaintiff's claims as pleaded in the FASC. 20 The FASC is 60 pages in length and comprises some 138 paragraphs, concluding with a claim for orders and relief in 19 paragraphs. For present purposes, it is necessary to refer only to certain parts of the FASC. 21 Some of the factual allegations relied upon by the Plaintiff as pleaded in the FASC have been summarised in paragraphs 11 to 18 of this judgment. The FASC pleads seven sets of representations said to have been made by the First Defendant (and sometimes other Defendants as well) between August 1987 and July 1995. With respect to each of the seven sets of representations, the FASC alleges:

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Submissions of the First Defendant 35 The First Defendant relies on the composition with his creditors as a complete defence to the FASC (paragraphs 42-46, Defence to FASC). 36 Mr Aldridge SC submits that all claims in the FASC against the First Defendant are provable debts. He submits that they arise "by reason of a contract, promise or breach of trust" for the purposes of s.82(2) of the Act, in the form of, inter alia, the 1978 retainer agreement (paragraph 9, FASC) and the 1988 retainer agreement (paragraph 24, FASC). In this way, Mr Aldridge SC submits that these demands arise by reason of a contract, promise or breach of trust so as to constitute provable debts within s.82 of the Act. 37 Mr Aldridge SC relies upon passages in Coventry in support of this proposition. Insofar as the Plaintiff may have derived previously some comfort from the decision of the Victorian Court of Appeal in Aliferis v Kyriacou (2000) 1 VR 447, Mr Aldridge SC submits that that decision has been relevantly overruled by the High Court in Coventry at paragraphs 70-71. 38 The First Defendant points to the following passage in Coventry where Gleeson CJ, Gummow, Hayne and Callinan JJ said at paragraph 50: "First, the text of s 82, like its legislative ancestors, shows that not all claims are provable in bankruptcy. Some content must therefore be given to s 82(2) and its reference to demands 'arising otherwise than by reason of a contract, promise or breach of trust'. Secondly, any amplification or extension of the content to be given to s 82(2), beyond the immediate operation conveyed by reference to demands arising by reason of a contract or promise, is to be fixed by reference to the operation of other provisions of the statute, and particularly the set-off provisions of s 86. A claim which may be made in answer to a claim which the bankrupt estate makes for damages for breach of a contract between bankrupt and claimant may be provable. That answering claim may be provable because it arises out of the mutual dealing or bilateral relationship of contract between bankrupt and claimant. By contrast, a claim which comes from a tripartite transaction, in which the bankrupt's misrepresentation induced the claimant to make a contract with a third party, does not arise from a mutual dealing and it arises otherwise than by reason of a contract or promise."

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Applying these principles, Mr Aldridge SC submits that the Plaintiff's claims against the First Defendant are all claims arising by reason of a contract, promise or breach of trust so that each claim is a provable debt within s.82 of the Act. 41 Mr Aldridge SC submits that the Plaintiff's claims in the FASC are not caught by s.153(2)(b) of the Act. He submits that the claims are brought in negligence, for breach of fiduciary duty and for statutory compensation under the Fair Trading Act 1987 (NSW) and the Trade Practices Act 1974 (Cth). He contends that there is no claim with respect to a debt incurred by means of fraud or fraudulent breach of trust. 42 Mr Aldridge SC acknowledges that there are decisions which accord a broad interpretation to the meaning of "fraud" in s.153(2)(b) of the Act: Chittick v Maxwell (1993) 118 ALR 728; Maxwell v Chittick (Court of Appeal (NSW), 23 August 1994, unreported, BC9402909 at 13); Re Bosun Pty Limited (In Liquidation) (2000) 34 ACSR 597; [2000] SASC 180 at paragraph 18. Mr Aldridge SC made a formal submission that those cases had been wrongly decided and that fraud in s.153(2)(b) was confined to actual fraud. He submitted that those parts of the FASC which alleged that the First Defendant made false representations or made representations with reckless indifference as to their truth could not constitute fraud within the meaning of s.153(2)(b) of the Act. 43 In the event that his primary arguments were accepted, Mr Aldridge SC submitted that the FASC as against the First Defendant ought be struck out and that the proceedings against his client ought be dismissed. He submitted that the General Steel test had been satisfied in this case and that these orders ought be made. 44 Mr Aldridge SC submitted that if the Plaintiff proposed to allege actual fraud against the First Defendant, the FASC did not presently contain such an allegation. The appropriate course, it was submitted, was that the FASC as against the First Defendant ought be struck out. He acknowledged that he could not reasonably oppose a grant of leave to the Plaintiff to replead his claim against the First Defendant if a claim in actual fraud was to be advanced. He acknowledged that the recent decision of the High Court in Coventry had altered the law in this area so that the Plaintiff ought not be shut out from a further opportunity to replead his case against the First Defendant. He emphasised, however, that the proceedings have been on foot for many years and had reached a fourth attempt by the Plaintiff to plead his case. In effect, he submitted that the Plaintiff ought be given a final opportunity to plead his case in proper form.

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Submissions of the Plaintiff 45 Mr Wells submitted that the claims made by the Plaintiff against the First Defendant are not provable debts but that, even if they were, the First Defendant is not released under s.240(1) from the debt by reason of the fraud exception to release in s.153(2)(b) of the Act. 46 He submitted that the decision of the High Court in Coventry was not destructive of the Plaintiff's claim. He pointed to the fact that the issue to be decided in Coventry was whether a claim for unliquidated damages for contravention of a statutory prohibition is a debt provable in the bankruptcy of the person who contravened the prohibition and, by that conduct, induced the claimant to make a contract with a third party: Coventry at paragraph 1. 47 The High Court resolved that question in the negative. The High Court held that a statutory claim for unliquidated damages for misleading or deceptive conduct by the bankrupt which induced the claimant to make a contract with the bankrupt (a bilateral claim), would be a debt provable in bankruptcy (Coventry at paragraphs 6, 71). On the other hand, a statutory claim for unliquidated damages for misleading or deceptive conduct by the bankrupt which induced the claimant to make a contract not with the bankrupt, but with a third party (a tripartite claim), is not a debt provable in bankruptcy (Coventry at paragraph 6, 71). 48 The Plaintiff alleges in this case that the conduct of the First Defendant induced the Plaintiff to, in the first instance, make a contract with the First and Sixth Defendants and, in the second instance, to advance funds to the Fifth Defendant. Mr Wells submits that the construction accorded to s.82(2) of the Act in Coventry does not stand in the way of such claims. 49 Mr Wells submits that Coventry is not authority for the proposition that claims in negligence or for breach of fiduciary duty are provable debts. The Plaintiff makes such claims in this case. Mr Wells emphasises that Aliferis was overruled to the extent that it held that claims for unliquidated damages for misleading and deceptive conduct inducing the making of a contract with the bankrupt were not provable (Coventry at paragraphs 68, 71). He submits that, in Aliferis, the Court held that whilst the claim based on contract would fail, a claim against a solicitor in negligence was not provable in a Part X arrangement. He submits that that part of the decision in Aliferis has been followed in other cases: Reid v Interarch Australia Pty Limited [2000] FCA 1328 at paragraph 15-22; Australian Competition and Consumer Commission v Kritharas (2000) 105 FCR 444 at 449-451. Mr Wells submits that this part of the decision in Aliferis is untouched by the High Court in Coventry. Accordingly, he contends that Aliferis remains good law on this point and constitutes authority in support of these parts of the Plaintiff's claim against the First Defendant. 50 The Plaintiff submits that the claims made against the First Defendant in the FASC are not provable debts within s.82 of the Act. However, if there are tenable arguments to the contrary arising from Coventry, the Plaintiff submits that the appropriate time to determine the First Defendant's contention that all of the claims are provable debts is at the trial and not through the exceptional remedy of summary dismissal. Evidence to be adduced at the trial may bear upon the resolution of these questions. The Court would only grant the exceptional remedy of summary dismissal if the First Defendant discharged the onus of establishing that it was plain that the claims were provable debts. Mr Wells submits that the First Defendant has not discharged that onus and that the summary dismissal application should be dismissed. 51 Even if, however, the First Defendant had demonstrated clearly on this application that any or all of the claims were provable debts within s.82 of the Act, the Plaintiff submits that a further impediment lies in the path of the First Defendant's summary dismissal application in the form of s.153(2)(b) of the Act. 52 The Plaintiff emphasises the broad interpretation to be given to the meaning of "fraud" in that provision in Chittick v Maxwell, Maxwell v Chittick and Re Bosun. The Plaintiff submits that the allegations in the FASC that the First Defendant made false representations, or made representations with reckless indifference as to their truth, constitute allegations of fraud within s.153(2)(b) of the Act as construed in these authorities. 53 The Plaintiff emphasises that it was noted in Coventry (paragraph 18) that none of the exceptions from release provided by s.153(2) of the Act were said to have been engaged in that case. In the present case, the Plaintiff submits that s.153(2) does have application. 54 It is submitted that s.153(2)(b) applies to compositions under Part X of the Act: Chittick v Maxwell. 55 The Plaintiff submits further that matters are likely to arise from the evidence at the trial which will bear upon the claims of fraud made in the FASC. In these circumstances, the Plaintiff submits that this live issue ought be left to determination at trial in the light of the evidence to be adduced.

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Resolution of Competing Submissions 56 To succeed on the application for summary dismissal, the First Defendant must satisfy the stringent requirements of the General Steel test (see paragraphs 5 to 6 above). 57 Where a defendant seeks summary dismissal of a claim against him relying upon a form of statutory protection from suit, it is necessary that the defendant demonstrate clearly that he falls within the protection provided by the statute before the Plaintiff's proceedings are to be peremptorily terminated. The First Defendant has assumed the burden, on this application, of demonstrating that this is so by reference to the contents of the FASC and the fact that he entered into a composition with his creditors pursuant to Part X of the Act on 1 May 1996 which was completed in 17 November 1998. The First Defendant submits that the General Steel test is satisfied in the light of this material and the application of s.82 of the Act as construed by the High Court in Coventry. 58 The decision in Coventry provides arguments upon which the First Defendant may seek to rely to avoid findings and verdicts against him on the Plaintiff's claim. Section 82(1) identifies the debts and liabilities that are provable in bankruptcy in terms that are very wide. Section 82(2) constitutes an exception to an otherwise broadly drawn definition of debts provable in bankruptcy: Coventry at paragraph 20. 59 I accept that each of the Plaintiff's claims against the First Defendant appears to have some relationship back to the retainer agreements between the Plaintiff and the First Defendant referred to in the FASC. However, the various causes of action brought against the First Defendant appear to be intertwined with related claims of various types against other Defendants. These are not simple claims by a plaintiff brought against a single defendant who is or was bankrupt or subject to a Part X arrangement. The decision in Coventry provides considerable support to the First Defendant if the Plaintiff's claims against the First Defendant can be characterised clearly as bilateral claims only. However, it appears to me that there is a triable issue as to whether the Plaintiff's claims against the First Defendant may be characterised fairly as tripartite claims. If they are characterised as tripartite claims, then the claims may not be provable debts and the First Defendant will not attract the protection of ss.82 and 240 of the Act. 60 In these circumstances, I do not accept that the First Defendant has demonstrated, to the level required by the General Steel test that the claims of the Plaintiff against the First Defendant are provable debts. I do not consider that Coventry provides a clear and complete answer to these claims at this time. Whether, on the evidence to be adduced at the trial, the First Defendant is able to defeat these claims by the Plaintiff upon the basis of s.82 and the decision in Coventry remains, in my view, an open question. There are debatable questions of fact and law involved in such a process which may be affected by evidence to be adduced at the trial. I am not satisfied that the First Defendant has discharged the onus upon him on this issue on the present application. 61 Even if the First Defendant was able to demonstrate, to the rigorous standard required on a summary dismissal application, that the Plaintiff's claims were provable debts for the purpose of s.82 of the Act, a further impediment lies in the path of this application. 62 The term "fraud" in s.153(2)(b) of the Act has been given a broad meaning. In Chittick v Maxwell, Young J (as his Honour then was) held that s.153(2)(b) of the Act was applicable in circumstances where equitable fraud had been established. On appeal, Mahoney JA (Priestley and Powell JJA agreeing) upheld this finding: Maxwell v Chittick. Mahoney JA said at 13: "It was submitted for Mr Maxwell that the result of the composition with creditors which was effected in 1991 was that he was released from the claims made by the plaintiffs. Section 153(2)(b) of the Bankruptcy Act 1966 provided that no discharge should be effected so as to 'release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he was a party or a debt of which he has obtained forbearance by fraud'. The learned judge concluded, and I agree, that the 'debt' owed to the plaintiffs was incurred by means of fraud or a fraudulent breach of trust. As the learned judge has pointed out, the term 'fraud' in the bankruptcy provisions in this regard has been given a broad interpretation. It is not necessary to pursue the authorities which were referred to by the judge and in argument before this Court. So much is accepted. The obligations incurred by Mr Maxwell, however they arose and whatever point in time they arose, involved fraud of the relevant kind. The obligations which arose under and by virtue of the original proposal to build were of an equitable nature and, as I have indicated, there was deceit in the nature of fraud at that time. That deceit was repeated at the time the deed was executed. There were, when the various mortgages were entered into, breaches of equitable obligations arising from deceit in the nature of fraud. In my opinion, on each of the relevant occasions, there was fraud within the meaning of the statute. I agree with the judge's conclusions in this regard." 63 The decision of the Court of Appeal in Maxwell v Chittick was followed by Debelle J in Re Bosun, where his Honour said at paragraph 18: "The liquidator has identified a cause of action which, if proved, would entitle the liquidator to recover damages from Makris, notwithstanding that he has been released from bankruptcy. It cannot be said that the liquidator cannot in any respect bring himself within s 153(2)(b). Fraud has a wide denotation in equity, reflecting the fact that Courts of Chancery are courts of conscience acting in personam. Cases such as Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223; Nocton v Lord Ashburton [1914] AC 932; and Boardman v Phipps [1967] 2 AC 46 are examples of what might be regarded as 'technical' frauds: see the discussion in Meagher, Gummow and Lehane (3rd edition) paras 1201 - 1210. The pursuit of interest in conflict with a duty arising from a fiduciary relationship may give rise to a 'technical' fraud. Fraud in this context must be given a broad interpretation by recognising that, in equity, that which is unconscionable might constitute fraud. As was observed by Mahoney JA in Maxwell v Chittick (unreported, NSW Court of Appeal, 23 August 1994): 'The term 'fraud' in the bankruptcy provisions in this regard has been given a broad interpretation'." 64 The FASC contains express allegations that the seven sets of representations allegedly made by the First Defendant were false or were made with reckless indifference as to their truth. 65 In SGB v The Queen (2005) HCA 80, Gummow, Hayne and Heydon JJ said at paragraph 2: "When 'reckless' is used in applying the principles of the tort of negligence, the yardstick is objective rather than subjective. On the other hand, to sustain an action in deceit, fraud is proved when it is shown 'that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false' [the formulation is that of Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 374] . But (3) is but an instance of (2) because, as Lord Herschell put it in Derry v Peek [at 374] : [O] ne who makes a statement under such circumstances can have no real belief in the truth of what he states.

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