Thirteenth Corp Pty Ltd v State [2004] VSC 320

6. The proceeding was commenced by writ dated 18 April 2002. The plaintiff is a company incorporated in the State of Victoria. The statement of claim alleges that by an agreement in writing dated 19 April 2000 between the plaintiff and EM Mactec Pty Ltd ("the Company"), the plaintiff agreed to lend to the Company the sum of $500,000 for a period of 35 days, thus repayable (with interest) on 23 May 2000. At the time when the Company incurred the debt, the defendants, including the first and second defendants, were directors of the Company.

9. The statement of claim alleged that at the time the Company incurred the debt to the plaintiff the Company was insolvent and that each of the defendant directors were aware of reasonable grounds for suspecting that the Company was insolvent (or a reasonable person in a like position would have been so aware). The statement of claim alleged that the defendants contravened s.588G of the Act, that the plaintiff had suffered loss and damage in that the principal sum and interest was not repaid on the due date or at all, and that the debt was wholly unsecured when the loss and damage was suffered. It appears from the statement of claim, and it is common ground, that on 12 May 2000 an application was made to the Supreme Court of Queensland that the Company be wound up, that on 16 June 2000 the Company appointed an administrator and that on 13 July 2000 it was duly resolved at a meeting of creditors that the Company be wound up. As a result, on 13 July 2000, Ian Douglas Ferrier and John Melluish were appointed joint liquidators of the Company.

12. The statement of claim concluded by pleading that the liquidators had given the plaintiff written consent to begin the proceeding and the plaintiff claimed the amount of its loss and damage ($500,000 plus interest) as a debt due to it from each of the defendants pursuant to s.588M(3) of the Act.[1]

15. The first and second defendants reside in Colorado, U.S.A. They entered an appearance on 7 November 2002. On 27 November 2002 they filed a defence consisting simply of a series of admissions, denials and non-admissions. On 5 December 2002 a Master made orders including orders in relation to discovery of documents and the administration of interrogatories to the first and second defendants.

18. The first and second defendants applied to a Master for leave to amend their defence. The application was heard on 1 May 2003 when the Master ordered that the proceeding be referred to mediation and provided for the first and second defendants to serve a copy of their proposed amended defence only if the proceeding did not resolve at mediation.

21. Following the hearing on 1 May 2003, the solicitors for the first and second defendants ("Gadens") wrote to the plaintiff's solicitors ("Comlaw") stating, inter alia, that "Mr Parncutt of Counsel for the plaintiff, informed the Court that the plaintiff required an early mediation date and an early trial (in the event proceeding fails to resolve at mediation) because the plaintiff required the prompt payment of its claim so as to avoid financial ruin." Gadens' letter continued that "[a]s a result of Mr Parncutt's admissions we are concerned that the plaintiff, if it fails in this action, may be unable to pay our clients' costs." The letter went on to refer to estimates of costs and some other matters and requested that the plaintiff provide their clients with security for costs, in default of which they would apply to the Court.

24. By letter dated 27 May 2003, Comlaw replied to Gadens' letter stating "[y]ou have not correctly restated what was said by Mr Parncutt of Counsel on behalf of the plaintiff to the Court. You are aware of that fact." The letter contained no explicit response to the request for security for costs.

27. The mediation was conducted on 20 May 2003 but was unsuccessful.

30. The first and second defendants filed an amended defence on 12 June 2003. They pleaded that the alleged debt and the transaction giving rise to it were not within their knowledge, nor incurred or made with their consent or authority. They further pleaded that the Company was at all material times solvent and they referred, among other things, to an allegedly valuable asset of the Company, namely, its disposal rights under a Land Fill Project Operation Agreement ("LPOA") which asset had been independently valued by valuers at $30M as at March 2001. The amended defence pleaded other positive defences to the allegation that they had contravened s.588G of the Act and also sought to be excused from any contravention pursuant to ss.1317 or 1318 of the Act for a number of reasons, including the fact that they were non-executive directors based in the United States and not involved with the day to day operation and affairs of the Company.

33. On 22 July 2003 the Listing Master fixed the proceeding for trial on 1 March 2004 and gave various associated directions.

36. By summons dated 18 February 2004, the first and second defendants sought leave to file and to serve a third party notice to the fourth defendant and an order that the trial date be vacated.

39. On 19 February 2004 the Master vacated the trial date and gave the first and second defendants leave to file and serve a third party notice. They were ordered to pay the costs thrown away by reason of the vacation of the trial date and the costs of the other parties of the application. Apparently what brought about the vacation of the trial date was the discovery of the whereabouts of the fourth defendant, another director of the Company, who had not been served by the plaintiff and who the first and second defendants wished to join as a third party. Shortly thereafter the plaintiff sought and obtained an order that the period of validity of the writ for service be extended so that the fourth defendant might be served. Other interlocutory steps also took place.

42. It is now necessary to mention that in cl.3.1 of the Loan Agreement dated 19 April 2000 between the plaintiff and the Company the Company agreed to offer as security for the loan a Charge over the LPOA. As a result Gadens requested from Comlaw a copy of the Charge over the LPOA referred to in cl.3.1. On 19 March 2004 Comlaw responded to this request by stating:

"[i]n relation to the Charge referred to in clause 3.1 of the Loan Agreement it has already been made abundantly clear to you our client was not provided with a Charge. Evidence of this fact will be led at trial, if necessary. However, as it appears that you are still steadfast in your belief that there is a charge in existence and correspondence relating to the same, please advise what specific documents you are referring to and where such may be found."

46. In addition, by affidavit dated 6 April 2004 Boman Irani (a director of the plaintiff and an ear, nose and throat surgeon - "Dr Irani"), deposed in substance that he knew nothing of the whereabouts of any documents relating to the Loan Agreement, or any Charge as referred to in cl.3.1 of the Loan Agreement.

49. On 9 June 2004 it was ordered that any further directions in this proceeding be made by the Judge in charge of the Corporations List.

52. By summons dated 16 June 2004, the fifth defendant sought orders against the plaintiff for further discovery and for security for costs. The fifth defendant's summons was supported by an affidavit of his solicitor, Mr Matthews, of the same date. Paragraph 26 of Mr Matthews' affidavit refers to a historical company search. The search shows that the sole director and secretary of the Company is Boman Nosherwan Irani of 10 Marshall Avenue, Kew and that the plaintiff had a total paid-up share capital of $2, comprised of two issued shares of $1, held beneficially (one each) by Farokh Boman Irani and Danesh Boman Irani, both also of 10 Marshall Avenue, Kew (and presumably family members or relatives of Dr Irani). The search further disclosed a registered fixed and floating charge dated 16 June 2000 in favour of St George Bank Ltd (securing the sum of $7M) and a further charge in favour of Civil Construction Services Corporation (securing the sum of $220,500). The charges, which were exhibited to Mr Matthews' affidavit, indicate that the plaintiff was acting in its capacity as Trustee of the "F & D Family Trust".

55. Paragraph 27 of Mr Matthews' affidavit states that searches indicated that the plaintiff owned no real property in the State of Victoria and was not registered for GST purposes.

58. The application by the fifth defendant did not proceed because the proceeding against him was discontinued by consent on 23 June 2004.

61. On 25 June 2004 it was ordered that the proceeding be re-fixed for trial on 11 October 2004 and directions as to a Court Book and for the exchange of witness statements were made.

64. The summons presently before the Court was not filed until 2 August 2004, a considerable time after the proceeding had been re-fixed for trial. The summons is supported by an affidavit sworn by Scott Keith Morris (of Gadens) on 2 August 2004 on behalf of the first and second defendants. Mr Morris deposes that on or about 24 June 2004 Gadens were provided for the first time with a copy of a Land Fill Disposal Rights Agreement Mortgage dated 19 April 2000 (which I have referred to as the "Charge"), which was given by the Company to the plaintiff to secure the obligations, inter alia, under the Loan Agreement. Mr Morris produces as exhibits to his affidavit a copy of the Loan Agreement, a copy of the Charge and a copy of a valuation of the LPOA in the sum of $30M. Further, recent correspondence is exhibited relating to a contention by the first and second defendants that the plaintiff's claim herein is bad at law and also dealing with a foreshadowed application for security for costs. A proposed amended defence was exhibited to a further short affidavit of Mr Morris.

67. An answering affidavit of Charles Leonidas sets out a chronology of the proceeding. Mr Leonidas then deposes that Dr Irani, after having been shown the Charge, says that he had no recollection of having signed that document. I interpolate that nowhere does Dr Irani deny that it is his signature on the Charge - moreover his signature on the Charge seems (at least to my inexpert eye) identical to the corresponding signature on the Loan Agreement. However Mr Leonidas goes on to depose that he is instructed by Dr Irani that the Charge was never lodged for registration pursuant to s.263 of the Act and that Dr Irani was never provided with a copy of it. The status of and the circumstances surrounding the Charge thus remain unclear.

70. Mr Leonidas also refers to an ASIC search which shows that there are three registered charges over the assets of the Company, namely, a fixed and floating charge in favour of Westpac dated 27 August 1999 and registered 30 September 1999, a fixed and floating charge in favour of NAB dated 10 September 1999 and registered in October 1999 and a fixed charge in favour of EM Mactec Inc. dated 21 December 1999 and registered on 28 January 2000. After dealing with a number of procedural matters, Mr Leonidas finally refers in his said affidavit to material indicating that the LPOA or rights thereunder were terminated on 6 June 2000 and that the realisation of any rights under the LPOA would be unlikely to satisfy the claims under the registered charges.

73. Section 588M(1) of the Act provides that that section applies where a director has contravened s.588G(2) of the Act in relation to the incurring of a debt by a company and the creditor to whom the debt is owed "has suffered loss or damage in relation to the debt because of the company's insolvency" and "the debt was wholly or partly unsecured when the loss or damage was suffered" and the company is being wound up. If those conditions are satisfied a creditor may recover from the director as a debt due to the creditor an amount equal to the amount of the loss or damage.[2]

76. When this application first came on for hearing on 6 August 2004 it was submitted by Mr Crutchfield of counsel for the first and second defendants that the plaintiff's debt was a secured debt or, more precisely, that the debt was not "wholly or partly unsecured when the loss or damage was suffered," within the meaning of s.588M(1)(c) of the Act, because the debt under the Loan Agreement was wholly secured by the Charge over the LPOA when the plaintiff (the creditor) suffered the loss and damage. Mr Crutchfield submitted that, on the plaintiff's own pleading, the loss and damage was suffered on 23 May 2000 (i.e. when the loan was repayable but not repaid) and at that time the debt was wholly secured. Accordingly, Mr Crutchfield submitted that the plaintiff was unable to make out any claim under s.588M of the Act and the proceeding must fail. Mr Crutchfield further submitted that it was irrelevant whether the Charge was of value or not; the only question was whether the debt was "wholly or partly unsecured" at the time when the loss or damage was suffered and that at that time in fact the Charge stood as security, expressly, for the whole of the debt.

79. In answer to Mr Crutchfield's submission, Mr Denton SC, who appeared with Mr Parncutt of counsel for the plaintiff, submitted that the Charge was invalid because it was unregistered and therefore the debt was wholly unsecured, or at least, as I understood him, that the Charge was void against the liquidator and therefore the debt was unsecured once the Company was in liquidation. Mr Denton foreshadowed some other arguments but for various reasons the application was adjourned to 20 August 2004.

82. On 20 August 2004 Mr Denton who then appeared with Mr Strahan of counsel for the plaintiff, continued his argument in opposition to the application by the first and second defendants and, at the outset, indicated that the plaintiff wished to amend its statement of claim because there were "a couple of other ways that we would like to be able to put our case". In the meantime Mr Denton contended that there were a number of questions of fact and law, turning primarily on when any loss and damage was suffered by the plaintiff, which were such that the plaintiff's claim could not be said to be hopeless or unarguable, and therefore it should not be summarily dismissed.[3]

85. Mr Denton advanced a further argument, which he referred to as the "nemo dat" argument, based upon the existence of the prior charges. He contended that the Company had nothing left to charge in favour of the plaintiff when it purportedly granted the Charge over the LPOA. In the alternative, he contended (abandoning his previous argument that the Charge was wholly invalid because unregistered) that the debt became unsecured when the Company went into liquidation because the Charge was then void as against the liquidator or because the plaintiff intended to prove for the debt as an unsecured creditor. I indicated to Mr Crutchfield, at that stage, that I did not intend to dismiss the claim summarily because the arguments were difficult and the facts unclear and I could not say that the plaintiff's position was hopeless. No formal order was made and I adjourned the summons so that the proposed amended statement of claim could be considered.

88. When the matter returned on 25 August 2004, there were two further documents before the Court. The first was an affidavit of Dr Irani sworn 24 August 2004 dealing with the security for costs application and I will come to that affidavit in due course. The second was the proposed amended statement of claim of the plaintiff ("the amended statement of claim"). Paragraph 6 of the amended statement of claim alleged that the Company was indebted to the plaintiff on 19 April 2000 (the date of the Loan Agreement) alternatively 23 May 2000 (the date of non-repayment) alternatively 16 June 2000 (the "critical date" when an administrator had been appointed by the Company). Paragraph 6A of the amended statement of claim was inserted to plead that, by cl.3.1 of the Loan Agreement, the Company "purported" to mortgage all its title and interest in the LPOA to the plaintiff and by cl.2.1 of the Charge "purported" to charge the LPOA rights in favour of the plaintiff.

91. Paragraph 11 of the amended statement of claim pleaded that the plaintiff had suffered loss and damage in relation to the debt because of the Company's insolvency in that:

(a) the debt had not been repaid on 23 May 2000 or at all ("the first loss and damage"); (b) the plaintiff had been denied the right to sue for the debt when the Company was wound up ("the second loss and damage"); (c) the debt became wholly unsecured when the LPOA was terminated on 6 June 2000 ("the third loss and damage").

95. Paragraph 12 of the amended statement of claim pleaded that the debt was wholly unsecured when the loss and damage was suffered in that (and I summarise):

1. the plaintiff suffered the first loss and damage on 23 May 2000 at which time the Company had granted prior registered charges; 2. alternatively, the plaintiff continued to suffer the first loss and damage and the debt was wholly unsecured as from 6 June 2000 when the LPOA was terminated, alternatively as from the "critical date" the debt was wholly unsecured by operation of s.266(1) and (8) of the Act (i..e. because the Charge was void as against the liquidator) alternatively because the plaintiff was claiming in the winding up as an unsecured creditor (and also by operation of s.588D of the Act); 3. the plaintiff suffered the second loss and damage on the "critical date" and [here the matters relied on under paragraph 2 immediately above were repeated]; 4. the plaintiff suffered the third loss and damage on 6 June 2000 and at that time the debt was wholly unsecured as a result of the termination of the LPOA.

99. Mr Crutchfield submitted that the proposed amendments to the statement of claim did not disclose a cause of action and were embarrassing. He contended that the amendments had "clarified rather than clouded the issues" and said that he wished to press the "strike-out application". Mr Crutchfield submitted that the relevant loss or damage because of the Company's insolvency was suffered when the debt was incurred, because the Company was then insolvent (the date was either the date of the Loan Agreement or the date when the loan was not repaid). He submitted that the loss and damage could not be said to be suffered when the Company went into liquidation because there could be a contravention of s.588G without the Company ever going into liquidation.[4] The entry into liquidation was not the suffering of the loss and damage with which ss.588G and 588M were concerned.

102. Mr Crutchfield further submitted that the existence or non-existence of security was irrelevant to the questions whether or when loss and damage was suffered because of a company's insolvency. That was made clear by the language of s.588M(1)(c) itself. Further, Mr Crutchfield relied on what was said in Powell v Fryer[5]. In that case Olsson J (with whom Duggan and Williams JJ agreed) dealt with an argument that because revenue imposts, such as rates, constituted a statutory charge on land, the value of the statutory charge had to be taken into account when assessing loss or damage under s.588M, as if the charge had been enforced. Olsson J said,[6] in rejecting that argument:

"I entertain no doubt that, read in context, the loss and damage adverted to is the amount of the unpaid debt due to the creditor in question."

106. Having heard Mr Crutchfield's submissions,[7] I am of the view that, at first blush, they are quite strong arguments and that the plaintiff may ultimately face substantial difficulties in defeating them. Nevertheless the matters are of some difficulty and complexity. There remains uncertainty as to the facts and circumstances of and affecting the Charge, and there are in any event questions of statutory construction and of law which are arguable and which, to my mind, do not admit of summary determination. In those circumstances I cannot, in light of the authorities, summarily dismiss the plaintiff's claim and I will therefore grant the plaintiff leave to amend its statement of claim as sought. It may be that the points made by Mr Crutchfield about the amendments are valid but I do not think that his clients will be embarrassed in their defence of this claim by such amendments.

109. I next turn to the application by the first and second defendants that the plaintiff provide security for their costs. The application, although very late, is made in unusual circumstances, where the existence and nature of the Charge has been recently ascertained by the first and second defendants and, as a result, the plaintiff has found it necessary to substantially amend its statement of claim - this has probably made the case somewhat longer and more complex than that which the first and second defendants originally faced. That is not to say that the case was not at the outset already of considerable potential difficulty. The substantial delay by the first and second defendants must therefore be viewed in the light of these circumstances.

112. Furthermore, the first and second defendants did not, apart from what a company search would have revealed, have available "credible testimony that there was reason to believe that the [plaintiff] will be unable to pay the costs of the defendant"[8] until recently. Indeed the plaintiff was opposing this application on the basis that their evidence of impecuniosity was insufficient. In that regard the affidavit of Dr Irani sworn 24 August 2004 is of some significance. Dr Irani deposes that the moneys which the plaintiff lent to the Company were lent to the plaintiff by him and that he, in turn, borrowed $100,000 from his wife and the balance from "Hollyburton UK Ltd on a short-term basis." Dr Irani deposes that he was sued by Hollyburton for his failure to repay the short-term loan, when the Company failed to repay the loan to the plaintiff, and that Hollyburton obtained judgment against him and that he is paying the judgment debt by instalments. It is evident from this account that the plaintiff is probably without means and that the Court has jurisdiction, subject to discretionary considerations, to make an order for security for costs.

115. Dr Irani goes on in his affidavit to say that an order for security for costs in a sum in excess of $100,000 would prevent the plaintiff from being able to proceed with this proceeding because "I would not be in a position to find the further sum... on top of the moneys I have already paid by reason of the default of the Company." This statement is no doubt directed to show that an order for security for costs would stultify the plaintiff's rights but I am not satisfied that that is shown. It is significant that the shareholders of the plaintiff (F. Irani and D. Irani) have not disclosed their financial position. I note also that Dr Irani's wife (query whether she is one of the shareholders) was able to advance him $100,000 for the purpose of this loan to the Company.

118. Another important matter which I take into account is what appears, in the light of the submissions that the plaintiff's debt was wholly secured, to be the real difficulties facing the plaintiff in this proceeding.

121. In all the circumstances, I think that an order for security for costs should be made. There is material before the Court as to the amount of the costs from this date to the completion of the trial and, in that regard, the plaintiff has provided an affidavit from a practitioner and costs expert who deposes that the proper party-party costs up to and including the trial would be about $114,727. I accept that evidence. I think that an appropriate amount for security for the costs of the first and second defendants is the sum of $114,000. I will order that the proceeding be stayed and the trial date vacated unless security in that amount is provided to the satisfaction of the Prothonotary on or before 9 September 2004

124. I will hear the parties on any consequential orders and as to costs. I mention here that I am not of the view that there should be any variation to the order for exchange of witness statements.

[1] It was common ground that the current provisions of the Act were no different from any prior provisions which may be applicable.

[2] Section 588M(3) of the Act.

[3] Referring to the well-known principles dealt with in such authorities as General Steel Industries Inc. v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125, 129-130; Trade Practices Commission v Pioneer Concrete (Qd) Pty Ltd (1994) 52 FCR 164, 175; Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598, 602-3; Ngo v State of New South Wales [1996] HCA 17; (1996) 137 ALR 40.

[4] Referring to Elliott v Australian Securities and Investments Commission [2004] VSCA 54.

[5] [2001] SASC 59; (2001) 37 ASCR 589 (Full Court of Supreme Court of South Australia)

[6] [2001] SASC 59; (2001) 37 ASCR 589, 602.

[7] I note that Mr Crutchfield also submitted that Mr Denton's "nemo dat" argument was plainly wrong because a subsequent charge would always amount to, at worst, a mortgage of the equity of redemption and thus was still a security. That particular submission was no doubt correct.

[8] Section 1335 of the Act.