Wily v King [2010] NSWSC 352 | Case summary

2009/287724 ANDREW HUGH JENNER WILY & ANOR IN THEIR CAPACITY AS THE LIQUIDATORS OF LED (NORTH COAST) PTY LIMITED v LARRY EDWARD KING & ANOR JUDGMENT 1 I am dealing with an application for judgment in default of defence. For reasons I shall explain, the application must be dismissed. 2 The proceedings in which the application is brought are proceedings by liquidators under s 588M(2) of the Corporations Act 2001 (Cth). 3 The relevant facts may be stated briefly. On 14 August 2008, Mr Wily and Mr Hurst became liquidators of LED (North Coast) Pty Ltd ("LED") pursuant to s 446A of the Corporations Act. On 27 February 2009, a statement of claim was filed by the liquidators as first plaintiff and LED as second plaintiff against Mr King (first defendant) and Mrs King (second defendant). 4 An amended statement of claim was filed on 29 June 2009. The relief claimed is as follows: "(a) An order that the first and second defendants pay to the second plaintiff the amount of $4,966,912.20. (b) An order that the first and second defendants pay to the second plaintiff interest on the amount stated in (a) above from 13 May 2008 until the date of judgment pursuant to section 100 of the Civil Procedure Act 2005. (c) An order that the first defendant pay to the second plaintiff the further amount of $1,007,109.01. (d) An order that the first defendant pay to the second plaintiff interest on the amount stated in (c) above from 13 May 2008 until the date of judgment pursuant to section 100 of the Civil Procedure Act 2005. (e) Costs." 5 The pleading and particulars allege that: (a) each of Mr King and Mrs King was a director of LED for a particular period; (b) LED became subject to a voluntary administration on 13 May 2008 and creditors voluntary winding up on 18 August 2008; (c) in the period 21 December 2006 to 30 April 2008 LED incurred certain identified debts totalling $4,966,912.20; (d) in the period 1 May 2008 to 13 May 2008 LED incurred certain other identified debts totalling $1,007,109.01; (e) at the time of the incurring of each such debt LED was insolvent and there were reasonable grounds for suspecting that LED was insolvent; (f) Mr King was a director of LED at the time of the incurring of each of the debts in each of the two groups and failed to prevent LED from incurring each such debt; (g) Mrs King was a director of LED at the time of the incurring of each of the debts in the first group and failed to prevent LED from incurring each such debt and; (h) Mr King and Mrs King were, at relevant times, aware that there were reasonable grounds for suspecting that LED was insolvent or a reasonable person in a like position in a company in LED's circumstances would have been so aware. 6 The amended statement of claim goes on to allege contravention of s 588G(2) by each of Mr King and Mrs King and an entitlement of the liquidators to "recover from Mr King and Mrs King as a debt due to [LED], an amount equal to the loss or damage suffered by each creditor to whom" a relevant debt is owed. 7 A notice of appearance was filed by Mr Gallant of NOT Lawyers on behalf of Mr King and Mrs King on 20 July 2009. A notice of change of solicitor was filed on 8 October 2009 when Mr O'Neill of O'Neill Partners replaced Mr Gallant. 8 A direction was made on 3 August 2009 that defences be filed and served by 21 September 2009. No defence was filed by either Mr King or Mrs King. 9 On 19 January 2010, the plaintiffs filed a notice of motion seeking judgment for LED against Mr King and Mrs King for $5,762.978.95 (inclusive of interest) and against Mr King alone for $1,168,522.37 (inclusive of interest). The notice of motion was headed "Notice of Motion Default Judgment for Liquidated Claim" and is in Form 38 referring to "UCPR 16.3 and 16.6". 10 As one might therefore expect, the plaintiffs rely on Part 16 of the Uniform Civil Procedure Rules 2005 for the proposition that the court can and should award judgment in the terms sought in the notice of motion. 11 Rule 16.1 provides: "This Part applies to proceedings commenced by statement of claim." 12 These proceedings were, as a matter of fact, commenced by statement of claim. For reasons to be mentioned presently, they should not have been commenced by statement of claim. For the moment, however, I pass over that point and assume that, by operation of rule 16.1, Part 16 of the Uniform Civil Procedure Rules applies to these proceedings. 13 On that assumption, Mr King and Mrs King are defendants "in default" for the purposes of Part 16. This is because of their failure to file a defence within the time allowed by the court: see rule 16.2(1)(a). 14 Rule 16.3 deals with the case where a defendant is in default. It allows the plaintiff to apply for judgment under Part 16 "according to the nature of his or her claim for relief". Unless the court otherwise orders, such an application for judgment must be accompanied by an affidavit of service of the statement of claim and an affidavit in support of the application. Rule 16.6(1) is in these terms: "(1) If the plaintiff's claim against a defendant in default is for a debt or liquidated claim or for a claim for unliquidated damages of the kind referred to in rule 14.13 (2), judgment may be given for the plaintiff against the defendant for: (a) a sum not exceeding the sum claimed, and (b) interest up to judgment, and (c) costs." 15 Rule 16.6(2) says that the affidavit in support must state, among other things, "the amount due to the plaintiff, in respect of the cause of action for which the proceedings were commenced, as at the time the originating process was filed". 16 The philosophy underlying rule 16.6 is that, because provision is made for the filing of a defence in response to a statement of claim and the statement of claim, of its nature, should contain all allegations necessary to make good the entitlement to the asserted cause of action, failure to file a defence should be taken to represent acceptance of the statement of claim and admission of the several allegations in it. 17 The important word in rule 16.6, for present purposes, is "may". The court is empowered to order judgment by default in cases within this rule but is not bound to do so. In Charles v Shepherd [1892] 2 QB 622, where judgment was sought upon default in delivery of a defence, Lord Esher MR said (at 624): "… the Court is not bound to give judgment for the plaintiff, even though the statement of claim may on the face of it look perfectly clear, if it should see any reason to doubt whether injustice may not be done by giving judgment; it has a discretion to refuse to make the order asked for." 18 I return, at this point, to a matter already foreshadowed, namely, that the proceedings were not properly commenced by statement of claim. 19 The cause of action asserted in the proceedings is wholly statutory. Section 588M(1) of the Corporations Act sets out certain conditions which, if satisfied, provide access to later subsections of s 588M. The conditions are, in brief, that a person (called "the director") has contravened s 588G(2) or s 588G(3) in relation to the incurring of a debt by a company, the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency, that the debt was wholly or partly unsecured when the loss or damage was suffered and that the company is being wound up. Elements of s 588G are thus attracted including the incurring of a debt by the company and certain matters concerning insolvency of the company. 20 Section 588M(2) then provides: "The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage." 21 It is, I think, questionable whether a statutory cause of action under which a liquidator (as distinct from the company) "may recover" money "as a debt due to the company" is, in terms of rule 16.6(1) of the Uniform Civil Procedure Rules, a claim "for a debt or liquidated claim". The company itself has no title to sue; and the liquidator, who clearly has a title to sue, has no right to recover. Rule 16.6(1) assumes that a plaintiff has a claim against the defendant for a debt or liquidated claim in such a way that a successful outcome for the plaintiff will be a judgment for the plaintiff against the defendant. The rule 16.6(1) approach does not easily accommodate the bifurcated cause of action created by s 588M(2). For reasons about to be explained, however, there is no need to pursue this question. 22 By virtue of rule 1.3(1)(a) of the Supreme Court (Corporations) Rules 1999, those rules apply to a proceeding in this court "under the Corporations Act". A proceeding in which recovery is claimed upon the wholly statutory cause of action created by s 588M(2) is, clearly enough, a proceeding "under the Corporations Act". Rule 1.3(2) makes "the other rules of the Court" applicable to such a proceeding but only to the extent that they are "relevant and not inconsistent with the Rules", that is, the Supreme Court (Corporations) Rules. 23 Rule 2.2(1) of the Supreme Court (Corporations) Rules is in these terms: "Unless these Rules otherwise provide, a person must make an application required or permitted by the Corporations Act to be made to the Court: (a) if the application is not made in a proceeding already commenced in the Court - by filing an originating process, and (b) in any other case, and whether interlocutory relief or final relief is claimed - by filing an interlocutory process." 24 Having regard to rule 2.2(1)(a) just quoted, these proceedings should have been commenced by originating process. 25 Rule 2.2(3) provides: " An originating process must: (a) be in accordance with Form 2, and (b) state: (i) each section of the Corporations Act or the ASIC Act, or each regulation of the Corporations Regulations, under which the proceeding is brought, and (ii) the relief sought." 26 Rule 2.9(1) provides that a person who intends to appear before the court at the hearing of an application must file and serve a notice of appearance and, "if appropriate", an affidavit stating any facts on which the person intends to rely. 27 There is no provision in the Supreme Court (Corporations) Rules for the filing of a defence to an originating process or for judgment in default of a defence. 28 It follows from the form and structure of the Supreme Court (Corporations) Rules and the fact that the Uniform Civil Procedure Rules apply to proceedings under the Corporations Act only to the extent that they are not inconsistent with the Supreme Court (Corporations) Rules that these present proceedings should have been commenced by originating process in Form 2 and not by statement of claim. A statement of claim would properly have been filed only if an order for pleadings had been made after the filing of an originating process. 29 It may well be the case that a claim under s 588M(2) can properly be determined upon admissions (by the party there called "the director") regarding the several elements referred to in s 588M(1) and imported from s 588G: compare, in relation to the analogous case of s 588FF, Dean-Willcocks (as liquidator of SJP Formwork (NSW) Pty Ltd) v Commissioner of Taxation (No 2) [2004] NSWSC 286; (2004) 49 ACSR 325; Cooper (as liquidator of Wanted World Wide (Australia) Ltd v Commissioner of Taxation [2004] FCA 1063; (2004) 139 FCR 205; Hall (as liquidator of Reynolds Vineyards Pty Ltd) [2004] NSWSC 950; (2004) 51 ACSR 169; Young v Commissioner of Taxation [2006] FCA 90; (2006) 56 ACSR 654; Re Harris Scarfe Ltd; Dwyer v R-Jay Pty Ltd [2007] SASC 115; (2007) 97 SASR 377. 30 But because a claim under s 588M(2) must be commenced by originating process in Form 2, the procedure is not one that provides a basis for the creation of deemed admissions by virtue of the failure to traverse that is the product of failure to file a defence: Termijtelen v Van Arkel [1974] 1 NSWLR 525. 31 The discretion under rule 16.6 of the Uniform Civil Procedure Rules cannot be enlivened by using a statement of claim to commence proceedings that the rules of court say are to be commenced in some other way. The defendants should not have been subjected to a requirement to file a defence except by an express order for pleadings. And even then, Part 16 of the Uniform Civil Procedure Rules would not have applied because the proceedings would have been commenced by originating process under the Supreme Court (Corporations) Rules, not by statement of claim. 32 The plaintiffs cannot take advantage of Part 16 of the Uniform Civil Procedure Rules in this case. Despite the apparent inactivity of the defendants, they must prove the elements of their case. As I have said, it may well be the case that admissions will be sufficient for that purpose (I would add that, if this is so, there is no apparent reason why any deemed admissions under rules 17.3 and 17.4 could not be relied upon). 33 The notice of motion filed on 19 January 2010 is dismissed. 34 The proceedings will be listed before the Corporations Judge on 17 May 2010 for further directions. **********

Wily v King

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