Sportsco Pty Ltd v Singh Group Pty Ltd (No 2)

Facts

The underlying dispute related to the purchase of a franchise business.  Singh, the purchaser, submitted that the statutory demand on Sportsco for $70,500 was a refundable deposit under the franchise agreement. Sportsco, the vendor, applied to set aside the demand claiming there was a genuine dispute concerning the debt and that it had an offsetting claim.  Singh alleged there was an agreement that the money was refundable if it was unable to obtain finance for the franchise business.  Singh did not obtain finance.  While Singh was provided with an  an offer to lease premises from which the franchise would operate it was never executed by Singh.  Sportsco claimed there was a dispute as to what constituted the agreement and whether the agreement was subject to finance. It also claimed Singh was liable to pay a franchise royalty fee of five years as a consequence of the breach and was liable for damages of approximately $300,000.

Decision

Ferguson J referred to TR administration proprietor Ltd V Frank marketing and Sales Brochure Ltd as support forthe proposition that in considering applications to set aside statutory demands there is no in-depth examination or determination of the merits of the dispute ([6] to [7]). Ferguson J found the evidence filed on behalf of Sportsco did not rise above the low hurdle required to show there was a genuine dispute. Her Honour found that much of the evidence was mere assertion ([9]). Her Honour was critical of the claim by Sportsco that an agreement had been entered into but it was not produced, similarly when the execution of agreement was denied by Singh Sportsco limited its allegations to a claim that it understood the documents had been sent for execution. Sportsco failed to rebut specific allegations made by Singh, in particular the production of an e-mail setting out the basis of the agreement (ie the monies were refundable if finance was unobtainable). Ferguson J stated, at [15], that while in an application to set aside a demand it is not necessary to have all the evidence required at trial it is necessary to respond to material allegations which could have easily been placed in an affidavit in reply. With respect to Sportsco’s contention that a conversation regarding refundability of the deposit was made by an accountant in the employ of Sportsco who did not have ostensible authority Ferguson J critisised the absence of evidence in support of this serious submission.

BKW Investments Pty Ltd v Training Connect Limited [2011] FCA 1314

Facts

BKW is a business which provides the methodology and material for teaching subjects online.  Training Connect provides educational services in English literacy, numeracy and other subjects ([4]). The parties entered into 2 memoranda establishing a business relationship and the parties commenced negotiations for a license agreement. The negotiations were unsuccessful, the relationship broke down and soon thereafter Training Connect issued a statutory demand regarding monies it had previously paid to BKW.

Decision

Cowdrey J relied, at [26], upon Spencer constructions v TNM Aldridge propriety Ltd regarding the criteria for establishing a genuine dispute, which requires that

• the dispute be bona fide and truly exist in fact;
• the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

In that context Cowdrey J considered that the two memoranda showed that the parties were involved in commercial relations and prima facie the conditions within the documents governed their commercial relationship. The subsequent e-mails and events highlighted a genuine dispute regarding the operation of those conditions.  Those documents demonstrated that the dispute between the parties was real and not spurious, hypothetical or misconceived.  The issues raised by BKW were that payments it received were converted to license payments and, conversely, by Training Connect that the agreements were frustrated were such as to require judicial determination.

Cowdrey J accepted BKW’s submission that because there was no address provided in the notice of the statutory demand BKW had to approach the court to obtain leave to serve its application outside Australia. As such it was placed in a position of severe disadvantage which may amount to a substantial injustice ([33]).  His Honour found that the absence of an Australian address for service constituted a defect. His Honour however stated that given there was a genuine dispute it was not necessary  to formally determine whether the defect cause substantial injustice. BKW sought and obtained a costs order on an indemnity basis.  Cowdrey made an indemnity costs order because Training Connect failed to withdraw the demand when it became apparent that a genuine dispute existed.

Issues

Sportsco and BKW is a study in contrasts. In Sportsco the application failed because Sportsco failed to provide the minimum material necessary to satisfy the court that there was a genuine dispute.  It told heavily against Sportsco that it failed to meet allegations made by Singh in any affidavit in reply and that many of its claims were not supported by documentary evidence which should have been available.  In BKW the court set aside the demand because both parties alleged that the documentation supported their respective positions.  Almost invariably documentary evidence lies at the heart of an application to set aside a statutory demand.  While the courts do not require applicants to lay out their entire case in a “ready – for – trial” format the bar is not so low that a court will accept assertion over evidence.

Care should be taken in relying on BKW as support for an award of indemnity costs when successful in setting aside a statutory demand.  That is not the usual orders made in this jurisdiction. Even where the court finds that it was apparent there was a genuine dispute an order for indemnity costs is rare.

Facts

ASIC alleged that the approval of the consolidated financial accounts of Centro Property Limited. Centro Property Trust and Centro Retail Trust for the financial year ending 30 June 2007 contravened sections 180(1), 344(1) and 601FD(3) of the Corporations Act 2001. Those contraventions included failing to disclose $1.5billion of short term liabilities of Centro Property and $500 million of Centro Retail by classifying them as non current liabilities and failing to disclose guarantees of short term liabilities of an associated company of about US $1.75 billion that had been given after the balance date (see [24] for a detailed summary of the issues).  Middleton J found that those matters were well known to the directors or, if not well known to them, should have been [11] & [23].

Middleton J found, at [8], the directors failed “..to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.”  His consideration of the facts with respect to each director is found at ([289] – [532]).  It is too extensive to comment upon here.  The focus of this post is on the legal principles enunciated by Middleton J.

Decision

Middleton J highlighted the consequences of the breaches and why they are significant when he said, at [10]:

This proceeding is not about a mere technical oversight. The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and, for a listed company, the market, is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view.

Principles

Middleton j restated the obligations and responsibilities of a director as:

• Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her [14];
• regarding documents signed off, approved or adopted by directors “..before they are adopted by the directors, be read, understood and focused upon by each director with the knowledge each director has or should have by virtue of his or her position as a director” [15];
• “there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt” [16]
• “All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position.”[17]
• a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged[17];
• a director should keep informed about the activities of the corporation[17];
• a director should monitor the corporate affairs and policies[17];
• a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements [17];
• a director, whilst not an auditor, should still have a questioning mind [17];
• a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise [18];
• While directors are entitled to delegate the preparation of books of account each director is expected to “..take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries” [20];
• for a director considering financial statements “.. is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focusing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports” [22];

Standard of proof

In a civil prosecution the appropriate test is the Briganshaw standard.  Further, where the applicant’s case rests on inferences from primary facts its is not sufficient for the circumstances to give rise to conflicting inferences of equal degrees of probability [103].

Financial Reporting

Middleton J endorsed the findings of Austin J in ASIC v Rich where the statutory standard encompasses an objective duty of skill or competence in the reading and understanding of financial material (see [123]).  In practical terms that requires, at [124], directors must:

..have the ability to read and understand the financial statements, including the understanding that financial statements classify assets and liabilities as current and non-current, and what those concepts mean. This classification is relevant to the assessment of solvency and liquidity. Equally, a director should have an understanding of the need to disclose certain events post balance sheet date. It would not be possible for a director to form the opinion required by s 295(4)(d) without such an understanding. It is not suggested that a director could vote in favour of a resolution in support of the required directors’ statements when he did not hold the opinions referred to at all.

While the Act requires the directors’ report be prepared by an entity rather than the directors themselves the report must be made by resolution and signed off by directors.  The directors have a “primary responsibility” for the declaration [128].  Directors can can rely on declarations by the CEO and CFO however Middleton J cautioned against taken such reliance too far, [131], stating, at [134]:

The obligation that a director may have to make a declaration, arising out of his or her performance of a chief executive function or a chief financial officer function is in addition to the responsibility that the director has under s 344 to take all reasonable steps to ensure compliance with the financial records and financial reporting requirements: s 295A(8).

At [139]ff Middleton considered the opeation of Part 2M.3 of the Act, relating to the integrity of annual financial statements.  Directors are responsible for compliance with Part 2M.2 & .3.  Under section 344 directors are not obliged to undertake the acts contained in those parts however under section 295(4) directors are required to form an opinion with all due care and diligence which, at minimum means, at [146], they “..must inform themselves as to the financial affairs company to the extent necessary to form each year the opinion required.”  In determining  compliance under section 344 the court must first determine what steps are required to comply with a relevant provision and then ascertain “what steps reasonably ought to have been taken by the directors to secure such compliance” [150]. It is an objective test.

Section 180 – exercise reasonable care and diligence

Middleton J made it clear that the statutory provision reflects the general law (see [164]) and summarised the directors responsibility thus, at [166] as:

Directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company. A director must become familiar with the fundamentals of the business in which the corporation is engaged; a director is under a continuing obligation to keep informed about the activities of the corporation; directorial management requires a general monitoring of corporate affairs and policies, and a director should maintain familiarity with the financial position of the corporation.

It is an objective standard of care which applies to both executive and non executive directors (see [172]).  In this case the directors responsibilities and duties were outside the realm of operational responsibility and the key issue , at [174], is:

..each director armed with the information available to him was expected to focus on matters brought before him and to seriously consider such matters and take appropriate action. This task demands critical and detailed attention, and not just ‘going through the motions’ or sole reliance on others, no matter how competent or trustworthy they may appear to be.”

In this case ASIC relied on the same conduct to allege a breach of both section 180 and 344.  Middleton considered the interplay between them and found, at [188]:

(a) The directors were required by s 180 to be diligent and careful in their consideration of the resolution to approve the accounts and reports; and

(b) The directors were required by s 344 to take all reasonable steps to secure compliance with the relevant provisions of the Act, and to at least inquire about any potential deficiency in the accounts and reports that they observed or ought by the exercise of the requisite care and diligence to have observed.

Accordingly it is possible to allege contraventions of both sections based on a common factual matrix.

Audit Committee

His Honour found, at [203], that while an audit committee had an important role of monitoring and oversight “..this is not to the exclusion of the role of a director to consider the financial accounts for him or herself. This does not involve a director being familiar with every accounting standard, but sufficiently aware and knowledgeable to understand what is being approved or adopted.” By way of obiter Middleton J suggested, at [206], that “.. it may well be that directors should have a degree of accounting literacy that requires a knowledge of accounting practice and accounting standards.”

Pleadings

His Honour made it clear that a party is confined to its pleadings (see [230] – [233]) and quoting the High Court in Kirk v Industrial Relations Commission as to the requirement when dealing with a civil offence:

“common law requires that a defendant is entitled to be told not only of the legal nature of the offence with which he or she is charged, but also of the particular act, matter or thing alleged as the foundation of the charge”. The Court continued (at [26] and [28]) to explain that the essential factual ingredients of the offence must be set out, and that, where the essence of the offence is a failure to do something, that which ought to have been done must be set out explicitly and with particularity..”

No case submission and summary judgment

The directors made a no case submission and summary judgment application which were rejected.  Middleton J did not put the directors to their election . When exercising his discretion Middleton J identified the following factors, at [539] as being relevant:

(a) A departure from the general rule can seldom be justified unless adherence to the rule would not serve the ends of justice or convenience;

(b) The Court will have regard to all the circumstances of the case, including the nature of the case, the stage it has reached, the issues involved and the evidence given;

(c) Regard should be had to whether, in all the circumstances of the case, putting the party to its election will result in the most efficient resolution of the proceeding – the Court will consider whether putting a party to its election will lead to the party unnecessarily leading the remainder of its evidence or, conversely, whether not putting the party to its election may result in a real risk that the Court will be required to consider the same evidence twice;.

(d) Departure from the general rule may be justified where the case alleges fraud or dishonesty – in those circumstances it would normally be wrong to permit a defendant to be cross-examined where there really is no evidence against him/her of fraud;

(e) Similarly, in ACCC v Amcor, Sackville J considered that defendants accused of serious breaches of the Trade Practice Act 1974 (Cth) which would render them liable to substantial civil penalties (and also cause potential loss of business reputation), and that the allegations were analogous to a fraud case, were reasons why the defendants should not be put to their election;

(f) Justice Davies in Trade Practices Commission v George Weston Foods Ltd (No 2) [1980] FCA 16; (1980) 43 FLR 55, rejected the fact that the proceeding was a civil penalty proceeding as a ground for not putting the defendants to their election. He nevertheless took into account as a matter to be considered that the allegation is one that calls for a standard of proof consistent with the seriousness of the allegations made.

The departure from the general rule is justified where the fraud is alleged against the moving party [543].

Middleton J found that the rules permitted a summary judgment application could be made even though a trial had commenced (see [548] – [549]).

ISSUE

While a considerable portion of the decision is a detailed analysis of the facts against the statutory obligations his Honour has set out in clear and precise detail the principles that apply to executive and non executive directors. He has summarised the law which has been extant for some time.  Given the case was involved and hard fought he also had cause to consider and rule upon issues relating to no case submissions, summary judgment and the role of pleadings in civil prosecutions.

Burchell & Anor v Hill & Ors

Facts

The plaintiff issued a subpoena to the National Australia Bank Limited, a non party. The NAB objected to producing the documents specified on the (not unusual grounds) that:

1. it was fishing for documents for the purpose of determining whether there was a cause of action against NAB;
2. it was oppressive and too wide;
3. the documents sought were irrelevant.

Analysis

The issue Muhktar AsJ considered was the scope and operation of the phrase “..to produce any document for evidence..” found in Order 42A.01.  He posited the question, at [3], as:

The question is: does the expression ”for evidence” mean that the only document capable of being sought under this rule is a document – a tenderable document – that the subpoenaing party wants to tender into evidence at trial? The Bank says the rule is to be so circumscribed and relies on the decision of Gillard J in Kennedy Taylor (Vic) Pty Ltd v Grocon.

The plaintiff/respondent submitted that the test was whether there is a legitimate forensic purpose in having the documents produced.  Reference to for evidence only requires that the documents may be needed for trial.  After a detailed review of authorities Muhktar AsJ set out the following applicable broad propositions:

1. at [15], “..the expression “for evidence” might be conjectural but the idea … is to convey an intention that an interlocutory subpoena under rule 42A should not be used as a substitute for non-party discovery. It is looking to obtain documents after the completion of the ordinary pleading and discovery process for use, or potential use, at trial. Whether the subpoena does, or does not, will depend on the terms of the subpoena…it will come to an examination, some times an impression by the Judge, of the breath of amplitude of the document description and nature, and whether the recipient is required to make a judgment whether a particular document satisfies the description
2. at [16], “..for evidence” means no more than the document produced may be potentially required for evidence, either in-chief or by cross-examination.”
3. at [17], “..for evidence” means no more than the document produced may be potentially required for evidence, either in-chief or by cross-examination. “
4. at [18], having regard to court’s practice prior to orders 42 and 42A “..the test was whether there was a legitimate forensic purpose in seeking documents before trial, and if it would be in the interests of justice to compel production. ..the essential test was whether the documents were identified with sufficient particularity.“
5. at [19], “..much might depend on the timing. At an early stage, a court might be more inclined to direct a party to rule 32.07 because at that stage attention is usually focussed on case formulation or pre-trial process. However, closer to trial, a court might be more supportive of the subpoena as long as it was not too wide.”
6. at [20], in determining whether the document can permissibly be subpoened “A useful test and one which I shall apply here is to ask whether the subpoena would have been objectionable if it was made returnable at trial.“

The NAB contended the subpoena was oppressive because there was evidence of illicit purposes.  Shortly before issuing the subpoena the plaintiff wrote to NAB and intimated that it was liable to compensate the plaintiff because a contravention of section 260A of the Corporations Act.  The court took into account the plaintiff’s disavowal of any ulterior purpose and noted that the subpoena was issued in the shadow of a looming trial.  The documents were relevant for that trial.  If they could be used for another purpose there would be a real question of the Court providing leave.  The Court was interested in the  issue at hand.  Compare this approach to that taken by Gillard J in Kennedy Taylor.

Issue

The propositions the court set out while very broad and general are a very useful point of reference when framing a subpoena under Order 42A and making application to set aside such a subpoena.  Some caution is warranted in relying on this decision as determinative of the scope of Order 42A subpoenas.  Gillard J in Kennedy Taylor (Vic) Pty Ltd v Grocon adopted a far more stringent test on the question of “evidence” as did Kaye J in Newnham v Davis. Muhktar AsJ essentially distinguished those decisions on the facts.

Re Bill Express Limited (in liq)

Facts

The applicant’s complaint at first instance, see [3],  was that the wording “all books and records relating to the affairs of [the] Bill Express [Group]” was oppressive and that the use of the expression “relating to the affairs” was uncertain and too wide.  On appeal the applicants in addition to maintaining the objection submitted the summons were beyond power because, see [6],:

1. summons issued under 596B of the Corporations Act must be “specified” whereas the summons described the documents as “relating to” the examinable affairs of the corporation;
2. the documents sought must be confined to examinable affairs of the corporation;
3. it is a fishing expedition;
4. it is too wide

Analysis

Davies J embarked upon a detailed analysis of sections 596D and 596B.  The court’s power under section 596B is enlivened when an eligible applicant provides sufficient facts which which satisfy it that the person summonsed may be able, rather than will be able,  to give information about the corporation or its examinable affairs.  It is not a high threshold (see [13]).  While the discretion is unfettered it must be exercised judicially (see analysis at [14]).

Davies J found that “relates”, a word capable of wide meaning, must be construed in the context within which it appears ([22]).  She found:

In this context, the phrase operates to indicate the requirement that there must be a connection between the documents sought to be produced and the examinable affairs of the company. It follows that a document that is unconnected with the company the subject of the examination or of its examinable affairs would not be a document required to be produced

Regarding point 2 of the applicants submissions her Honour summarised the guiding principles, after a detailed examination of the authorities,  as “the cases confirm that the scope and exercise of the power to order the production of documents for the purposes of an examination depends on the scope and exercise of the power to order an examination.” (see [26]). Where there is no limitation on the subject matter of the examination, other than it is about a corporation’s examinable affairs, the examinee must produce all books and records relating to the affairs of the  corporation.

Davies, extracting Re New Tel (In Liq) listed legitimate purpose of examination under 597 of the Corporations Act (see [27]):

(a) an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation;

(b) an examination assists the corporation’s administrators to identify the corporation’s assets, both tangible and intangible and also allows the corporation’s liabilities to be identified;

(c) the purpose is to protect the interest of the corporation’s creditors;

(d) the examination serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation;

(e) an examination assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations.

Her Honour considered the meaning of “specified books” ([29] – [34]). She found that section 596D(2) requires no other construction than the ordinary meaning of “specified” (see [33]).   To that end she stated:

Where an order is made under s 596B, the summons must identify the books and records required to be produced with sufficient clarity to enable the recipient to know what the documents come within the terms of the summons to be able to form a reasonable view about what must be produced in order to comply with the summons. The inquiry, in each particular case, is the degree of specificity required to provide the clarity and precision that the section mandates.

Her Honour found the summonses were not too wide or oppressive noting that

1. the applicants, although not officers of the company had significant involvement in its affairs.  The onorous nature of the request is no reason not to comply provided it complies with the statutory requirements of section 596D.;
2. the appropriate test in determining whether the summons is oppressive is “.whether the summons makes “reasonably clear” what documents must be produced.” (see [37])

Issue

Courts take a broad view regarding liquidators summonses.  There is limited utility in taking issue with broad terminology typically used in framing such summonses.

]]> http://www.peteraclarke.com.au/2010/04/08/production-of-documents-summons-and-subpoena-re-bill-express-limited-in-liq-2010-vsc-101-31-march-2010-burchell-anor-v-hill-ors-2010-vsc-96-31-march-2010/feed/ 0 http://www.peteraclarke.com.au/2009/05/29/statutory-demands-section-459s-corporations-act-interesting-twists-and-turnsgrant-thornton-services-nsw-pty-limited-v-st-george-wholesale-distributors-pty-ltd-no-2-2009-fca-557-27-may-20/ http://www.peteraclarke.com.au/2009/05/29/statutory-demands-section-459s-corporations-act-interesting-twists-and-turnsgrant-thornton-services-nsw-pty-limited-v-st-george-wholesale-distributors-pty-ltd-no-2-2009-fca-557-27-may-20/#comments Thu, 28 May 2009 20:46:42 +0000 Peter Clarke http://www.peteraclarke.com.au/?p=403 Yesterday’s Federal Court decision in Grant Thornton Services (NSW) Pty Limited v St. George Wholesale Distributors Pty Ltd (No 2) throws up both a curious factual situation but the relatively little considered section 459(S) of the Corporations Act 2001. It is also a salient and sombre lesson in how to run an application.

Facts

Grant Thornton Services (NSW) Pty Ltd (“Grant Thornton”) provides accounting services.  It provided those services to the “Paul’s Warehouse” group of companies.  St George Wholesale Distributors Pty Ltd (St George) is part of that group but unlike other companies in that group it had net asssets.  Grant Thornton issued invoices on St George totalling $91,305.50. When the invoices were not paid Grant Thornton issued a statutory demand.  St George neither paid the sum nor applied to set aside the demand.  When St George found itself the subject of winding up application it roused itself to apply for leave to oppose the application on the basis that there was a genuine dispute. Leave is required because, per section 459 (S), St George could have earlier applied to set aside the statutory demand because there was a genuine dispute.

The issues

Section 459(s) (pars [7]  – [10])

To get leave section 459(s) requires that a court is satisfied that the ground is material to proving that a company is solvent.