FEDERAL COURT OF AUSTRALIA

Smith, In the Matter of Barron Entertainment Ltd (In Liq) v Barron

[2004] FCA 1596

CORPORATIONS – winding up – insolvent trading – action against directors – springing order requiring filing of defence – failure to comply with springing order – practical implementation of interlocutory judgment – claim for damages to be assessed according to various alternative periods of insolvency – assessment of damages requiring assessment of relevant period – issues similar to those raised at full trial – relevance to discretion to extend time for compliance with springing order

PRACTICE AND PROCEDURE – springing order – direction to file defence within a specified time – filing of formal defence – non-compliance with rules of pleading – bare admissions and denials – failure to have regard to information available to respondents at time defence filed – failure to sign certificate verifying pleading – illusory defence – non-compliance with springing order – whether judgment should be entered – discretion to extend time – time extended – indemnity costs – payment forthwith

Corporations Act (2001) (Cth) s 588G, s 588H, s 588M

Federal Court Rules O 11 r 18, O 11 r 13(3), O 11 r 1B

Burkett v Miller (unrep, Sup Court, 6/9/77) cited

Magenta Nominees Pty Ltd v Bonini  [1999] WASC 88 cited

Reiss v Wolf [1952] 2 QB 557 cited

Republic of Liberia v Roye [1876] 1 App Cas 139 cited

Freeman v Rabinov  [1981] VR 539 cited

Southern Cross Oil v Fire and All Risks Insurance Co Ltd (1986) 7 NSWLR 319 cited

Bomanite Pty Ltd v Slatex Corp Australia Pty Limited (1991) 32 FCR 379 cited

In the Matter of section 588M(2) of the Corporations Act

And

In the Matter of Barron Entertainment Ltd (ACN 008 971 560) (Receiver and Manager Appointed) (In Liquidation),

And

In the Matter of Barron Television Ltd ACN 009 998 794) (Receiver and Manager Appointed) (In Liquidation)

VINCENT ANTHONY SMITH AND BRYAN KEVIN HUGHES as Liquidators of Barron Entertainment Ltd (ACN 008 971 560) (Receiver and Manager Appointed) (In Liquidation) v Paul Douglas Barron and David James Humann

W3034 of 2003

FRENCH J

3 DECEMBER 2004

PERTH

                        IN THE MATTER of section 588M(2) of the Corporations Act

                        And

                        IN THE MATTER of Barron Entertainment Ltd

                        (ACN 008 971 560)

                        (Receiver and Manager Appointed)

                        (In Liquidation)

                        And

                        IN THE MATTER of Barron Television Ltd

                        (ACN 009 998 794)

                        (Receiver and Manager Appointed)

                        (In Liquidation)

THE COURT ORDERS THAT:

A.        On the applicants’ motion filed 25 August 2004:

            1.         The defence filed on 3 August 2004 is struck out.

            2.         The time limited for the respondents to file a defence is extended to 17 December 2004.

            3.         The respondents are to pay the applicants’ costs of the motion filed 25 August 2004 on an indemnity basis and are to pay those costs, to be taxed if not agreed, forthwith.

B.        On the respondents’ motion dated 1 December 2004:

            1.         The motion is dismissed.

            2.         There will be no order as to the costs of the motion.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

                        IN THE MATTER of section 588M(2) of the Corporations Act

                        And

                        IN THE MATTER of Barron Entertainment Ltd

                        (ACN 008 971 560)

                        (Receiver and Manager Appointed)

                        (In Liquidation)

                        And

                        IN THE MATTER of Barron Television Ltd

                        (ACN 009 998 794)

                        (Receiver and Manager Appointed)

                        (In Liquidation)

REASONS FOR JUDGMENT ON MOTION FOR JUDGMENT

Introduction

1                     On 16 December 2003, the liquidators of Barron Entertainment Limited (BEL) and Barron Television Limited (BTV) commenced proceedings against two former directors of the companies, Paul Douglas Barron and David James Humann.  In those proceedings they claimed damages said to have been suffered by unsecured creditors of the companies when the companies incurred debts at a time when they were insolvent.  In February 2004, the directors of the companies were given until April 2004 to file their defences.  On 5 May 2004, they were given an extension of time to file their defences until 5 August 2004.  The District Registrar who made that order also ordered that in the event of non-compliance judgment was to be entered for the applicants.  A defence was filed on 3 August 2004.  The liquidators have since filed a motion for judgment on the basis that the defence, which consisted largely of bare admissions and denials, was not a proper defence and did not comply with the District Registrar’s order.  In the meantime, and at very much the last moment, the directors have filed a motion seeking to substitute a much more expansive amended defence.

2                     For the reasons set out below, I am of the opinion that the defence which was filed on 3 August 2004 was filed merely as a holding defence, did not comply with the rules of pleading, was not a ‘real’ defence to the application and did not constitute a compliance with the self-executing default order made by the District Registrar on 5 May 2004.

3                     I have however decided, having regard to the seriousness of the consequences for the companies’ directors, to exercise my discretion to extend time for compliance with the District Registrar’s order until 17 December 2004.  In the light of the observations made in these reasons for judgment and the issues raised by counsel for the liquidators at the hearing of the motion, counsel and the solicitors acting for the directors will have an opportunity to review the amended defence and to ensure, so far as possible, that the defence now filed accords with the Rules and raises matters of substance in answer to the statement of claim.

4                     In order to minimise the prejudice to the liquidators in terms of wasted costs arising from the necessity to file  the motion which they have, I propose to order that the directors pay the liquidators’ costs on an indemnity basis and that when those costs have been either taxed or agreed, they do so forthwith.  All of this of course is without prejudice to any application that might be brought subsequently to strike out the amended defence when it is filed. 

Factual and Procedural History

5                     The Barron Group of Companies was, for a number of years until July 2001, engaged in the business of making and distributing film and television productions.  The parent company of the group was BEL which operated as the distribution company and which directed and controlled all of the operations of the group at its directors’ meetings.

6                     One of the companies in the group was BTV.  This was a wholly owned subsidiary of BEL and operated as the film and television production company for the group.  Paul Douglas Barron and David James Humann were at all material times, between 16 March 1989 and 23 July 2001, directors of BEL and BTV. 

7                     On 23 July 2001, Vincent Anthony Smith and Bryan Kevin Hughes were appointed as joint and several administrators of both companies.  Upon the commencement of winding up of the companies they were appointed as joint and several liquidators on 1 February 2002. 

8                     On 16 December 2003, the liquidators commenced proceedings in this Court against Mr Barron and Mr Humann claiming damages in respect of loss and damage suffered by trade creditors of BEL and BTV over a number of alternative periods.  The claims were based on the proposition that the two directors had contravened s 588G of the Corporations Act 2001 (Cth) by failing to prevent their companies from incurring debts at times at which there were reasonable grounds for suspecting that the companies were insolvent.  A lengthy and complex statement of claim comprising 61 paragraphs and five schedules was filed with the application.  

9                     The first directions hearing came on before Carr J on 6 February 2004.  The day before that hearing, Mr Harrison, the solicitor acting for Messrs. Barron and Humann, swore an affidavit in support of an extended time for the preparation and filing of a defence.  He said he was informed by the directors and believed that their defence would be that they had reasonable grounds to expect, and did expect, that BEL and BTV were solvent at the time the relevant liabilities were incurred and that the companies would remain solvent.  He said that, in order for the directors to prepare a defence, it was necessary for them to retain an accountant to:

(a)        examine the liabilities shown in the schedules to the statement of claim;

(b)        determine the actual dates on which the Barron companies’ liabilities were incurred;

(c)        prepare statements recording the history of each of the liabilities;

(d)        prepare and present schedules as to the current assets of the Barron companies in order to establish the available funds from which payments could be made; and

(e)        provide such further accounting information as was needed to prepare their defence.

10                  Mr Harrison said that, during the week commencing 26 January 2004, Messrs Barron and Humann had conferred with a chartered accountant, Mr Stevenson, who was a former consultant accountant to their companies.  Mr Harrison had discussed with Mr Stevenson the time he estimated it would take to prepare the accounting information and was given an estimate that at least 100 hours would be necessary and possibly up to 200 hours might be needed.  Mr Stevenson had been approached because he had previously worked with and was familiar with the accounting systems of the Barron Group.  He would require, if engaged, the services of an assistant accountant to provide the information in a timely fashion and if he commenced immediately on the task he would be likely to take eight weeks to provide the necessary information.  By email, on 5 February 2004, Mr Stevenson advised Mr Harrison that because of his workload he was unable to accept the offer to perform the necessary accounting work.  Mr Harrison was informed by Mr Barron that he and Mr Humann were approaching other accountants with a view to having them perform the necessary accounting work. 

11                  Mr Harrison said that, in his opinion, the liquidators’ case against Messrs. Barron and Humann was so complex in fact and law that they should instruct counsel to prepare and present their defence.  At the time of swearing his affidavit he had already sought the preliminary view of counsel, Mr Shanahan, and details of his availability.  Mr Shanahan had then agreed to act as counsel.  He had informed Mr Harrison he would need up to four weeks to draft and settle the defence.  Mr Harrison also foreshadowed that third party proceedings would be commenced against the other two directors of BEL who had not been named as respondents in the proceedings.   

12                  A draft of the statement of claim had been provided to Messrs. Barron and Humann on 27 November 2003.  They had also undergone a substantial public examination conducted by the liquidators before a District Registrar of the Court in December 2002.

13                  At the directions hearing Carr J said that, having regard to the January holiday period, the apparent complexity of the case on the papers, and the sizeable amount of money involved, he accepted what was put to him on behalf of Messrs Barron and Humann and allowed eight weeks for the filing of a defence.  His Honour’s direction required filing of the defence by 2 April 2004.  In the course of the directions hearing his Honour observed that if the worst came to the worst a holding defence would have to be drafted.  The formal direction made by his Honour was in the following terms:

‘By 2 April 2004 the Respondents do file and serve their Defence, any third party notices and third party statements of claim.’

Directions were also given for the filing of witness statements and objections as to admissibility.  No order was made as to discovery on the basis that the parties could proceed cooperatively and informally and that orders would be made if necessary. 

14                  By 4 April 2004, no defence or third party claim had been filed.  Mr Scovell, the solicitor for the liquidators, sent an email to Mr Harrison saying that he had been instructed to request that the matter be brought back to the Court for further programming orders.  Mr Harrison responded that he was in the process of preparing an affidavit in support of an application for additional time.  After some further emails Mr Harrison responded on 16 April 2004 stating that the accountants for the directors had not been able to make much progress in providing information and that substantial further time would be required.  A final program would be provided by close of business on 16 April.  On 22 April, Mr Harrison advised Mr Scovell that the directors would require a further three months in which to prepare their defence and any third party notices.

15                  The matter came before District Registrar Jan on 5 May 2004. 

16                  Mr Humann swore an affidavit on behalf of himself and Mr Barron in which he referred to Mr Harrison’s earlier affidavit and the reference in it to approaches that were being made to accountants to assist in the preparation of the defence.  He named some five accountants who had been approached without success.  Eventually in mid-February 2004 he was able to persuade Messrs O’Brien and Bevan of Horwaths to accept instructions to act.  According to Mr Humann’s affidavit, Mr Bevan spoke with the receiver and manager of BEL, who was then Mr Matt Adams of Taylor Woodings.  He held the records of the Barron Group.  He had provided a CD-ROM listing approximately 2,100 archive boxes of records held relating to the Barron Group.  That CD-ROM contained 140 pages of archive box listing and, according to Mr Humann, was almost illegible.  Mr Humann said it was unclear exactly what boxes contained what material. 

17                  On 30 March 2004, Mr Adams told Mr Bevan that he would arrange for Messrs Barron and Humann to access the selected boxes for a fee of between $500 and $1,000.  Horwaths agreed, on 6 April 2004, to carry out the accounting work but required a fee of $5,000 per month with the first payment to be made in advance.  That meant the initial payment of $5,000 had to be found and that could not be done immediately. 

18                  On 13 April 2004, Mr Humann saw Mr Bevan again to discuss the recovery of the various archive boxes.  He also authorised an ASIC search of the various accounts filed with ATSIC regarding the Barron Group.  He telephoned Mr Adams on 15 April 2004 and discussed with him the most appropriate method of gaining access to the books and records.  Mr Adams said there would be a cost for uplifting the boxes.  Initially Mr Humann was told the cost was $18 per box and that 300 boxes would need to be examined.  He subsequently met with Mr Adams’ assistant, Mr Freeman, and made arrangements for the boxes to be collected.  After further discussion with Horwaths it was agreed that a start would be made by uplifting 42 boxes.  Mr Humann paid $197.40 on 27 April 2004 as a deposit for their collection.  He also paid Horwaths $2,500 on or about 15 April 2004, being his portion of the payment for their April retainer.  Mr Barron had promised to pay the balance by 7 May 2004. 

19                  On 3 May 2004, Mr Humann telephoned Mr Bevan and was told that the first 42 boxes of records had just been delivered to him on that day and that an accountant had been allocated to the task and had commenced the task of preparing the schedules needed for the defence.  Mr Bevan then told Mr Humann that he believed it would take from that date, six weeks to prepare raw material from which relevant working papers and schedules and data could be consolidated and a further three weeks to refine the material into a schedule comparable with the schedules set out in the statement of claim.  Mr Humann asked Mr Bevan if there were any ways of speeding up the process.  Mr Bevan said it would be difficult to do that and would not be time effective to allocate further accountants to carry out the task. 

20                  Mr Shanahan, counsel for Messrs. Barron and Humann, had informed them that once he had the necessary accounting information he would need up to four weeks to draft the defence.  In his affidavit Mr Humann asked for three months in which to prepare the schedules necessary to defend the claim and a further four weeks thereafter for counsel to prepare the defence. 

21                  On 5 May 2004, District Registrar Jan made a number of directions including a direction that by 5 August 2004 Messrs Barron and Humann file and serve their defence and any cross claim.  He also made a self-executing default order in the following terms:

‘Unless the respondents comply with Order 1 herein judgment be entered for the applicants’.

The directions hearing was adjourned to 19 August 2004 at 3pm.  A defence was filed on 3 August 2004.  It was singularly uninformative consisting for the most part of statements of admissions or denial of the various paragraphs set out in the statement of claim. 

22                  On 25 August 2004, the liquidators filed a motion for judgment seeking orders in the following terms:

‘1.        Orders in favour of the Applicants against the Respondents as claimed in the Originating Process on the grounds that the Respondents have not substantively complied with the order of Registrar Jan made 5 May 2004. 

2.         Alternatively, an order that the Respondents’ defence be struck out and judgment entered for the applicants as claimed in the Originating Process pursuant to Order 11, rule 16 of the Federal Court Rules, on the grounds that the defence:

            2.1       discloses no reasonable defence or other case appropriate to the nature of the pleading; and

            2.2       causes prejudice, embarrassment or delay in the proceeding.

3.         The respondents pay the Applicants’ costs of the motion:

            3.1       on an indemnity basis; and

            3.2       forthwith.’

Directions relating to the motion were made on 26 August, 13 October and 12 November 2004. 

23                  A motion was lodged at the Court on 1 December 2004 on behalf of Messrs Barron and Humann seeking leave to amend their defence in terms of a minute of amended defence filed with the motion.  Both motions were heard on 2 December 2004.

Statutory Framework

24                  The relevant parts of ss 588G and 588H of the Corporations Act are as follows:

‘588G(1)         This section applies if:

(a)       a person is a director of a company at the time when the company incurs a debt; and

(b)       the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)        at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d)       that time is at or after the commencement of this Act.

...

(2)       By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a)       the person is aware at that time that there are such grounds for so suspecting; or

(b)       a reasonable person in a like position in a company in the company’s circumstances would be so aware.

...

588H(1)           This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section 588M in relation to the incurring of the debt).

(2)       It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.

(3)       Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time when the debt was incurred, the person:

(a)       had reasonable grounds to believe, and did believe:

            (i)         that a competent and reliable person (the other person) was  responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and

            (ii)        that the other person was fulfilling that responsibility; and

(b)       expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.’

Subsections (4), (5) and (6) relate to defences based upon illness and the taking of all reasonable steps to prevent the company from incurring the debt.

25                  Section 588M is the provision under which the present proceedings are brought.  That section provides:

(1)       This section applies where:

(a)       a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b)       the person (in this section called 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

(c)        the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d)       the company is being wound up;

whether or not:

(e)        the director has been convicted of an offence in relation to the contravention; or

(f)        a civil penalty order has been made against the director in relation to the contravention.

(2)       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.

(3)       The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

(4)       Proceedings under this section may only be begun within 6 years after the beginning of the winding up.’

The Relief Sought

26                  The relief sought in the originating application is in the following terms:

‘Damages

1          In relation to the BEL Debts:

            1.1       Pursuant to s588M(2) of the Corporations Act (Act), payment to the Applicants of the sum of:

                       1.1.1     $2,638,214.00, being the Total BEL Debts incurred during the period from 30 June 2000 to 23 July 2001;

                       1.1.2     alternatively $2,469,796.00 being the Debts of BEL incurred during the period from 30 September 2000 to 23 July 2001;

                       1.1.3     alternatively, $1,671,173.00 being the Debts of BEL incurred during the period from 31 December 2000 to 23 July 2001;

            1.2       Payment to the Applicants of damages in respect of the loss and damage suffered by the BEL Trade Creditors as pleaded in paragraph 58;

2          In relation to the BTV Debts:

            2.1       Pursuant to s588M(2) of the Act, payment to the applicants of the sum of:

                       2.1.1     $5,796,593.00, being the Debts of BTV incurred during the period from 30 June 2000 to 23 July 2001;

                       2.1.2     alternatively $2,735,345.00 being the Debts of BTV incurred during the period from 30 September 2000 to 23 July 2001;

                       2.1.3     alternatively, $435,004.00 being the Debts of BTV incurred during the period from 31 December 2000 to 23 July 2001;

            2.2       Payment to the applicants of damages in respect of the loss and damage suffered by the BTV Trade Creditors as pleaded in paragraph 61.

Interest

3          Interest pursuant to s51A of the Federal Court Act at the rate applicable from time to time from the date each Debt was incurred until judgment.

Costs

4          Costs.

Further Orders

5          Such further or other Orders as the Court considers appropriate.’

Whether the Default Judgment Should Stand

27                  The order made by the District Registrar on 5 May 2004 was in terms self-executing.  However, as may be seen from a consideration of the relief claimed by the liquidators in their originating application, it would not be straightforward in its implementation.  The judgment effected by the order, in the event of non-compliance with the condition that a defence be filed, would at most be interlocutory in character.  That is to say, it would take the form of judgment for damages to be assessed.  The damages claimed in the originating application are claimed on three alternative bases.  The choice of the appropriate basis involves a choice of a period during which debts were incurred.  The three periods are:

30 June 2000 to 23 July 2001

30 September 2000 to 23 July 2001

31 December 2000 to 23 July 2001.

The three periods reflect alternative pleadings in the statement of claim of the periods in which the company is said to have incurred debts while insolvent.  The assessment of damages would therefore necessarily involve a determination of which of the three periods was applicable, that is to say when the company was insolvent for the purposes of s 588G.  It may also draw in the question of the state of knowledge of the directors in respect of the alternative periods posited.  Having regard to the way in which the statement of claim and the claims for relief are framed the assessment of damages is likely to resemble a full trial of the issues. 

28                  It cannot be said that there was no defence filed at all in the present case.  However the liquidators submit that the defence which was filed was so deficient as to constitute a failure to comply with the order of the Court.  This requires a consideration of the circumstances in which superficial compliance with the condition of a springing order requiring filing of a document in court will not amount to actual compliance with that condition.

29                  In an unreported decision of the Full Court of the Supreme Court of Western Australia, Burkett v Miller (unrep, Sup Court, 6/9/77), Burt CJ considered  a ‘self-operating’ order conditioned upon filing an affidavit of discovery.  The affidavit was said to be deficient.  His Honour said:

‘We have had a great deal of discussion today as to whether that order was self-operating but I think upon the filing of the affidavit it could not thereafter be said to be self-operating.  If no affidavit had been filed at all, then perhaps it could have operated itself.’

The decision appealed from in that case was a decision of a single judge on appeal from a Master.  It appears from the brief reasons of the Full Court that an affidavit having been filed the decision of the Master on whether to give effect to the default order was properly to be regarded as discretionary and based upon an assessment of the sufficiency of the affidavit. 

30                  In Magenta Nominees Pty Ltd v Bonini [1999] WASC 88, Wheeler J took from the Burkett decision the proposition that:

‘... the filing of a wholly inadequate affidavit of general discovery will prevent a springing order from being self-executing, but the inadequacy of the affidavit may nevertheless enliven a discretion to strike out the claim pursuant to Order 26 rule 15, on the basis that an inadequate affidavit represents a failure to give discovery as contemplated by the Rules of the Supreme Court or by the relevant order.’

Her Honour referred to other authority for the proposition that a document which is not made in good faith or could be regarded as an illusory attempt to comply with a springing order will not prevent the order from being self-executing notwithstanding that, in its form, the document appears to be an appropriate affidavit – Reiss v Wolf [1952] 2 QB 557; Republic of Liberia v Roye [1876] 1 App Cas 139 but cf Freeman v Rabinov [1981] VR 539 and Southern Cross Oil v Fire and All Risks Insurance Co Ltd (1986) 7 NSWLR 319.  Her Honour concluded from the authorities that:

‘... while the filing of a document, which is deficient in some respect, may prevent the operation of a springing order, it is not the case that the Court will never look at the substance of the document.  However, even if the document is of such apparent adequacy as to prevent the operation of the springing order, Burkett directs attention to a further inquiry, in the exercise of a discretionary decision.’

31                  There is no express provision of the Federal Court Rules which confers upon the Court the power to enter judgment on a discretionary basis where formal compliance with a condition of a springing order, sufficient to defeat the operation of the order, has occurred.  In my opinion, the questions the Court is asked to consider in determining whether there has been compliance with an order that a pleading be filed. are:

1.         Has any document be filed at all, and if so

2.         Does the document filed as a matter of form and substance comply with the order made?

If the answer to the second question is no, then the self-executing default order will operate.  If it is yes, then the self-executing default order will not operate.  The answer to the question may involve an assessment and evaluation of the substance of the document filed and whether, as a matter of substance, it obeys the order of the Court.  That is not a question of discretion.  If there be compliance then, in my opinion, no question of discretion arises in relation to the operation of the default order.

32                  If a pleading is filed it may comply with the requirements of the order and yet be amenable to strike out under the provisions of the rules relating to pleadings which fail to disclose a reasonable cause of action or defence or on one of the other prescribed grounds.  That it is struck out does not mean that its filing was nugatory and that it did not satisfy the requirements of the self-executing default order.  Such an order is a serious measure which, if it takes effect, deprives a party of its entitlement to have its case heard and determined on the merits.  It does so on the basis of a serious failure to comply with an order of the Court.  It is not to be construed broadly or vaguely. 

33                  The defence in this case consisted of some admissions but for the most part simply comprised denials of the greater part of the statement of claim.  It contained virtually no pleading of any material facts as required by O 11 r 2.  In particular, it did not raise any of the defences under s 588H of the Corporations Act, especially s 588H(2).  Yet, according to Mr Harrison’s affidavit sworn on 5 February 2004, he had been informed by Messrs Barron and Humann, and believed, that their defence would be that they had reasonable grounds to expect, and did expect, that BEL and BTV were solvent at the time the relevant liabilities were incurred.

34                  Order 11 r 18 provides that:

‘When a party in any pleading denies an allegation of fact in the previous pleading of the opposite party, he must not do so evasively or generally, but must answer the point of substance, in accordance with rule 13 of this Order.’

Order 11 r 13 relates to admissions and traverses by specific denial or by a statement of specific non-admission.  Order 11 r 13(3) provides:

‘Subject to sub-rule (4), every allegation of fact made in a statement of claim or counterclaim which the party on whom it is served does not intend to admit must be specifically traversed by him in his defence or defence to counterclaim, as the case may be; and a general denial of such allegations, or a general statement of non-admission of them is not a sufficient traverse of them.’

35                  The failure of the defence which has been filed, to comply with the requirements of O 11 rr 18 and 13 is illustrated simply by its bare denial of the entirety of par 7 of the statement of claim.  This paragraph comprises some 22 subparagraphs and a larger number of sub-subparagraphs.  It sets out various matters by reason of which it is said, by the liquidators, that on each of the occasions between 30 June 2000 and 23 July 2001 that debts were incurred by BEL, there were reasonable grounds for suspecting that BEL was insolvent or would become insolvent by incurring those debts. 

36                  The defence as filed was not accompanied by the certificate in accordance with Form 15B, which is required by O 11 r 1B.  That certificate is in the following form:

‘I (name of legal representative) certify to the Court that, in relation to the pleading dated  (insert date) filed on behalf of the (party, eg applicant, respondent), the factual and legal material available to me at present provides a proper basis for:

(a)       each allegation in the pleading; and

(b)       each denial in the pleading; and

(c)        each non-admission in the pleading.

Date:

                        Legal representative for the (party, eg applicant, respondent)’

In my opinion the ‘defence’ filed, on the face of it, did not amount to an attempt in good faith to plead to the statement of claim.  It was plainly conceived as a ‘holding defence’ that is an attempt to defeat the operation of the self-executing default order and to obtain more time for the preparation of the real defence in these proceedings. 

37                  The preceding conclusion is reinforced by a consideration of some of the statements made by Messrs Barron and Humann in their public examinations on matters covered by their blanket denials in the present defence.  Paragraph 6.1 of the statement of claim alleges that overdraft facilities at the National Australia Bank (NAB) had been withdrawn in December 1999 and that the NAB required BEL to obtain alternative funding and to repay its overdraft facilities in full by 28 February 2000.  It was also alleged in par 6.1 that the NAB advised BEL in April 2000 that it no longer wished to be BEL’s bank.  This was all simply denied in the defence.  Yet, as appears from the public examination, these matters were put to Mr Barron and it was not really disputed that the NAB had informed BEL of the need to obtain alternative finance.  Mr Barron was referred in the course of the examination to a financial report forming part of a BEL Board meeting agenda which was to the effect that the NAB had withdrawn the company’s overdraft facility and confirming the position that they no longer wished to be the company’s bankers. The further allegation that at 30 June 2000, BEL had no overdraft or banking facilities from any other bank or financial institution was also denied even though it appeared clear  from the agenda item referred to that there was no existing overdraft or other facility at the relevant time.

38                  At par 6.3.2 it was alleged that one of the only alternative sources of finance to BEL was an Underwriting Agreement by which the Capital Finance Corporation Australia Pty Ltd was to provide any shortfall in film production costs not obtained from investors.  This too was denied.  Yet the existence of the Underwriting Agreement dated 28 February 2000 was accepted by Mr Barron.  In the course of the public examination he was asked:

‘Q.       As I understand this Underwriting Agreement, this is an agreement for Capital to come up with any shortfall in production costs that are not obtained from investors.  Is that correct?

A.        Without reading the Agreement in detail that would be my understanding.’

39                  The public examination was conducted in December 2002.  Mr Scovell’s affidavit multiplies examples of matters denied in the defence which are said to conflict with admissions made and documents tendered during the public examination.  The content of the proposed new defence in relation to par 6.1 concerning the position with respect to the NAB reflects material which could have been made available to Mr Barron’s solicitors and counsel from before the time that these proceedings were instituted.

40                  Whatever the difficulties experienced in obtaining access to the accounts of BEL and BTV, it is clear that, as at 5 August, there had been no real attempt to go even part of the way in attempting to plead a real defence to the claim. 

41                  In his affidavit of 12 November 2004, Mr Barron said that the defence filed was ‘a defence prepared by our legal advisers based on what information could be collated and made available to us at that time’.  Having regard to the matters already on the record in the public examination and matters raised in the minute of the amended defence, the defence as filed plainly did not answer the description in Mr Barron’s affidavit.

42                  In this case I am driven to the conclusion that what was filed was not in truth a defence to the claim at all.  It was never intended to be the defence.  It was filed simply to avoid the effect of the self-executing default order made by the District Registrar.  It did not comply with the Rules of Court.  It did not reflect any real attempt to plead matters which it was within the capacity of Messrs Barron and Humann to plead having regard to the content of their public examinations and the materials that were put before them at that time.  In my opinion the order made by District Registrar Jan was not obeyed by the filing of the defence and because it failed to comply with the requirements of the Rules or to disclose any reasonable defence in accordance with those requirements, the defence should be struck out. The question that arises is whether there should be judgment for the liquidators on the basis of the non-compliance.

43                  It was open to Messrs Barron and Humann to apply to the Court for a further extension of time for the filing of the defence in the event that it could be shown that, despite their best endeavours, the information necessary to make a full and complete pleading had not come to hand.  Instead of taking that step they placed misconceived reliance upon a holding defence which was not a defence at all.  I am inclined to what some might regard as the charitable view that this probably indicates not so much a deliberate and contumelious disregard of the Court’s orders as a basic misconception about what was sufficient to comply with them.  It seems inescapable that their advisers, not least counsel who signed the defence, may have given support to that misconception. 

44                  I have a discretion to extend the time fixed by District Registrar Jan for filing a proper defence.  This is not a matter of exercising what I regard as a questionable ‘discretion’ to give effect to a self-executing default order where there has been a formal compliance but the document filed is deficient.  The discretion to which I have regard in this case is the well established discretion to extend time for compliance with an order of the Court.  In considering whether to extend time, I have regard to the following factors:

1.         The prejudice to Messrs Barron and Humann if judgment is entered against them by default having regard to the very substantial sums involved amounting to some millions of dollars.

2.         The absence, as conceded by counsel for the liquidators, of any prejudice to the liquidators other than incurring of costs and the delay in respect of the motion and the delay in recovery of those costs.

3.         The extent to which an order for indemnity costs payable forthwith will mitigate such prejudice as the liquidators may have suffered.

In having regard to the two last mentioned elements, I am mindful of the remarks which I made in Bomanite Pty Ltd v Slatex Corp Australia Pty Limited (1991) 32 FCR 379 (at 392):

‘Non-compensable inconvenience and stress on individuals are significant elements of modern litigation.  Costs recoverable even on an indemnity basis will not compensate for time lost and duplication incurred where litigation is delayed or corrective orders necessary.  The public interest also has become an increasingly significant element in the application of judicial resources.  Inefficiencies in their use arising from lost and wasted time can never be compensated by costs.’  

4.         The nature of the assessment of damages which would have to be undertaken and which, for reasons I have already given, would involve a consideration of substantive issues likely to arise at the trial of the proceedings in any event.

45                  Messrs Barron and Humann have filed a motion and a proposed amended defence.  The question of the sufficiency of that document has been raised by the liquidators in argument.  I am not in a position to say that it discloses no defence.  It offers a much more detailed pleading than its predecessor, albeit it still contains a large number of bare denials.  However, there appears to be a positive case advanced and facts pleaded in relation to it.  The minute as filed does not comply with O 11 r 1B in that it does not attach or embody the necessary certification by counsel in the form contained in Form 15B of the Federal Court Rules.  The amended defence does offer the promise of a substantive defence.  In my opinion, the course that I should undertake is to extend the time for filing a defence and to extend it for a further 14 days from today so that counsel for Messrs Barron and Humann and their solicitors may have regard to the requirements of the Rules in relation to pleadings, the observations I have made and the necessity to be in a position to properly certify in accordance with O 11 r 1B.

46                  Counsel for the liquidators has asked for indemnity costs on the motion.  In my opinion, having regard to the circumstances which I have outlined in this case, that is an appropriate order as is the other order sought, that the costs should be paid forthwith.  The fact that I am able to make that order has informed the exercise of my discretion in deciding to extend the time for the filing of a proper defence. 

Conclusion

47                  For the preceding reasons the orders that I make are as follows:

A.        On the applicants’ motion filed 25 August 2004 IT IS ORDERED THAT:

            1.         The defence filed on 3 August 2004 is struck out.

            2.         The time limited for the respondents to file a defence is extended to 17 December 2004.

            3.         The respondents are to pay the applicants’ costs of the motion filed 25 August 2004 on an indemnity basis and are to pay those costs, to be taxed if not agreed, forthwith.

B.        On the respondents’ motion dated 1 December 2004 IT IS ORDERED THAT:

            1.         The motion is dismissed.

            2.         There will be no order as to the costs of the motion.

Associate:

Dated:              3 December 2004