FEDERAL COURT OF AUSTRALIA

Lawrenson Light Metal Die Casting Pty Ltd (in liq) v Cosmick Pty Ltd

[2006] FCA 753

PRACTICE AND PROCEDURE – claim against mortgagee for unconscionable conduct in sale of business – claim against solicitors for accessorial liability in placing advertisement for sale of business – strikeout application by solicitors

Held – claim against solicitors dismissed – mere preparation of documents by a solicitor cannot create accessorial liability without any further participation in the impugned conduct

WORDS & PHRASES – “no reasonable prospect of successfully prosecuting the proceeding”

Trade Practices Act 1974 (Cth) s 75B(1)

Federal Court of Australia Act 1976 (Cth) s 31A

Federal Court Rules O 20 r 2, O 11 r 6, O 62 r 9(1)(d)

Duncan v Lipscombe Child Care Services Incorporated [2006] FCA 458 cited

Dey v Victorian Railways Commissioners (1948) 78 CLR 62 distinguished

General Steel Industries Incorporated v Commissioner for Railways (New South Wales) (1964) 112 CLR 125 distinguished

Yorke v Lucas (1985) 158 CLR 661 applied

LAWRENSON LIGHT METAL DIE CASTING PTY LTD (in liq) v COSMICK PTY LTD & ORS

VID 1512 of 2005

HEEREY J

18 MAY 2006

MELBOURNE

THE COURT ORDERS THAT:

1.                  The proceeding against the fifth respondent is dismissed;

2.                  The applicant pay the fifth respondent's costs of the proceeding, including reserved costs and the costs of the amended notice of motion, on an indemnity basis;

3.                  The applicant's solicitors indemnify the fifth respondent against non-payment of such costs.

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

REASONS FOR JUDGMENT

1                     Beforethe Court is an amended notion of motion by which the fifth respondent Kalus Kenny Lawyers, a firm of solicitors, seeks dismissal of the proceeding against them under O 20 r 2 of the Federal Court Rules or alternatively, under O 11 r 6, an order that the statement of claim against them be struck out.  The applicant produced a proposed amended statement of claim, and although formal leave had not been given to file that document it was agreed that argument on the motion should proceed on that version of the statement of claim.

2                     The statement of claim, broadly speaking, alleges that a sale of the business of the applicant company, Lawrenson Light Metal Die Casting Pty Ltd (in liquidation) (Lawrenson) by a Controller, the second respondent Mr William Graham, to the third respondent Melbourne Gravity Pty Ltd (Gravity) was not at arms’ length and was at an undervalue.  Kalus Kenny are said to be liable under s 75B of the Trade Practices Act 1974 (Cth), as aiders and abettors of a contravention of the Act by the first respondent Cosmick Pty Ltd (Cosmick).   

3                     The statement of claim alleges a loan from Cosmick to Lawrenson and default by the latter, following which Mr Graham made the sale complained of.  It is alleged that Mr Graham was the sole director of Cosmick and also a shareholder and director of Gravity, and that the fourth respondent, Mr Alexander McGregor, was also a shareholder and director of Gravity and was acting as an agent or servant for Cosmick and/or Mr Graham.

4                     Paragraphs 23 and 24 allege failure by Mr Graham and Kalus Kenny to give Lawrenson a payout figure for the loan agreement.

5                     Paragraph 25 alleges:

“On Monday 8 November 1999, Kalus Kenny Lawyers acting as solicitors and agents for Cosmick an advertisement in the ‘Financial Review’ for the immediate sale of the plant, equipment and business owed by Lawrenson.”

Presumably the word “placed” was intended to be inserted after “Cosmick”. 

6                     Paragraph 27 alleges

“The Advertisement:

(a)   Was a small advertisement.

(b)   Did not give any details or description of the plant, its equipment, its location, its volume, its reputation and its business.

(c)    Did not give a contact phone number for inquiries.

(d) Did not give sufficient time for offers to be made considering the complexity of this kind of acquisition and nature of business.”

7                     During the course of argument, a copy of the advertisement was produced.  It measures approximately 10 x 15 cm and is in the following terms:

“Cosmick Pty Ltd as the Controller of the assets of a Melbourne based Diecasting company offers for immediate sale the following:

Plant and Equipment

Other business assets

Initial enquiries for the above assets should be made as follows:

Attention:        Mr Henry Kalus

                        Kalus Kenny

                        Commercial Lawyers

                        Facsimile 9826 9909

The above matter is urgent.  Offers for purchase of the above will close at 5.00pm on Friday 12^th November 1999.  All offers must be accompanied by a deposit of 10% payable by bank cheque.”

8                     Paragraph 28 alleges that on 16 November 1999 Mr McGregor made an offer to purchase Lawrenson’s plant, equipment, inventory and business.

9                     Paragraphs 29 and 30 allege that on 23 November 1999 Cosmick, as mortgagee in possession, entered into a contract to sell Lawrenson’s plant, equipment, inventory and business to Gravity “being a company related to McGregor” and that the sale contract was signed by Mr Graham on behalf of Cosmick, and by Messrs Graham and McGregor on behalf of Gravity. 

10                  Paragraphs 31 and 32 allege that the contract price was $400,000 plus a maximum sum of $25,000 for inventory and that at all relevant times the market value was $1.2 - 1.5 million. 

11                  Paragraph 33 alleges that for the following reasons Cosmick has, contrary to s 51AA of the Trade Practices Act, engaged in unconscionable conduct:

“(a)     The terms and conditions of the Loan referred to in paragraphs [sic] 15 hereof.

(b)       The service of the Notice of Demand in circumstances referred to in paragraphs 17 and 18 hereof.

(c)        The service of the Notice of Possession in the circumstances referred to in paragraph 19 hereof.

(d)       The appointment of Graeme [sic] as a Controller of Lawrenson as pleaded in paragraph 20 hereof.

(e)        If only to [sic – presumably “Failure to”] provide Lawrenson with details of the payout figure for the Loan in the circumstances referred to in paragraphs 22, 23 and 24 hereof.

(f)        The placing of the Advertisement within 7 days of serving of the Notice of Possession.

(g)       The deficiencies in the Advertisement as pleaded in paragraph 27 hereof.

(h)       Accepting an offer by McGregor which was on terms less favourable than specified in the Advertisement.

(i)        Entering into the Sale Contract for a wholly inadequate consideration as alleged in paragraphs 31-32 hereof. “

12                  It should be noted that only (e), (f) and (g) concern Kalus Kenny.  Nothing further is alleged against Kalus Kenny in relation to (e). 

13                  Paragraphs 34 and 35 allege aiding and abetting by Mr Graham and Cosmick respectively, contrary to s 75B. 

14                  Paragraph 36 alleges that in placing the advertisement Kalus Kenny have, contrary to s 75B, aided and abetted the breach of the Act by Cosmick.  There is then an allegation that Lawrenson has suffered loss and damage.

15                  The relevant test is now contained in s 31A of the Federal Court of Australia Act 1976 (Cth).  The Court must be satisfied that the applicant has “no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding”.  As I noted in Duncan v Lipscombe Child Care Services Incorporated [2006] FCA 458, this is a lower standard for strikeout applications than that previously laid down by the High Court's decisions in Dey v Victorian Railways Commissioners (1948) 78 CLR 62 and General Steel Industries Incorporated v Commissioner for Railways (New South Wales) (1964) 112 CLR 125. The previous test, which has been replaced by s 31A, required that the allegations be quite clearly so untenable that they cannot possibly succeed.

16                  The only case pleaded against Kalus Kenny is that of accessorial involvement contrary to part of s 75B(1)(a).  There is only a limited reliance on the various forms of accessorial liability provided by this section.  It is not alleged that Kalus Kenny:

·          counselled or procured the contravention (par (a));

·          induced the contravention (par (b));

·          has been in any way, directly or indirectly, knowingly concerned in, or a party to, the  convention (par (c)); and/or

·          conspired with others to effect the contravention (par (d)).

17                  In Yorke v Lucas (1985) 158 CLR 661 at 667 the High Court held that for the purposes of s 75B(1)(a) it must be demonstrated that the person sought to be made liable intentionally aided, abetted, counselled or procured a contravention.  To form the requisite intent, the person must have knowledge of the essential matters which make up the contravention, whether or not there is knowledge that those matters amount to a contravention of the Act. 

18                  In the present case, the only allegation raised against Kalus Kenny to found s 75B liability is that they placed the advertisement.  In itself that cannot amount to the requisite involvement any more than sending the advertisement by post to the newspaper would involve Australia Post in the contravention.  It is not alleged that Kalus Kenny prepared the advertisement, or advised as to its contents or timing.

19                  It is also not alleged that Kalus Kenny prepared the contract of sale, or was involved in negotiations for the sale or had any knowledge of the alleged deficiency between the sale price and the true value. 

20                  This deficiency is all the more striking when one has regard to a proceeding on 9 September last in a related matter before Merkel J: Mijac Investment Pty Ltd v William Graham VID297/2005.  This case concerned complaints about the same sale.  It appears that Mijac Investment was at that stage an assignee of Lawrenson’s rights.  In the present proceeding Lawrenson alleges a re-assignment of those rights.  I was told the present proceeding has been instituted because it is thought that rights under the Trade Practices Act cannot be assigned.

21                  In any event there was an applicationto join Kalus Kenny as a party to the Mijac proceeding.  There was a substantial interchange between Merkel J and Mr Sharp, counsel who then appeared for the applicant.  Pages 12-16 of the transcript follow (irrelevant discussion omitted):

“HIS HONOUR:   Now what does the "solicitor is involved" mean though?  Do you say that they know it is in breach of fiduciary duty and they participated by facilitating it?

MR SHARP:   Yes, your Honour.

HIS HONOUR:   Well, that is the cause of action I said I didn't quite see pleaded.  That they had notice of all the …acts and circumstances that made the sale a breach and they facilitated it by engaging in some conduct independently of their own.

MR SHARP:   We allege that they are aiding and abetting the fiduciaries, Graham and Cosmic, as vendors.

…

MR SHARP:   … We say that Kenny aided and abetted Graham and Cosmic in their actions in breach of their obligations as specified above.

HIS HONOUR:   Yes.

MR SHARP:   So we say that they have breached their obligations as mortgagee.

HIS HONOUR:   … what you really want to say is that they acted as solicitors and they crossed the line and being aware what their clients were doing were in breach of their fiduciary or whatever duties they owed in respect of the sale … and the transactions.  They facilitated them.

MR SHARP:   Yes, your Honour.  …

HIS HONOUR:   Well, there is a cause of action.  I haven't got the case in front of me but anyone who, if you aid and abet or if you participate in a fiduciary's breach of obligations of that kind then you might be liable.

MR SHARP:   Yes.

HIS HONOUR:   … What is unusual is trying to claim that solicitors who merely created the documents to effect the transactions are liable.  … I am not quite sure what it is that you are alleging they did more than prepare documents.

MR SHARP:   Well, your Honour, they acted as their agents.

HIS HONOUR:   But that is a meaningless thing to me.  What does that mean?  Solicitors prepare documents … in their capacity as solicitors.  They are not principals and they don't act as an agent for a principal.  They are contracted to perform a function by someone.

…

HIS HONOUR:   ‑ ‑ ‑ an agent is a person who is effecting the breach on behalf of a principal.  Have you got an authority that says a solicitor in preparing documents that enables these transactions to take a legal form is liable for the breach?  That is what I am asking for?

…

HIS HONOUR:   I just want to look at what you are really claiming against a solicitor expressed in case law.

…

MR SHARP:   It is Gold Sell Nominees (provisional liquidator appointed) v Network Finance [sic – Goldcel Nominees v Network Finance Ltd [1983] VR 257)].

…

MR SHARP:   And I might add, your Honour, that the solicitor did more than act as solicitor and my instructor has pointed out he actually conducted the sale.  He was the party that was responsible for organising the sale.

HIS HONOUR:   What does that mean?

MR SHARP:   I believe, your Honour, that he placed the ads and dealt with the negotiations - through him.  The sale was negotiated through the solicitors …

HIS HONOUR:   Do you know factually what the solicitor did in this case that managed to get them into the ring?

…

MR SHARP:   He conducted the sale.

HIS HONOUR:   ‑ ‑ ‑ that made Murphy J believe that in this case a solicitor is in the ring as a servant and agent of the mortgagee.

MR SHARP:   … I believe … that it was Mr Soburn who was the solicitor for the vendor.

HIS HONOUR:   And what did he do?

MR SHARP:   He conducted the sale.  He organised the sale on behalf of the finance company, received offers, rejected offers.

HIS HONOUR:   Okay.  So he entered into the ring.  Took off his solicitor's cloak and acted as like an agent.

MR SHARP:   Well, we say that is what has happened in this case.

HIS HONOUR:   Okay.  Well, I will hand this back.  Anyway it seems to me that your real complaint against the solicitors relates to their participation in the transaction.”

22                  It is clear that counsel, presumably on instructions, was submitting to Merkel J that his client’s case against Kalus Kenny was that they participated in the transaction complained of and that their participation involved more than simply acting as a solicitor in preparing documents and the like.

23                  The absence of such allegations from the statement of claim presently under consideration shows, as a matter of practical reality, that the only case that the applicant can bring is that Kalus Kenny placed the advertisement in the newspaper.  That falls far short of any conduct which would amount to aiding and abetting for the purposes of 75B(1).  I am satisfied therefore that the claim against Kalus Kenny has no reasonable prospect of success and I will make the orders sought in the amended notice of motion.

24                  The order then will be that the proceeding as against the fifth respondent is dismissed.  The applicant is to pay the fifth respondent’s costs of the proceeding, including reserved costs and the costs of the amended notice of motion, on an indemnity basis.  There will be an order under O 62 r 9(1)(d) that the applicant’s solicitors indemnify the fifth respondent against non-payment of such costs.

Associate:

Dated: