FEDERAL COURT OF AUSTRALIA

B J McAdam Pty Limited v Jax Tyres Pty Limited (No 5) [2014] FCA 358

THE COURT ORDERS THAT:

1.    Pursuant to r 16.21 of the Federal Court Rules 2011 (Cth), paragraph 2 of the Plaintiffs’ Reply filed 24 October 2013 be struck out.

2.    The Plaintiffs are not to rely upon paragraphs 94 to 115 and 183 to 219 of the affidavit of Mr Marcus McAdam sworn 25 October 2013, together with any exhibited documents referred to in those paragraphs (unless such documents are referred to in other paragraphs of that affidavit), at the hearing of these proceedings.

3.    The Plaintiffs pay the Fourth, Fifth and Tenth Defendants’ costs of and incidental to this application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The fourth, fifth and tenth defendants (‘the Hurrell parties’) seek to strike out paragraph 2 of the Plaintiffs’ Reply. If successful they also seek an order which would prevent the Plaintiffs from adducing evidence in support of the case pleaded in that Reply.

2    The background to this litigation is set out in this Court’s previous decisions in B J McAdam Pty Limited v Jax Tyres Pty Limited (No 2) [2012] FCA 799 and B J McAdam Pty Limited v Jax Tyres Pty Limited (No 3) [2012] FCA 1438. These reasons assume familiarity with those two decisions.

3    The relevant paragraphs of the Second Further Amended Statement of Claim, the Defence and the Reply appear in the schedule to these reasons. The Plaintiffs allege that BJ McAdam Pty Limited (‘BJM’) was entitled to receive from Jax Tyres Pty Limited (‘Jax Tyres’) the sum of $283,548. They say, however, that it only received $60,580 of this amount from Jax Tyres. As an alternative they allege that Mr Bruce McAdam received the balance of $222,968 from Jax Franchising Systems Pty Limited (‘JFS’) as trustee for the JF Unit Trust.

4    The Hurrell parties, on the other hand, admit that the $60,580 was paid by Jax Tyres to Mr Bruce McAdam or an entity (such as BJM) which was associated with him. They also agree that $222,968 was paid to Mr Bruce McAdam and that this was paid by JFS as trustee for the JF Unit Trust.

5    On the pleadings there is, therefore, an issue as to whether the $60,580 was paid to Bruce McAdam (or entity associated with him) by Jax Tyres (as the Plaintiffs contend) or by JFS as trustee of the JF Unit Trust (as the Hurrell parties contend). There is no issue about the $222,968. Both parties contend it was paid to Mr Bruce McAdam by JFS as trustee for the JF Unit Trust.

6    In any event, the Hurrell parties plead that the payments made to Mr Bruce McAdam and BJM were both distributions to them as unitholders in the JF Unit Trust. Unlike the Plaintiffs the Hurrell parties do not make any express allegation as to who should have paid the $283,548. They limit themselves instead to allegations as to who did pay it.

7    The Plaintiffs then plead in their Reply that the profits of the joint venture with Quickfit should have been passed to the McAdam interests not through the JF Unit Trust but instead through the Jax Franchising Australia Unit Trust (‘the JFA Unit Trust’). On two prior occasions I have declined to permit such a case to be put because it makes no difference to the economic position of any party: whether the McAdam interests should have received their $283,548 from the JF Unit Trust (of which they hold 33.34%) or through the JFA Unit Trust (of which they also hold 33.34%) is, at least on its face, a somewhat arid inquiry.

8    In the current Reply some effort has now been made to address this concern. It is said that if the money had been paid through the JFA Unit Trust it would have been paid to Merim rather than Mr Bruce McAdam and he is liable to a higher tax rate than Merim. The utilization of the JF Unit Trust has therefore cost him tax and at the same time Merim has received nothing.

9    Unfortunately the case suggested by the Reply is inconsistent with the case pleaded in chief. It will be recalled – it is easy to forget – that the Plaintiffs’ case in chief is that BJM was entitled to receive the distribution of $283,548 from Jax Tyres. Its case in reply is that Merim was entitled to receive the distribution of that sum from Jax Tyres Investments Pty Limited (‘JTI’) as trustee of the JFA Unit Trust. These are inconsistent contentions.

10    That this is so may be observed from tracing the flow of argument:

(a)    the Plaintiffs allege BJM was entitled to be paid the $283,548 by Jax Tyres;

(b)    the Hurrell parties counter by saying Bruce McAdam or an entity associated with him were paid that sum but by JFS as trustee of the JF Unit Trust as to $222,968 and as to $60,580 by Jax Tyres. They say nothing about who should have paid the money beyond a general denial of the Plaintiffs’ allegations (which would suffice to attach to the Plaintiffs’ allegation of the entitlement of BJM to receive the $283,548 from Jax Tyres); and

(c)    the Plaintiffs then plead in reply that the $283,548 should have been paid by JTI as trustee of the JFA Unit Trust to Merim (being the same sum they allege they were entitled to receive from Jax Tyres).

11    The Plaintiffs are thereby committed to proving that the $283,548 should have been distributed by Jax Tyres to BJM and also that it should have been distributed to Merim by JTI as trustee for the JFA Unit Trust. This is a clear case of inconsistency. Nor is it a situation where there is the making of alternate allegations – the Plaintiffs will not be pleading (a) or (c); they will be pleading (a) and (c).

12    Rule 16.06 of the Federal Court Rules 2011 (Cth) prohibits a party from pleading ‘inconsistent allegations of fact or inconsistent grounds or claims except as alternatives’. The Reply contravenes this requirement and will be struck out. It follows that orders preventing the use of evidence in support of the Reply should also be made. The Plaintiffs must bear the costs of the application. I make the orders sought in the Hurrell parties’ brief.

13    If the Plaintiffs wish to run a case that the funds should have flowed to Merim through the JFA Unit Trust they will need either to abandon their present allegation that the money should have been paid by Jax Tyres to BJM or put the argument based upon the JFA Unit Trust as a true alternative. In neither case can this likely be achieved in a Reply. As to the former, only an amendment to the Second Further Amended Statement of Claim could achieve that outcome. As to the latter, the making of the present allegation as an ‘alternative’ would reveal that it was not in reply because the proposition that Merim should have been paid the $283,548 by the JFA Unit Trust is not a reply to either of the points made in the Hurrell parties’ defence that:

(a)    BJM did receive $60,580 from Jax Tyres; and

(b)    Mr Bruce McAdam did receive $222,968 from the JF Unit Trust.

To say that funds should have flowed from source A is not responsive to the proposition that they in fact flowed from source B.

Associate:

Dated:    8 April 2014

Schedule

Relevant portions of Second Further Amended Statement of Claim.

95.    In 2010, Mr. Hurrell caused Jax Tyres to distribute to Valedon and Mr. Hurrell monies based on their shareholding.

Particulars

(i)    Mr Hurrell - $524,404;

(ii)    Valedon - $42,524.

96.    In 2010, BJM was entitled to receive distributions from Jax Tyres in the amount of $283,548, but Mr Hurrell caused Jax Tyres to distribute only received from Jax Tyres $60,580 to BJM.

97.    Alternatively, in 2010, Mr Hurrell caused:

(a)    BJM to recieved the sum of $60,580 from Jax Tyres; and

(b)    Bruce McAdam to received the sum of $222,968 from JFS as trustee for the JF Unit Trust.,

and the plaintiffs repeat paragraphs 102131 to 104133 below as to the financial position of JFS at time of the said distribution.

98.    The conduct of Mr. Hurrell as alleged in paragraphs 95 to 97 above was:

(a)    contrary to the interests of BJM as a member of Jax Tyres:

(b)    further and in the alternative, oppressive to, unfairly prejudicial to and unfairly discriminative against BJM as a member of Jax Tyres.

Relevant Portions of the Defence

95.    In answer to paragraph 95 of the Claim, the Hurrell Parties:

a)    admit that in 2010, Jax Tyres paid the sum of $524,404 to Hurrell or an entity associated with him;

b)    admit that in 2010, Jax Tyres paid the sum of $42,524 to Board or an entity associated with him;

c)    say that the payments referred to in subparagraphs (a) and (b) above were made on behalf of JFS as trustee of the JF Unit Trust; and

d)    otherwise deny the allegations.

96.    In answer to paragraph 96 of the Claim, the Hurrell Parties:

a)    admit that in 2010, Jax Tyres paid $60,580 to Bruce McAdam or an entity associated with him;

b)    say that the payment referred to in subparagraph (a) above was made on behalf of JFS as trustee of the JF Unit Trust; and

c)    otherwise deny the allegations.

97.    In answer to paragraph 97 of the Claim, the Hurrell Parties:

a)    repeat paragraph 96 above;

b)    admit that in 2010, in addition to the sum of $60,580 referred to in paragraph 96(a) above, JFS as trustee for the JF Unit Trust paid $222,968 to Bruce McAdam;

c)    say that, in the premises, in 2010 the total sum of $850,476 was distributed to the unitholders in the JF Unit Trust, being the total of the payments referred to in paragraphs 95(a), 95(b) and 97(b) above in the following proportions:

(i)    61.66% to Hurrell or an entity associated with him;

(ii)    33.34% to Bruce McAdam or an entity associated with hi; and

(iii)    5% to Board or an entity associated with him.

d)    say further that on or about 4 July 2011 a further distribution of $250,000 was paid to the unitholders of the JF Unit Trust, which payment contained an adjustment of approximately $800 so as to equalise the distributions referred to in subparagraph (c) above with the unitholders’ actual respective interests in the JF Unit Trust, namely:

(i)    61.60% to Hurrell or an entity associated with him;

(ii)    33.40% to Bruce McAdam or an entity associated with him; and

(iii)    5% to Board or an entity associated with him; and

e)    otherwise deny the allegations

The Reply

1.    The Plaintiffs join issue with the allegations in the Defences that have been filed by the Defendants.

2.    In reply to paragraphs 95 to 98 of the Defence of the Fourth, Fifth and Tenth Defendants, the Plaintiffs say further:

(a)    the payment of $222,968 referred to in paragraph 97(b) of the Defence of the Fourth, Fifth and Tenth Defendants represented purported distributions of income from the Merged Business (as defined in paragraph 23 of the Second Further Amended Statement of Claim);

(b)    on around 4 January 2005, JTI became the owner of 65% of the units in the JQFS Unit Trust;

(c)    on or about 19 April 2005:

i)    JFS nominated JTI as the Shareholder for the purpose of the Shareholders Agreement dated 16 November 2004 between JFS and Quickfit;

ii)    JTI became the owner of 65% of the shares in JQFS;

iii)    JTI became the trustee of the Jax Franchising Australia Unit Trust (the JFA Unit Trust);

(d)    at all material times after 19 April 2005:

i)    JTI held its units in the JQFS Unit Trust and its shares in JQFS on trust for the JFA Unit Trust;

ii)    JQFS, as trustee of the JQFS Unit Trust, had beneficial ownership of the Merged Business;

iii)    pursuant to the JQFS Unit Trust, JQFS was obliged to distribute income from the Merged Business, as to 65%, to JFS or its nominee and, as to 35%, to Quickfit or its nominee;

iv)    the relevant nominee of JFS was JTI;

v)    to the extent that JFS received income from the Merged Business, it held it on trust for JTI as trustee for the JFA Unit Trust;

(e)    any income from the Merged Business purportedly received by JFS forms part of the assets of the JFA Unit Trust;

(f)    to the extent that any part of that income should have been distributed to “Bruce McAdam or an entity associated with him” as alleged in paragraph 97(c)(ii) of the Defence of the Fourth, Fifth and Tenth Defendants, the income should have been distributed to Merim as shareholder in JTI and unitholder in the JFA Unit Trust;

(g)    if the allegations in paragraph 97 of the Defence of the Fourth, Fifth and Tenth Defendants are correct, then Mr Hurrell and Mr Board, by causing JFS to distribute the income to Bruce McAdam personally and by failing to cause JTI, as trustee of the JFA Unit Trust, to make the payments to Merim:

i)    caused material prejudice to Merim and Bruce McAdam

Particulars

(1)    If Bruce McAdam is obliged to pay tax on the income personally, he will be taxed at a materially higher rate than Merim will be taxed on receipt of the income.

(2)    Merim did not receive the payments it was entitled to receive under the JFA Unit Trust.

ii)    engaged in conduct in the affairs of JTI that was oppressive to, unfairly prejudicial to and unfairly discriminatory against Merim as a member of JTI and/or as a unitholder of the JFA Unit Trust; or

iii)    engaged in conduct in the affairs of JFS that was oppressive to, unfairly prejudicial to an unfairly discriminatory against Bruce McAdam as a member of JFS and/or as a unitholder of the JF Unit Trust;

(h)    the conduct of Mr Hurrell and Mr Board provides further justification for the allegation of breach of section 232 of the Corporations Act 2001 (Cth) in the Second Further Amended Statement of Claim.