Supreme Court New South Wales Medium Neutral Citation: Prime Capital Securities Pty Ltd v David Tai Acupuncture Research Centre Pty Limited [2013] NSWSC 725 Hearing dates: 29 May 2013 Decision date: 29 May 2013 Jurisdiction: Common Law Before: Slattery J Decision: Fifth cross defendant's motion dismissed. Fifth cross defendant to pay 75% of the cross claimants' costs on the motion and all the third and fourth cross defendants' costs of the motion. Fifth cross defendant to serve a Statement of Account in relation to the loan made to the second cross claimant. Catchwords: PROCEDURE - summary disposal - application to strike out parts of the cross-claim under UCPR r 13.4 - the fifth cross-defendant claims that the cross-claim discloses no reasonable cause of action against him - whether the pleaded case is available to be made out - whether the case is adequately pleaded - not plain and obvious that there is no issue to be tried - HELD: motion dismissed. PROCEDURE - pleadings - whether knowledge under Australian Securities and Investments Commission Act 2001 s 12GF and s 236 of the Australian Consumer Law sufficiently pleaded - UCPR r 14.28 - HELD: pleadings sufficient - motion dismissed UNCONSCIONABLE DEALINGS - unconscionable conduct and misleading and deceptive conduct - the cross-claimants claim that the first cross-defendant did not disclose a fee payable under a loan agreement and engaged in unconscionable conduct - representation by silence - fifth cross-defendant a director of the first cross-defendant - cross-claim pleads that the fifth cross-defendant was a person knowingly involved in the first cross-defendant's conduct. COSTS - interlocutory decisions - general rule that costs follow event - the fifth cross-claimant unsuccessful on the motion - whether the cross-claimants should have all their costs of the motion - the cross-claimants amended the cross-claim after the strike out motion was filed - HELD: the fifth cross-defendant to pay 75% of the cross-claimants' costs of the motion. COSTS - interlocutory decisions - whether a parties not joined to the motion should have their costs of the motion - the parties had a direct procedural and substantive interests in the outcome of the motion - HELD: the fifth cross-defendant to pay the costs of the third and fourth cross-defendants on the motion. Legislation Cited: Australian Securities and Investment Commission Act 2001 s 12GF, s 12CA to 12CC, s 12BA to 12BN Uniform Civil Procedure Rules 2005 r 13.4, r 14.28 Real Property Act 1900 s 57(2)(b) Cases Cited: General Steele Industries v Commissioner for Railways (1964) 112 CLR 125 Texts Cited: P Butt Land Law 6th edition Category: Interlocutory applications Parties: Prime Capital Securities Pty Limited: Plaintiff,First Cross Defendant David Tai: Defendant, Cross Claimant David Tai Acupuncture Research Centre Pty Limited: Second Cross Claimant Global Nominees Pty Limited: Second Cross defendants Sandra Littlewood: Third Cross Defendant Audrey McDonald: Fourth Cross Defendant Paul Scanlon: Fifth Cross Defendant Representation: Counsel: Mr Newton (Plaintiff and Fifth Cross Defendant) Mr Rickard (Defendant and Second Cross Claimant) Mr Griscti (Third and Fourth Defendants) Solicitors: File Number(s): 2011/00385376 ex tempore Judgment 1This is an application by the fifth cross-defendant to strike out the cross claim in the proceedings against him. The motion is brought on the basis that the cross claim against the first cross-defendant discloses no reasonable cause of action against him, or, in the alternative, that the case is not adequately pleaded against him. But to understand the role of the fifth cross-defendant in the pleading and in the wider events between these parties, some background is required. 2The fifth cross-defendant, Mr Scanlon, is a director of and a shareholder in Prime Capital Securities Pty Limited ("Prime") the plaintiff and first cross-defendant in these proceedings. In August 2011 Prime lent $1.1 million to a company David Tai Acupuncture Research Centre Pty Limited ("Acupuncture Research") which loan obligations were guaranteed by David Tai, a defendant and a cross-claimant in the proceedings. The purpose of the loan was for Mr Tai to purchase a house in Bunyana Avenue, Wahroonga in which Mr Tai then lived and from which he conducted his acupuncture business. 3The loan was for a period of 12 months. It was advanced on an interest only basis, secured by mortgages given over the Bunyana property itself and six other commercial properties owned either by Mr Tai or by Acupuncture Research or interests associated with Mr Tai. 4The loan documentation was finalised on 18 August 2011 but the loan went into default very shortly afterwards. Real Property Act 1900 s 57(2)(b) notices were served on 11 October 2011. 5Prime then proceeded to exercise its power of sale over all seven properties, the Bunyana property and the six others. All sales of those properties were completed by about March 2012. I am told from the bar table, that Westpac, the first mortgagee on some of the properties, has been paid out, after which about $2.2 million has been realised from those sales. There were attempts to resolve these proceedings during 2012 between Mr Tai and Mr Scanlon but they have been unsuccessful. 6These proceedings have a curious procedural history. Originally Prime commenced the proceedings for possession of the Bunyana property and some of the other properties, and for recovery of the $1.1 million and other interest and fees due under the loan agreement. Prime's claim was against both Acupuncture Research and Mr Tai. But after Mr Tai and Acupuncture Research launched a cross-claim back against Prime and a number of other parties, who will be detailed in a moment, Prime sought to discontinue the principal proceedings. Acupuncture Research and Mr Tai opposed this course unless their legal costs were paid. 7The cross-defendants on the cross-claim are the following persons. Prime is the first cross defendant. Mr Scanlon is the fifth cross-defendant. But apart from him there are three other cross-defendants, two of them solicitors and one a corporate purchaser of the properties mortgaged as security for Prime's loan to Acupuncture Research. 8Mr Newton of counsel appears for Prime and Mr Scanlon. Mr Rickard of counsel appears for the Tai interests and Mr Griscti of counsel appears for the two solicitors: Ms Littlewood and Ms Macdonald. 9Pursuant to Prime's exercise of its power of sale, the Bunyana property was sold to a company called Global Nominees Pty Limited ("Global Nominees"). The cross-claim pleads against Global Nominees, as the second cross-defendant, that its shareholders are Mr Scanlon and a company called Prime Bnk Pty Limited and that Mr Scanlon is a director of Global Nominees. 10The claim against Global Nominees is that Mr Scanlon controlled both Prime, the company exercising the power of sale and Global Nominees the purchaser of the Bunyan property. The claim against Global Nominees is that it was a party to and a beneficiary of a misuse by Prime of its exercise of power of sale, and acted in breach of its duty to act in good faith in the exercise of that power. The Bunyana property was purchased for some $1.047 million in August 2011 and then sold to Global Nominees for $960,000. A question is whether it should have been sold to Global Nominees at all, if Mr Scanlon was a controller of both companies. If these alleged facts are made out relief might be possible against Prime and Global Nominees, on the basis that it may be difficult for both companies to establish a sale wholly in good faith between companies that are creatures of the same individuals: cf Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 at 58-59 per Lord Templeman, ANZ Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 227-228 per Aickin J, Re One.Tel Networks Holdings Pty Limited [2001] NSWSC 1065 and see P Butt Land Law 6th edition at 660. But that is not what I am concerned with today. 11Two solicitors are also sued on the cross-claim: Ms Littlewood and Ms Macdonald. Ms Littlewood acted for Acupuncture Research on the purchase of the Bunyana property and the associated financing transactions with Prime. Ms Macdonald acted as the solicitor giving advice to Mr Tai who was required to give a guarantee of the obligations of Acupuncture Research as one of the conditions of the loan. 12The contentions against all these persons in the cross-claim can be summarised at a fairly high level in the following way. The cross-claimants' claim is that Prime engaged in misleading and deceptive conduct and unconscionable conduct in the way that the loan documentation and loan transaction proceeded with Acupuncture Research and Mr Tai. Mr Scanlon is said to be knowingly involved in that misleading and deceptive conduct and the alleged unconscionable conduct. Whether such misleading and deceptive conduct or unconscionable conduct was engaged in is very much in issue as a matter both of fact and law. 13The two solicitors involved are each alleged to have been negligent in the performance of their duties of care and skill on their retainers. The negligence alleged, that they failed to ensure that Mr Tai and his company well understood the terms of the loan, is disputed. In Ms Littlewood's case it is alleged that Acupuncture Research was not properly advised, and against Ms Macdonald that Mr Tai was not properly advised. 14The focus now turns to the pleadings and the documents for the transactions in question. It is only necessary in the balance of these reasons to consider the position of Acupuncture Research, Prime and Mr Scanlon. Mr Tai's position as guarantor is not of central relevance, nor is that of the solicitors, nor that of Global Nominees. 15The only parts of the pleadings currently in issue relate to the plea by Acupuncture Research and Mr Tai for knowing involvement in the alleged misleading and deceptive conduct and unconscionable conduct of Prime. 16A Further Amended Cross Claim has been offered in answer to the motion filed in March. The legal representatives on all sides have efficiently taken the course of seeking to reduce the issues on the motion: by Mr Rickard proposing to file this Further Amended Cross Claim that deals with some of the matters raised in the motion; and by Mr Newton arguing the motion on the basis of the Further Amended Cross Claim. 17The pleadings between the Tai interests and Mr Scanlon require examination of paragraphs 14A, 14B, 15, 16, 18C, 18CA, 18D and 18E of the Further Amended Cross Claim ("FACC"). They provide as follows: 14A. The First Cross Defendant engaged in the following conduct: a. inserting in the Loan Agreement the clauses referred to in paragraph 14 requiring payment by the Second cross claimants of interest and fees pursuant to the clauses referred to in paragraph 14; b. denying the Cross Claimants the opportunity to rectify the alleged events of default; c. denying the Second Cross Claimant the opportunity of refinancing the loan. d. failing to disclose the first cross defendant's true intentions regarding the way it proposed to manage the loan; e. requiring the Cross Claimants to provide more security than reasonably necessary to protect its interests; f. inserting in the Loan Agreement and/or seeking to rely upon clauses 5.1 (read with items 3 and 4 of the schedule), 5.2, 5.3, 6.1 (read with clause 13.1 and item 1 of the schedule), 6.2 (read with item 2 of the schedule), 6.4, 8, 10.1 and/or 10.6 (the penal provisions); g. requiring the Cross Claimants to obtain a deed of priority from Westpac within a time that was too short to be possible in the circumstances; and h. insisting that the Loan Agreement be entered by the Second Cross Claimant, a company, thereby avoiding the application of the National Credit Code, notwithstanding that the predominant purpose of the loan was the provision of finance so as to permit the First Cross Claimant, an individual, to purchase a domestic residence 14B. Further and in the alternative, the Cross Claimants say that: a. letters dated 1 and 16 August 2011 from James White Capital on behalf of the Plaintiff / First Cross Defendant to the Defendants stated that the lender's fees would include a Discount Establishment Fee of 2% of the Facility Limit and that the Discount Establishment Fee will only be accepted where no Event of Default occurs, and a higher fee applies in all other cases as outlined in the Facility Agreement; b. the Loan Agreement was structured so as to conceal the prospect that the Establishment Fee, as defined in the Loan Agreement, might be required to be paid for the life of the loan and its quantum, in that: i. the Establishment Fee was not disclosed in the schedule to the Loan Agreement; ii. the Discount Establishment Fee, defined in the Loan Agreement so as to amount to $22,000, was disclosed in the schedule to the Loan Agreement; c. except so far as it was disclosed in the letters referred to in sub-paragraph a and the Loan Agreement, the Plaintiff / First Cross Defendant did not tell the Defendants or any of them that any establishment fee other than the Discount Establishment Fee might be payable; d. the matters in sub-paragraphs a, b and c constituted a representation that no establishment fee other than the Discount Establishment Fee would be payable (the representation); e. [Not used] f. the representation was in trade or commerce; g. the representation was in relation to financial services; h. in the premises of sub-paragraph a, in the context of cll 6.1, 13.1 and item 1 of the schedule of the Loan Agreement, the representation was misleading or deceptive contrary to s 12DA of the ASIC Act alternatively s 18 of the Australian Consumer Law; i. in reliance upon the representation, the Defendants entered into the Loan Agreement. 15. The Cross Claimants say that each of the penal provisions is not a true estimate of the First Cross Defendant's loss and are therefore penalties and void alternatively unenforceable in whole or in part. 16. Further, the Cross Claimants say that in all the circumstances alleged in paragraphs 14A and 14B, the first cross defendant has engaged in conduct that is unconscionable contrary to the provisions of section 12CB alternatively section 12CC of the ASIC Act alternatively section 21 alternatively section 22 of the Australian Consumer Law. Claim against Scanlon 18C. At all material times, the Fifth Cross Defendant was the sole director of the Plaintiff / First Cross Defendant and the principal of James White Capital. 18CA. All the activities of the Plaintiff / First Cross Defendant were carried out solely, or alternatively predominately, by the Fifth Cross Defendant. 18D. The Fifth Cross Defendant was involved in the contraventions by the Plaintiff / First Cross Defendant alleged in paragraphs 14B and 16 in that: a. the Fifth Cross Defendant had knowledge of the facts alleged in paragraph 14A and in sub-paragraphs a to c of paragraph 14B; and b. the conduct of the Plaintiff / First Cross Defendant alleged in paragraph 14A and in sub-paragraphs a to c of paragraph 14B was procured and carried out on behalf of the Plaintiff / First Cross Defendant by the Fifth Cross Defendant, And as such is liable for damages for the contraventions pursuant to s 12GF of the ASIC Act alternatively s 236 of the Australian Consumer Law. 18E. In the premises of paragraph 18D, the representation alleged in paragraph 14B was made also by the Fifth Cross Defendant and accordingly in the premises of paragraph 14B the Fifth Cross Defendant thereby engaged in misleading and deceptive conduct contrary to s 12DA of the ASIC Act alternatively s 18 of the Australian Consumer Law. 18The motion proceeded by reference to the basic documentary evidence of the loan transactions. This was the loan agreement itself made on 18 August 2011, some correspondence preceding that loan agreement, and the solicitor's certificate of independent advice given by Ms McDonald. 19The submissions ably advanced by Mr Newton put everything that could be put for the purposes of seeking to strike out this pleading. But for the reasons I am about to explain I am not persuaded that it should be struck out. The law is clear that in an application under Uniform Civil Procedure Rules 2005 r 13.4 the Court should only strike out proceedings where it is plain and obvious there is no issue to be tried. The test has been put in different ways that are fully set out in General Steel Industries v Commissioner for Railways (1964) 112 CLR 125. 20There is one preliminary matter to be observed. Mr Newton correctly conceded that provided the case was properly pleaded and provided there were facts to establish it, that a liability may exist in law under Australian Securities and Investment Commission Act 2001 ("ASIC Act") s 12GF against a person who is knowingly involved in conduct which is a contravention of ASIC Act ss 12CA to 12CC or ss 12BA to 12BN. Provided the cross claimants establish that someone such as Mr Scanlon was a "person involved in the contravention" the cause of action is certainly one known to law. Mr Newton did not dispute that. 21The real questions were two subsequent matters: (1) whether the pleaded case was ever capable of being made out against Prime or Mr Scanlon (the UCPR r 13.4 point); and (2) whether the case against Mr Scanlon of knowing involvement had been adequately pleaded against him (the UCPR r 14.28 point). 22As to the first of those matters, the UCPR r 13.4 point, the argument put by Mr Newton was that the pleading in paragraph 14B(a) to (c) could not be made against either Prime or Mr Scanlon at trial. Mr Newton conceded that he was bringing this strike out claim not on behalf of Prime but only on behalf of Mr Scanlon. The same argument that is put here by Mr Newton could have been put on behalf of Prime. 23His contention is that the representation alleged in paragraph 14B(d) that there was a representation that no establishment fee other than the Discount Establishment Fee would be payable, could never be made out on the facts. He submitted that the establishment fee was clearly identified in the transaction documents. Therefore, it could not ever be said, to use the words of paragraph 14B(d), that "no establishment fee other that the Discount Establishment Fee would be payable ". 24Mr Newton then took me through the loan agreement to show how the establishment fee was clearly payable. It is not necessary for this purpose to go through all the terms of the loan agreement, only those that are necessary to identify the essentials. 25Provisions were made in that loan agreement for the making of the advance of $1.1 million, for the payment of interest, and for the compounding of interest. 26An establishment fee is provided for in clause 6.1. This is a very substantial fee, which is challenged in the cross-claim. Clause 6.1 provides: 6.1 Establishment Fee In addition to any other money payable to the Lender, the Borrower must pay to the Lender on or before the first Advance Date, the Establishment Fee. If no Event of Default subsists and if the Borrower pays the Lender the Discount Establishment Fee in Item 5, then the Lender will accept the Discount Establishment Fee on that date. Nothing in this clause, is a waiver of the Lender's right to receive the full Establishment Fee. Payment of the remainder of the Establishment Fee is due and payable on the occurrence of any Event of Default. 27Clause 6 also provides for the termination fees, renegotiation fees and covenant breach fees, which are all said to be equal to two percent of "the Limit" and, subject to other conditions, payable in the event of the termination of the agreement, for renegotiation of the agreement, or on the breach of any covenant of the agreement, whether or not such breach is remedied. But the precise quantum of the establishment fee does not appear on the face of clause 6.1. One must go to the definition of "establishment fee" in clause 13.1, which provides "establishment fee" means "an amount of equal to 50 percent of the Limit". One must then go to the definition of "Limit" also found in clause 13.1, which is defined as meaning "the amount specified in item one" of the schedule. 28Item one in the schedule is the amount of $1.1 million. Once one has that information, one has to calculate 50 percent of that figure to produce a figure of $550,000, which is the establishment fee. The schedule contains other matters including the Discount Establishment Fee, which is two percent of the Limit, or $22,000. The items in the schedule also identify the higher and lower rates of interest and a list of the securities for the loan. 29The loan agreement was preceded by correspondence from the arranger of this loan on behalf of the parties, James White Capital. There are two pieces of correspondence from James White Capital: a letter of 1 August 2011 and another letter of 16 August 2011. The first is a preliminary letter. The second is a more detailed examination of the various integers that makeup the loan agreement. 30The second of these letters refers to the Discount Establishment Fee being two percent of the facility limit and then with an asterisk the following words appear in smaller type "please note the discount establishment fee will only be accepted where no event of default occurs and a higher fee applies in all other cases as outlined in the facility agreement". Emphasis has been added to the words "higher fee" in these reasons. 31The sum of $550,000 does not appear anywhere in this letter or in the 1 August letter. Nor indeed does it appear as a figure anywhere in the loan agreement, nor in any other correspondence before me today. 32The submission put by Mr Newton in a number of ways in substance comes down to the core proposition that the establishment fee is clearly payable under the loan agreement. Because one can identify it and calculate its amount by looking to each of those provisions, he contends that a contention that no establishment fee other than the discount establishment fee would be payable could never be made out. I do not accept this argument. It is at least arguable on these materials in my view that such a representation may be made out. Whether it is made out or not in my view is a matter for argument at trial. 33The evidence that could be expected to support paragraph 14B of the pleading is foreshadowed by the pleading itself as being both documentary evidence and other evidence of conduct. Subparagraphs 14B(a) and (b) are clearly directed to documentary matters. But paragraph 14B(c) also refers to conduct, that Prime, "did not tell the defendants or any of them that any establishment fee other than the discount establish fee might be payable". This seems to me to found a case of alleged misrepresentation by silence, all the circumstances of which would presumably be advanced in a trial by evidence to the effect that there were exchanges between representatives of Prime and representatives of Mr Tai and Acupuncture Research and negotiations before the loan but where the establishment fee was not mentioned. 34That on its own seems to me to be enough to answer Mr Newton's point. Whether or not the representation in paragraph 14B(d) is made out will depend upon evidence which is yet to be adduced. That may or may not make out a case of misrepresentation by silence or by omission. But it is evidence which the cross claimants should not be precluded from adducing at trial. 35But even without that future evidence, the pleading in paragraph 14B(a) and (b) is arguable enough to support the making of the representation. I certainly do not regard it as unarguable that such a misrepresentation may be implied from the words of letter of the 16 August letter that "a higher fee applies in all other cases" combined with the fact that this fee is called an "establishment fee". It is not beyond the realm of argument for it to be contended by Mr Rickard and Mr Griscti that no one would expect that those words might be a label for a fee which is approximately 25 times the size of a discounted establishment fee; and one which applies well after the establishment of the loan. 36The plea in paragraph 14B(b) is that loan agreement was "structured so as to conceal the prospect that the establishment fee...might be required to be paid for the life of the loan and its quantum". It has been said the establish fee is not disclosed in the schedule to a loan agreement. It is clearly not set out as a figure there. But Mr Newton makes the point that the schedule does not itself contain any of the obligations that make the establishment fee payable. That is also true. But apart from that point, the loan is structured in such a way that the figure of $550,000 appears nowhere in the loan agreement. It is necessary to go through four steps and one calculation in order to find that figure. Certainly this is not the most convenient route to the figure. It will no doubt be argued at trial the agreement has been structured deliberately in that way. Whether that involves concealment or not, or something else, is entirely a matter for further argument. For those reasons, I am not prepared to find that the pleading cannot succeed against Mr Scanlon on the ground that the alleged misrepresentation could not be made out. 37As to the UCPR r 14.28 point, an adequate pleading against Mr Scanlon of his involvement in this alleged misleading conduct is required. Mr Newton says that paragraph 18D does not adequately plead his involvement. Mr Newton has some point in a sense that paragraph 18D(b) pleads that the events referred to in paragraphs 14B(a) to (c) were "procured and carried out" on behalf of the first cross-defendant, Prime, by Mr Scanlon. 38I think it is sufficiently obvious that Mr Scanlon is said to be the actor and involved in each of those events. It may be inferred he acted in a conscious way and therefore knew of those events. I do not think any further amendment to the pleading is necessary for it to be obvious that it is a pleading of knowledge against Mr Scanlon of each of those events in paragraphs 14B(a) to (c). I will therefore not require any further amendment to paragraph 18D. This judgment will stand as defining the issues between the parties. 39Mr Newton also submitted it was necessary to plead the matters from which that knowledge might be inferred. But it seems to me that they are matters of evidence. The pleaded definition of the conduct in which Mr Scanlon was involved is sufficient. Mr Newton's argument on the second ground also fails. 40I should observe that, whether or not this pleading is struck out, the same issues will arise against Prime, and some of them against the two solicitors. Mr Scanlon's motion has failed. I decline to strike out the Cross-Claim to the extent that it joins and alleges matters against the fifth cross-defendant, Mr Scanlon. 41There have been arguments about costs on both sides. As between Mr Scanlon and the Tai interests, the Tai interests did adjust to the original motion by filing the FACC. They should not have all their costs. But the costs will follow the event between those parties. I will order 75 percent of the Tai interests' costs to be paid by the fifth cross defendant. 42Arguments have also taken place about what should happen between Mr Scanlon and the solicitors. I was at first minded to accede to Mr Newton's submissions that: the solicitors' interests were not directly affected; they were not joined as respondents to the motion; and they should not have their costs. But at the end of the day, it seems to me that Mr Griscti's argument is correct: the solicitors have a direct procedural and substantive interests in maintaining Mr Scanlon in the proceedings and were entitled to be heard on that question. It is in their legitimate interests to advance their case as it is for Mr Scanlon to resist it, so that they can avoid bearing a larger proportion of any liability that might arise at the end of these proceedings. For that reason, I will also make an order for costs in favour of the two solicitors against Mr Scanlon. 43There is one other matter. The parties agreed that Prime would serve a statement of account as between mortgagee and mortgagor, to avoid or reduce future disputes as to quantum. That order is also made below. 44I make the following orders: (1)The fifth cross defendant's Notice of Motion is dismissed; (2)The fifth cross-defendant to pay: (a) 75% of the cross-claimants' costs of this motion; (b) the third and fourth cross-defendants' costs of this motion. (3)Adjourn these proceedings before the registrar in Common Law at 9am on Wednesday 5 June. (4)The first cross defendant serve on the cross claimants and the third and fourth cross defendants a Statement of Account describing when and how the loan of $1,100,000 (the Loan) was disbursed and describing the dates and amounts of all fees, charges, rates and expenses applied in relation to the loan and describing the dates and amounts of all payments received and recovered in connection with the Loan. oOo DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 June 2013