Supreme Court New South Wales Medium Neutral Citation: In the matter of Galtari Pty Ltd (in liq) [2018] NSWSC 917 Hearing dates: 29 May 2018 Decision date: 19 June 2018 Before: Gleeson JA Decision: (1) Dismiss Mr Randell's amended interlocutory process filed 29 May 2018 and Mr Smith's interlocutory process filed 5 February 2018. (2) Direct the plaintiffs to serve a draft amended statement of claim within 14 days. (3) Direct Mr Randell and Mr Smith to inform the plaintiffs whether they consent to the proposed amended pleading within a further 7 days and if not, to indicate within that period the grounds and reasons for any objections to the draft amended statement of claim. (4) Direct the parties to lodge with the Associate to Gleeson JA by 10 July 2018 draft short minutes of order in the event of agreement in relation to the filing of the amended statement of claim. In the absence of consent to the proposed amended statement of claim, stand over the applications before the Corporations List Judge on 17 July 2018 at 10 am. (5) The plaintiffs pay the costs of Mr Randell's amended interlocutory application filed 29 May 2018. (6) The plaintiffs pay the costs of Mr Smith's interlocutory application filed 5 February 2018. Catchwords: PRACTICE AND PROCEDURE – application by defendants for summary dismissal of proceedings or striking out of plaintiffs' pleadings – where defendants entered into and were subsequently discharged from personal insolvency agreements under Pt X of the Bankruptcy Act 1966 (Cth) – whether defendants released from all provable debts under s 82 of the Bankruptcy Act – s 230 of the Bankruptcy Act – where the fraud exception to the release from provable debts pleaded by the plaintiffs by way of reply – meaning of fraud in s 153 (2)(b) of the Bankruptcy Act – whether fraud sufficiently pleaded and particularised in plaintiffs' reply – whether accessorial liability claims sufficiently pleaded and particularised – whether leave to replead should be granted PRACTICE AND PROCEDURE – jurisdiction – cross-vesting – transfer of proceedings – whether proceedings involve a "special federal matter" – s 3 (1)(e) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) – whether proceedings fall within the exclusive jurisdiction of the Federal Court under s 27 of the Bankruptcy Act – whether Supreme Court required to transfer the proceeding to the Federal Court – s 6(1) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) Legislation Cited: Bankruptcy Act 1966 (Cth), ss 27, 60, 82, 86, 134, 230, 232, 153(2)(b), Pt 10 Civil Procedure Act 2005 (NSW), ss 56, 57, 58 Commonwealth Constitution, ss 75, 76, 77 Corporations Act 2001 (Cth), ss 9, 79, 181, 182, 254T, 588FF, 588M, 1317H Judiciary Act 1903 (Cth), ss 39(2) Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth), ss 3(1), 4, 6 Uniform Civil Procedure Rules 2005 (NSW), rr 13.4, 14.4, 14.28, 15.3, 15.4(2), 15.10(2) Cases Cited: Adelaide Bank Limited v Phontos [2016] FCA 824 Barnes v Addy (1874) LR 9 Ch App 244 Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] 1 Ch 250 CGU Insurance Ltd v Blakeley (2016) 90 ALJR 272; [2016] HCA 2 Chittick v Maxwell (1993) 118 ALR 728 Cordes v Dr Peter Ironside Pty Ltd (2010) 2 Qd R 235 Coshott v Parker [2017] NSWSC 1098; (2017) 323 FLR 212 Eberstaller v Poulos (2014) 87 NSWLR 394; [2014] NSWCA 211 Edwards v Santos Ltd (2011) 242 CLR 421; [2011] HCA 8 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 Felton v Mulligan (1971) 124 CLR 367; [1971] HCA 39 Fokas v Mansfield [2017] NSWCA 231 Giorgianni v R (1985) 156 CLR 473 Green v Schneller [2001] NSWSC 897; (2001) 189 ALR 464 Lifeplan Australia Friendly Society Ltd (ACN 087 649 492) v Ancient Order of Foresters in Victoria Friendly Society Ltd (ACN 087 648 842) [2017] FCAFC 74; (2017) 120 ACSR 421 Maxwell v Chittick [1994] NSWCA 196 Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2008] FCAFC 172; (2008) 171 FCR 380 Morris Finance Ltd v Brown (2016) 93 NSWLR 551; [2016] NSWCA 343 Moss v Eaglestone (2011) 83 NSWLR 476; [2011] NSWCA 404 New South Wales v Williams [2014] NSWCA 177; (2014) 242 A Crim R 22 Penthouse Publications Ltd v McWilliam [1991] NSWCA 222 Pereira v Director of Public Prosecutions (1988) 82 ALR 217 Perera v Genworth Financial Mortgage Insurance Pty Ltd (2017) 94 NSWLR 83; [2017] NSWCA 19 PT Garuda Indonesia Ltd v Australian Competition and Consumer Commission (2012) 247 CLR 240; [2012] HCA 33 Re Bosun Pty Ltd (in liq) [2000] SASC 180; (2000) 34 ACSR 597 Ritchie v Woodward (Executor of the Estate of the late Brian Patrick Woodward) [2016] NSWSC 1715 Scott v Bagshaw (2000) 99 FCR 573; [2000] FCA 816 Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405 Skalkos v Smiles [2006] NSWSC 192 Tonbul Baykal v Terry Van Der Velde as trustee for the bankrupt estate of Hakan Tandogan [2017] NSWSC 36 Truthful Endeavour Pty Ltd v Condon [2015] FCAFC 70; (2015) 233 FCR 174 Wentworth v Rogers (No 5) (1986) 6 NSWLR 534 Yeshiva Properties No 1 Pty Ltd v Joan Marshall [2005] NSWCA 23 Yorke v Lucas (1985) 158 CLR 661 Texts Cited: M Leeming, Authority to Decide the Law of Jurisdiction in Australia (Federation Press, 2012) Category: Principal judgment Parties: David Gregory Young (First Plaintiff) Galtari Pty Ltd (in liq) (Second Plaintiff) Aaron Randell (First Defendant) Brett Smith (Second Defendant) David Marsh (Third Defendant) Damon Moloney (Fourth Defendant) Aaron Randell, Gregory Emerson, Clinton Young and Anthony Riordan trading as Emerson, Randell & Young (Fifth Defendants) Techton Building Services Pty Ltd (Sixth Defendant) Cheskaye Pty Ltd (Seventh Defendant) Tresfree Pty Ltd (Eighth Defendant) Representation: Counsel: Mr S Golledge (Plaintiffs) Mr C Harris SC (First Defendant /1st-named Fifth Defendant) Mr IR Pike SC / Mr JS Burnett (Second Defendant) Solicitors: Gillis Delaney Lawyers (Plaintiffs) Eakin McCaffery Cox (First Defendant /1st-named Fifth Defendant) Marque Lawyers Pty Ltd (Second Defendant) File Number(s): 2017/270538 Judgment 1. GLEESON JA: The first plaintiff, Mr David Young, is the liquidator of the second plaintiff, Galtari Pty Ltd (Galtari). Galtari operated a childcare centre business from premises owned by another entity. Mr Young was appointed liquidator of Galtari on 11 August 2015 by resolution of creditors following termination of a deed of company arrangement. Galtari had earlier been placed into voluntary administration on 8 September 2014. 2. This judgment deals with applications by two defendants for summary dismissal of this proceeding brought by the plaintiffs against them, or striking out of the plaintiffs' pleadings in this proceeding. Background 1. The plaintiffs commenced this proceeding by originating process filed on 6 September 2017 seeking relief against the defendants by way of damages or equitable compensation, or compensation under various provisions of the Corporations Act 2001 (Cth) in respect of three matters: (a) the entry into a deed of guarantee by Galtari on 20 July 2012 in respect of which Galtari subsequently became liable for a debt of $2,000,000; (b) the declaration of a dividend by Galtari in the amount of $195,000 at a time when it is alleged Galtari was insolvent; and (c) payments made by Galtari between 16 January 2012 and 5 August 2014 totalling $164,196.81 to related parties being entities associated with one or other of the defendants. 2. The first defendant is Mr Aaron Randell; he is also the first-named fifth defendant, being the partners in an accounting firm, Emerson, Randell & Young, the accountants for Galtari. The second, third and fourth defendants are Mr Brett Smith, Mr David Marsh and Mr Damon Moloney. Mr Marsh was at all relevant times a director of Galtari. The plaintiffs allege that Mr Smith and Mr Moloney were each a director of Galtari within the extended meaning of the definition of "director" in the Corporations Act, s 9. It is not necessary for present purposes to mention the sixth, seventh and eighth defendants. 3. The relief sought in the originating process against Mr Randell and Mr Smith is as follows: 1. with respect to the deed of guarantee: 1. orders pursuant to s 1317H of the Corporations Act or alternatively, damages or equitable compensation from Mr Randell and Mr Smith in respect of loss sustained by Galtari as a result of the execution of the deed of guarantee (par 7); 2. damages against Emerson Randell & Young for breach of contract or alternatively, negligence, for failing to properly advise Galtari in respect of entering into the guarantee (par 2); 3. orders pursuant to s 588FF against Mr Randell and Mr Smith in respect of the benefits received by them as a result of Galtari entering into the deed of guarantee (par 3); 4. alternatively, an account of profits from Mr Randell and Mr Smith in respect of the benefits received by each of them as a result of Galtari entering into the deed of guarantee (par 5); 5. orders pursuant to s 588M of the Corporations Act against Mr Smith calculated with respect to the loss sustained by Buckra as a result of the $2,000,000 loan advance, the subject of the guarantee given by Galtari (par 6). 1. with respect to the dividend claim: 1. orders pursuant to s 1317H of the Corporations Act or alternatively, damages or equitable compensation from Mr Randell, Mr Smith and Emerson, Randell & Young in respect of the loss sustained by Galtari as a result of the declaration of the dividend (par 7); 2. alternatively, an account of profits from Mr Smith (par 8); 3. an order pursuant to s 588M of the Corporations Act or alternatively, s 588FF of the Corporations Act against Mr Smith (par 9). 1. with respect to the void payment claims: 1. an order under s 588FF of the Corporations Act against Mr Smith for amounts paid by Galtari (par 10); 2. an order pursuant to s 1317H of the Corporations Act or alternatively, damages or equitable compensation from Mr Smith in the amount of the void payments in respect of the loss sustained by Galtari as a result of such payments (par 12); 3. alternatively, orders against Mr Smith for restitution of the amount of the void payments on the ground of monies had and received for the use of Galtari (par 13). 1. The plaintiffs filed a statement of claim on 16 November 2017. 2. In his defence filed on 13 December 2017, Mr Randell pleaded in bar to the plaintiffs' claims that he was released under s 230 of the Bankruptcy Act 1966 (Cth) from all liabilities pleaded against him by the plaintiffs in the statement of claim. It is common ground that on 20 December 2013, Mr Randell entered into a personal insolvency agreement under the provisions of Pt X of the Bankruptcy Act following a resolution of his creditors on 10 December 2013 and that on 10 April 2014 a certificate was issued under s 232 of the Bankruptcy Act by the trustee of his estate certifying that all obligations created under the personal insolvency agreement were discharged on that date. 3. By their reply filed on 1 February 2018, the plaintiffs joined issue with Mr Randell's defence and specifically asserted that they did not admit that the liabilities pleaded against Mr Randell constituted in whole or in part a provable debt or debts within the terms of Mr Randell's personal insolvency agreement (par 2). The plaintiffs further pleaded that if, which was not admitted, some or all of those liabilities were provable debts within the meaning of the personal insolvency agreement then, by reason of the effect of s 153(2)(b) of the Bankruptcy Act and the matters of fact referred to in the particulars to par 3, no release was obtained from those liabilities. The particulars given to par 3 repeated the matters alleged against Mr Randell in specified paragraphs of the statement of claim. 4. Mr Smith has not filed a defence. It is common ground, however, that Mr Smith also entered into a personal insolvency agreement pursuant to Pt X of the Bankruptcy Act on 20 December 2013 and on 21 March 2014, the trustee of Mr Smith's estate issued a certificate under s 232 of the Bankruptcy Act certifying that all the obligations under the personal insolvency agreement were discharged on that date. It is also common ground that Mr Smith also relies upon the statutory release under s 230 of the Bankruptcy Act and had he filed a defence containing such a plea in bar, the plaintiffs would rely by way of reply on the fraud exception in s 153(2)(b) of the Bankruptcy Act to the release from provable debts. Relevant provisions of the Bankruptcy Act 1. Part X of the Bankruptcy Act deals with personal insolvency agreements, being an arrangement between a debtor and his or her creditors outside bankruptcy. 2. Section 230 of the Bankruptcy Act relevantly provides: 230 Release of provable debts (1) If a personal insolvency agreement provides for a debtor to be released from a provable debt, the agreement operates to release the debtor from that provable debt unless the agreement is set aside or terminated under this Part. (2) Subsection (1) has effect subject to subsections (3), (4) and (5). Exceptions (3) Subsection (1) does not operate to release the debtor from a debt that would not be released by his or her discharge from bankruptcy if he or she had become a bankrupt on the day on which he or she executed the personal insolvency agreement. … 1. It is not in issue on this application that the terms of the personal insolvency agreement entered into by each of Mr Randell and Mr Smith provided that upon completion of their respective obligations under such agreement they each would be released from all provable debts (cl 8.3). The reference to "provable debts" is a reference to debts provable under s 82 of the Bankruptcy Act, as if a sequestration order had been made against Mr Randell and Mr Smith on the Fixed Date (relevantly, 22 October 2013) and the Trustee of their estates (Mr Nick Mellos and Mr Stephen Dixon) were trustee in bankruptcy of their bankrupt estate (cl 7.1, First Sch, items 2 and 5). 2. Section 82 of the Bankruptcy Act relevantly provides: 82 Debts provable in bankruptcy (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. … (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. … 1. The terms of s 230(3) are to be read with s 153 of the Bankruptcy Act which relevantly provides: 153 Effect of discharge (1) Subject to this section, where a bankrupt is discharged from a bankruptcy, the discharge operates to release him or her from all debts (including secured debts) provable in the bankruptcy, whether or not, in the case of a secured debt, the secured creditor has surrendered his or her security for the benefit of creditors generally. Note: The operation of this section in relation to accumulated HEC debts and semester debts under the Higher Education Funding Act 1988 is affected by section 106YA of that Act. (2) The discharge of a bankrupt from a bankruptcy does not: … (b) release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt of which he or she has obtained forbearance by fraud; or … The applications before this Court 1. By his amended interlocutory process filed on 29 May 2018, Mr Randell seeks an order that par 3 of the reply be struck out, and a further order for summary dismissal of the proceeding against him as the first defendant and the first-named fifth defendant. 2. By his interlocutory process filed on 5 February 2018, Mr Smith seeks summary dismissal of the proceeding against him, with the exception of the void payments claim the subject of items 17 to 24 in the Schedule to the statement of claim. Alternatively, Mr Smith seeks an order striking out the statement of claim, with the same qualification. In oral argument, senior counsel for Mr Smith clarified the extent of that qualification. Mr Smith does not seek summary dismissal or striking out of the void payments claim relating to items 15 to 24 in the Schedule to the statement of claim. 3. The applications for summary dismissal rely on the Court's power in Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 13.4. The applications for striking out the plaintiffs' pleadings rely on the Court's power in UCPR, r 14.28. The Court may receive evidence on both applications: UCPR, rr 13.4(2) and 14.28(2). 4. In support of their applications, Mr Randell and Mr Smith relied upon affidavit evidence demonstrating their entry into their respective personal insolvency agreements on 20 December 2013 and their respective discharge on 21 March 2014. The plaintiffs relied upon an affidavit from the liquidator sworn 5 September 2017 deposing to the basis of the claims made in the proceeding. 5. Whilst counsel for the plaintiffs maintained his submission in oral argument that there was no deficiencies in the plaintiffs' pleadings, counsel made an oral application for leave to re-plead, if the Court determined that the pleadings were deficient. A. The jurisdiction of the Court 1. Before addressing the applications before the Court, there is an anterior question which must be addressed. That is the question of jurisdiction which must be determined at the outset: Eberstaller v Poulos (2014) 87 NSWLR 394; [2014] NSWCA 211 at [20]. 2. The particular question which arises is whether this proceeding involves a "special federal matter" within the meaning of s 3(1)(e) of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth) (Cross-vesting Act) because it involves a matter within the exclusive jurisdiction of the Federal Court and the Federal Circuit Court under s 27 of the Bankruptcy Act, and accordingly, this Court must transfer the proceeding to the Federal Court in the absence of an order under s 6(3) of the Cross-vesting Act. 3. Counsel for the plaintiffs submitted that this proceeding involves a "special federal matter" given that Mr Randell has pleaded a defence relying on s 230 of the Bankruptcy Act. Senior counsel for Mr Smith submitted that the proceeding does not involve the exercise of jurisdiction "in bankruptcy" under s 27 of the Bankruptcy Act, but rather involves the mere recognition of the legal effect of a provision in the Bankruptcy Act, relevantly, s 230, which picks up s 153 of the Bankruptcy Act. Senior counsel for Mr Randell adopted those submissions. 4. For the reasons that follow, I am satisfied that the Court has jurisdiction. Jurisdiction of State Courts with respect to Bankruptcy 1. The starting point is s 39 of the Judiciary Act 1903 (Cth) (Judiciary Act) which relevantly confers federal jurisdiction on State Supreme Courts. Specifically, s 39(2) provides that: "The several Courts of the States shall within the limits of their several jurisdictions, whether such limits are as to locality, subject-matter, or otherwise, be invested with federal jurisdiction, in all matters in which the High Court has original jurisdiction or in which original jurisdiction can be conferred upon it … " (Emphasis added). It is not necessary to set out the conditions and restrictions referred to in sub-pars (a) and (c) of s 39(2), as they are not presently relevant. 1. The original jurisdiction of the High Court is provided for under ss 75 and 76 of the Australian Constitution. Under s 76(ii), the Parliament may make laws conferring original jurisdiction on the High Court in any matter "arising under any laws made by the Parliament". Accordingly, any matter which "aris[es] under" the Bankruptcy Act is one for which the Supreme Court will be invested with federal jurisdiction under s 39(2) of the Judiciary Act, subject to the limits of the Court's jurisdiction as to "locality, subject-matter, or otherwise". 2. One such jurisdictional limit that may be provided for is a provision which confers a jurisdiction on federal courts to the exclusion of courts of the states, as is permissible under s 77(ii) of the Constitution, which provides that Parliament may make laws "defining the extent to which the jurisdiction of any federal court shall be exclusive of that which belongs to or is invested in the courts of the States". Section 27 of the Bankruptcy Act is one such restriction, being a provision that confers exclusive jurisdiction of two federal Courts in bankruptcy, subject to presently irrelevant exceptions: Truthful Endeavour Pty Ltd v Condon [2015] FCAFC 70; (2015) 233 FCR 174 (Truthful Endeavour), at [45]; Coshott v Parker [2017] NSWSC 1098; (2017) 323 FLR 212 at [13]. Section 27 provides: the Federal Court and the Federal Circuit Court have concurrent jurisdiction in bankruptcy, and that jurisdiction is exclusive of the jurisdiction of all Courts … (Emphasis added). 1. The phrase "jurisdiction in bankruptcy" in s 27 of the Bankruptcy Act is to be read with the definition of "bankruptcy" in s 5 of the Bankruptcy Act which provides that "bankruptcy in relation to jurisdiction or proceedings, means any jurisdiction or proceedings under or by virtue of this Act" (Emphasis added). 2. The investing of exclusive jurisdiction in bankruptcy under s 27 has been described as "effect[ing] a repeal of the general investing of federal jurisdiction in State Courts ... by s 39(2) of the Judiciary Act … to the extent any jurisdiction or proceeding arises under or by virtue of the Bankruptcy Act": Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2008] FCAFC 172; (2008) 171 FCR 380 (Meriton) at [81] (Greenwood J). 3. However, not every matter arising under the Bankruptcy Act will be a matter engaging the jurisdiction "in bankruptcy" under s 27 of the Bankruptcy Act: Coshott v Parker at [18]-[20]. In Meriton, Perram J observed at [172]: There is no precise overlap between jurisdiction exercised in respect of matters "arising under" the Bankruptcy Act and the exercise of the jurisdiction "in bankruptcy", although in practice there may tend to be some degree of coincidence between the two concepts. 1. This statement was approved of by Payne JA (Basten JA agreeing) in Morris Finance Ltd v Brown (2016) 93 NSWLR 551; [2016] NSWCA 343 at [32]. Payne JA noted that although Perram J had dissented on the outcome in Meriton, the proposition was not inconsistent with anything decided in that case. In Meriton, Perram J further observed at [172] that the distinction was: … important because to the extent that a matter arises under the Bankruptcy Act but does not involve the exercise of jurisdiction "in bankruptcy", s 27 will not prevent a State court from exercising the jurisdiction conferred on it by s 39(2) of the Judiciary Act … 1. To use the relevant statutory language, not every matter "arising under" the Bankruptcy Act, being a "[law] made by Parliament" will be considered a "jurisdiction or proceedings under or by virtue of the [Bankruptcy] Act" (s 5). 2. That such a distinction is to be drawn is supported by the Explanatory Memorandum of the Bankruptcy Legislation Amendment Bill 1996, which introduced the conferral of exclusive jurisdiction on the two federal Courts under s 27 of the Bankruptcy Act. The Explanatory Memorandum states at p 54: In order to preserve the existing arrangements whereby there is national uniformity with respect to creditor's petitions, it is necessary to give the Federal Court jurisdiction in bankruptcy exclusive to that of other courts except the High Court under s 75 of the Constitution. The Supreme Courts will be able to deal with bankruptcy matters under the Jurisdiction of Courts (Cross-Vesting) Act 1987, but in general, as at present, bankruptcy proceedings will only be capable of being initiated in the federal Court. This change will not have any significant impact in practice, as very few bankruptcy cases are initiated in State or Territory courts, with only one known matter in 1994. Nor will this change affect the operation of provisions of the Act such as ss 139ZG, 139ZL, 139ZQ and 161B, which create debts in respect of contributions liabilities, avoid transfers of property and trustee remuneration, and enable trustees to enforce those debts in state and territory courts of competent jurisdiction. (Emphasis added) 1. In Green v Schneller [2001] NSWSC 897; (2001) 189 ALR 464 at [22], Barrett J observed that: … [i]n [Sutherland v Brien (1999) 149 FLR 321], Austin J decided that s 27(1) did not vest in the courts to which it refers exclusive jurisdiction in respect of every question turning upon the interpretation and application of the Bankruptcy Act. That must be so. When persons become bankrupt, it is necessary for courts to determine all kinds of questions about the consequences. Many of those questions will depend for their answers on the provisions of the Bankruptcy Act. 1. In Coshott v Parker at [20] Adamson J considered the jurisdiction "in bankruptcy" under s 27 to be a "subset" of the jurisdiction with respect to matters arising under the Bankruptcy Act, and noted that there were "important practical reasons" for the distinction (at [19]): … [w]hile the presentation of creditor's petitions and matters of that nature fall within the exclusive jurisdiction, there is no intention to deprive the State courts of jurisdiction to deal with matters arising when, for example, a party to a proceeding is declared bankrupt unless it would involve jurisdiction "in bankruptcy". The effect of the Cross-vesting Act 1. If a proceeding engages the jurisdiction "in bankruptcy" within the meaning of s 27 of the Bankruptcy Act, this does not mean the Supreme Court is "wholly deprived of jurisdiction": Tonbul Baykal v Terry Van Der Velde as trustee for the bankrupt estate of Hakan Tandogan [2017] NSWSC 36 (Tonbul Baykal) at [13]. This is because of the operation of the Cross-vesting Act, s 4(1), which relevantly provides: (1) Where: (a) the Federal Court or the Family Court has jurisdiction with respect to a civil matter, whether that jurisdiction was or is conferred before or after the commencement of this Act; and (b) the Supreme Court of a State or Territory would not, apart from this section, have jurisdiction with respect to that matter; then: (c) in the case of the Supreme Court of a State (other than the Supreme Court of the Australian Capital Territory and the Supreme Court of the Northern Territory)—that court is invested with federal jurisdiction with respect to that matter … (Emphasis added). 1. In other words, where the exclusive jurisdiction under s 27 of the Bankruptcy Act is engaged, the Supreme Courts are (re)invested with the relevant federal jurisdiction under s 4(1), because they would not otherwise have jurisdiction "in bankruptcy" but for the operation of that section. (This is also the view taken by Leeming JA, writing extra-judicially, in Authority to Decide: The Law of Jurisdiction in Australia (Federation Press, 2012) at 167-8). Thus s 4(1) operates as a conferral of federal jurisdiction on the Supreme Court, notwithstanding that s 6 of the Cross-vesting Act requires "special federal matters" to be transferred to the Federal Court in the absence of an order under s 6(3). The Jurisdiction of State Supreme Courts under s 4(1) 1. In Truthful Endeavour at [46], the Full Court of the Federal Court observed that the policy of the Cross-vesting Act is not only to identify matters of which the exclusive jurisdiction of the Federal Courts was not to be disturbed (this being the effect of s 4(4)), but also to identify matters that should be transferred to federal courts, this being done by the notion of a "special federal matter" (defined in s 3(1)). Sub-section (4) provides that s 4 does not apply to matters arising under specific Commonwealth statutes, of which the Bankruptcy Act is not one specified. The Full Court summarised the effect of s 4(1) of the Cross-vesting Act as follows at [45]: At this point, it is helpful to refer in a little more detail to investing of federal jurisdiction in State courts and to the Cross-vesting Act. Section 4(1) of the Cross-vesting Act provides, relevantly, that where the Federal Court has jurisdiction with respect to a civil matter (whether conferred before or after commencement of the Cross-vesting Act) and a Supreme Court would not, apart from this section, have jurisdiction with respect to the matter, then the Supreme Court is invested with federal jurisdiction in respect of the matter. State courts are invested (subject to various qualifications and conditions by the mechanics of withdrawal and simultaneous investing in s 39(1) and (2) of the Judiciary Act) with federal jurisdiction in all matters referred to in ss 75 and 76 of the Constitution. This includes s 76(ii) – any matter arising under any law made by Parliament. Specific statutes may qualify or restrict that general investing. An example is s 27 of the Bankruptcy Act which provides for exclusive jurisdiction of two federal courts in bankruptcy. The authority of Parliament to make jurisdiction in federal courts exclusive is contained in s 77(ii) of the Constitution. Section 4(4) of the Cross-vesting Act lists various statutes and statutory provisions to which "[t]his section does not apply to a matter arising under". The Bankruptcy Act and provisions of it is, and are, not mentioned in s 4(4). 1. That s 4(1) invests the jurisdiction "in bankruptcy" in State Supreme Courts is recognised in subsequent cases: Adelaide Bank Limited v Phontos [2016] FCA 824 at [68]-[69]; Tonbul Baykal at [13]; Ritchie v Woodward (Executor of the Estate of the late Brian Patrick Woodward) [2016] NSWSC 1715 at [454]; see also Fokas v Mansfield [2017] NSWCA 231 at [20] (White JA). Special Federal Matters 1. Under s 6 of the Cross-vesting Act, if a matter for determination in a proceeding that is pending in a State Supreme Court is a "special federal matter", the court must transfer the proceeding to the Federal Court, unless the Supreme Court is satisfied that "there are special reasons" for determining the matter itself "in the particular circumstances of the proceeding other than reasons relevant to the convenience of the parties": Cross-Vesting Act, s 6(3). 2. Section 3(1) of the Cross-Vesting Act relevantly defines a "special federal matter" to include: " … (e) a matter that is within the original jurisdiction of the Federal Court by virtue of section 39B of the Judiciary Act 1903; being a matter in respect of which the Supreme Court of a State or Territory would not, apart from this Act, have jurisdiction." (Emphasis added). 1. In Truthful Endeavour, the Full Court of the Federal Court concluded that the jurisdiction "in bankruptcy" under s 27 amounted to a "special federal matter" by virtue of s 3(1)(e). See also Tonbul Baykal at [25]. 2. Importantly, the definition of a "special federal matter" contains two elements or steps, both of which must be satisfied. With respect to the first step, being whether the matter is within the original jurisdiction of the Federal Court by virtue of the Judiciary Act, relevantly, s 39B(1A) of the Judiciary Act provides that: The original jurisdiction of the Federal Court of Australia also includes jurisdiction in any matter: … (c) arising under any laws made by the Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter. (Emphasis added). 1. Provided that the proceeding involves a matter "arising under" the Bankruptcy Act, this first leg will be satisfied. The words "by virtue of" in s 3(1)(e) should not be understood as limiting s 3(1)(e) to matters which are within the jurisdiction of the Federal Court only by virtue of s 39B: Truthful Endeavour at [52]. Whether a matter "arises under" a federal law, such as the Bankruptcy Act, is addressed below. 2. The second step, by definition, will be engaged if the proceeding falls within the exclusive jurisdiction of the two federal courts under s 27 of the Bankruptcy Act: Truthful Endeavour at [48]. The effect of s 27 is to restrict or displace the jurisdiction which a State Supreme Court would otherwise have under the Judiciary Act, s 39(2), such that the only source of jurisdiction for a State Supreme Court for s 27 Bankruptcy Act matters is the Cross-vesting Act itself. The scope of jurisdiction "in bankruptcy" 1. Not every matter which arises under the Bankruptcy Act will invoke the jurisdiction "in bankruptcy". Matters arising under the Bankruptcy Act 1. Whether there is a "matter arising under" a law of Parliament directs attention to the width of the word "matter", as well as what gives a matter the character of "arising under" a particular law of Parliament. The word "matter" refers to the whole justiciable controversy: Truthful Endeavour at [55]. 2. In CGU Insurance Ltd v Blakeley (2016) 90 ALJR 272; [2016] HCA 2 at [28]-[29], the High Court (French CJ, Kiefel, Bell and Keane JJ) discussed the meaning of the word "arising under" in s 76(ii) of the Constitution in the following terms: The use of the constitutional term "matter" in the statutory investing of Supreme Courts with general and specific federal jurisdiction directs attention to the frequently quoted observation of Latham CJ in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett: "a matter may properly be said to arise under a Federal law if the right or duty in question in the matter owes its existence to Federal law or depends upon Federal law for its enforcement, whether or not the determination of the controversy involves the interpretation (or validity) of the law." It is a particular application of that general statement to say that a matter will arise under a federal law if it involves a claim at common law or equity or under a law of a State where the claim is "in respect of a right or property which is the creation of federal law". If the source of a defence to a claim at common law or equity or under a law of a State is a law of the Commonwealth, then on that account also the matter may be said to arise under federal law. The existence of such a claim in a proceeding will meet the subject matter condition necessary to enliven the federal jurisdiction invested in a court of a State pursuant to s 77(iii) of the Constitution, read with s 76(ii) … (Emphasis added). 1. Thus, one of the ways by which a matter "arises under" a federal law is if the source of the defence which asserts that the defendant is immune from the liability or obligation alleged is a law of the Commonwealth: Felton v Mulligan (1971) 124 CLR 367 at 408; [1971] HCA 39; Edwards v Santos Ltd (2011) 242 CLR 421; [2011] HCA 8 at [45]; PT Garuda Indonesia Ltd v Australian Competition and Consumer Commission (2012) 247 CLR 240; [2012] HCA 33 at [13]. 2. Applied to the present case, the defence pleaded by Mr Randell under s 230 of the Bankruptcy Act relying upon the statutory release in respect of provable debts under his personal insolvency agreement (and similarly, the reply pleaded by the plaintiffs relying upon the fraud exception in s 153(2)(b) of the Bankruptcy Act) means that this Court is exercising federal jurisdiction by reason of s 39(2) of the Judiciary Act, unless some relevant restriction applies. The scope of s 27 Bankruptcy Act 1. The next question is whether this proceeding falls within the exclusive jurisdiction of the two federal Courts under s 27 of the Bankruptcy Act. 2. In Meriton, the Full Court of the Federal Court considered whether a State court (relevantly, the Industrial Court of New South Wales) had the jurisdiction to determine two issues: (a) whether proceedings brought in the Industrial Court had been deemed to be abandoned once the instigator had become bankrupt, involving consideration of the proper construction of ss 60(2) and 60(3) of the Bankruptcy Act, and (b) whether the trustee in bankruptcy had been effective in assigning the chose in action constituted by the proceedings to the undischarged bankrupt, which involved, inter alia, a consideration of the extent of the powers of the trustee under s 134(1) of the Bankruptcy Act. 3. As to the first issue, s 60(2) of the Bankruptcy Act relevantly provided that an action commenced by a person who subsequently became bankrupt was stayed until the trustee made an election, in writing, to prosecute or stay the action. Under s 60(3), if the trustee did not make such an election within 28 days of notice of the action being served, they would be deemed to have abandoned the claim. 4. After observing at [5] that resolution of the proceeding did not require determination of the precise limits of the "jurisdiction in bankruptcy" under s 27, Branson J considered the jurisdiction of the Industrial Court in relation to the s 60 issue and concluded at [8] that: … s 60(2), (3) and (4) of the Act are not concerned to give powers to "the Court". They are intended to apply generally to litigation commenced by persons who subsequently become bankrupt … The status of a proceeding commenced by a person who subsequently becomes bankrupt is a matter which must necessarily be addressed by the court in which the proceeding has been commenced. Nothing in s 27, or elsewhere in the Act, discloses an intention to deprive a State court of the power to determine the status of a proceeding before it. Whether or not a trustee has made an election in writing to prosecute or discontinue a proceeding is a mixed question of law and fact. Although the Act requires every court seized of an action commenced by a person who subsequently becomes a bankrupt to determine this question, the determination of the question does not involve the exercise of jurisdiction "under or by virtue of [the] Act". It relevantly involves mere recognition of the binding legal effect of the Act. (Emphasis added). 1. As to the s 134(1) issue, Branson J concluded at [18] that: … the recognition by the Industrial Court of New South Wales of the trustee's entitlement to assign to Mr Rose the right to prosecute the State proceeding did not involve it in the exercise of jurisdiction in bankruptcy. This is because, as mentioned above, it is not to exercise jurisdiction under or by virtue of the Act for a court simply to recognise the effect of the Act. Indeed it is necessary for a court to be able to determine the standing of the parties before it. 1. Greenwood J concluded in Meriton at [117] that: … when a State court determines whether a proceeding can properly be commenced or maintained before it or whether the plaintiff has standing to engage the jurisdiction of the Court, by reason of any impediment going to the operation or application of a provision of the Bankruptcy Act, such an application is not one under or by virtue of the Bankruptcy Act. The Commission in Court Session was not exercising a jurisdiction in bankruptcy by determining the motions before it brought by Meriton and Owners. 1. Branson, Greenwood and Perram JJ all agreed that the Industrial Court had jurisdiction to determine the s 60 issue. (This approach to s 60 was accepted by the Court of Appeal in Moss v Eaglestone (2011) 83 NSWLR 476; [2011] NSWCA 404.) However, Perram J dissented in relation to the s 134(1) issue, in finding that the Court did not have jurisdiction to consider the trustee's power of assignment under s 134(1). His Honour said at [210]: The application of those principles to the current facts is not straightforward. The Industrial Relations Court had jurisdiction to determine whether the trustee had elected to prosecute the proceedings under s 60(2) and it likewise had jurisdiction to determine whether those proceedings had been abandoned under s 60(3). However, it was forbidden by s 27 to examine any issue which affected the title of the trustee and this necessarily included the validity of the deed of assignment. It might have been possible for the Industrial Relations Court to have determined the s 60 issues without recourse to the issue of the validity of the deed of assignment. It could, for example, have concluded that the letter alleged to be an election was such without considering the deed of assignment's validity. However, it did not do so. It is clear that both Marks J and the Full Bench considered the validity of the deed of assignment and, in both cases, that consideration was an indispensable step in the process of making their orders. It follows that their orders resulted from the impermissible exercise of a non-existent jurisdiction. 1. It is well-established that matters involving claims with the effect of declaring for or against the title of a trustee in bankruptcy fall within the scope of s 27: Scott v Bagshaw [2000] FCA 816; (2000) 99 FCR 573. 2. In Scott v Bagshaw, the appellant, being the trustee of a family trust, sought a declaration that certain properties were charged in his favour, in support of a loan made to the joint registered proprietors. One of the registered proprietors was bankrupt, and the trustees in bankruptcy sought to deny any entitlement to an equitable mortgage. The trustees argued that the appellant's claim related to a debt provable within s 82 of the Bankruptcy Act, and hence it had not been competent for the appellant to commence the proceedings without leave under s 58(3)(b). In concluding that the claim fell within the scope of s 27(1), the Full Court of the Federal Court observed at [19]-[20] that: On the face of the pleadings, the claim is one to realise an equitable charge. The pleadings make no reference of any section of the Act and the matter may be capable of reaching judgment without reference to any such section. However, the undoubted effect of an order being made in the terms sought by the appellant would be that a declaration would be made against the title of the third respondents. Upon the third respondents' becoming trustees, the title to the properties (and subsequently to the money representing part of the properties) became vested in them: ss 58(1) and 132 of the Act. The consequence of any such order must therefore be that it would have a necessary adverse effect on the title of the third respondents to the extent that it established title in the appellant. That is a matter that falls within the jurisdiction in bankruptcy. (Emphasis added) 1. In Truthful Endeavour, the respondent (Mr Condon) was appointed as the trustee of a bankrupt estate, and the bankrupt's property vested in him under s 58(1), and was divisible amongst the bankrupt's creditors under s 116(1). The bankrupt's daughter argued that certain property had been held on trust for her and other beneficiaries, such that it did not vest in the trustee. After referring to the decisions of Scott v Bagshaw and Meriton, the Full Court of the Federal Court remarked at [35] that the effect of these decisions, particularly the former, was that "there [was] … no doubt that an application of the kind referred to in s 31(1)(f) is a proceeding in bankruptcy for the purposes of s 27(1) and the definition of bankruptcy in s 5(1)". 2. In Tonbul Baykal, the plaintiff lodged a caveat claiming an equitable interest in land arising from contributions she made to the purchase of the property and its upkeep. The registered proprietor, her son, became bankrupt, and the property became vested in the trustee. White J (as his Honour then was) observed at [11]-[12]: The present claim by the plaintiff does not invoke any particular provision of the Bankruptcy Act. Her claim arises under the general law and principles of equity but the claim seeks a determination of the extent of the property that is vested in the defendants as trustees in bankruptcy, which would determine what amounts were available to be distributed to creditors or to be paid to the defendants out of the bankrupt's property for their remuneration or expenses. The authorities seem to have settled the question that the present proceeding does engage "jurisdiction in bankruptcy" within the meaning of s 27 of the Bankruptcy Act. 1. In Cordes v Dr Peter Ironside Pty Ltd (2010) 2 Qd R 235, the Queensland Court of Appeal upheld a decision of the primary judge granting a stay on the basis that the relevant matter fell within s 27 of the Bankruptcy Act. The plaintiff had asserted rights in respect of real property on the basis of an interest which was inconsistent with rights claimed by the trustee in bankruptcy. Holmes and Chesterman JJA observed at [38]: Although the paths of reasoning in the judgments of Greenwood J and Perram J in Meriton Apartments are not identical, and the contemplated scope of bankruptcy jurisdiction is correspondingly different, both firmly endorse the conclusion in Scott v Bagshaw, that decisions involving findings for or against the trustee in bankruptcy's title to property fall within the jurisdiction of the Federal Court. This Court should not depart from an appellate decision of the Federal Court unless convinced that its interpretation is wrong. The conclusion that s 31(1)(f) provides an example of bankruptcy jurisdiction is not obviously flawed. There is no reason not to follow Scott v Bagshaw. (Emphasis added). 1. The distinction drawn by Branson J in Meriton between exercising jurisdiction in bankruptcy and merely recognising the effect of the Bankruptcy Act has been applied in subsequent cases. In Ritchie v Woodward, the defendant contended that the effect of a composition was to operate as a release by his creditors of all claims made against him in the proceedings, because, by virtue of s 82, these were "provable debts". An anterior question arose as to whether the Supreme Court had jurisdiction to construe the phrase "the debts provable" in his bankruptcy, as it was used in the Bankruptcy Act. In finding that the Court had jurisdiction, Emmett AJA said at [458]-[459]: The status of a proceeding commenced by a person who subsequently becomes bankrupt is a matter that must necessarily be addressed by the court in which the proceeding has been commenced. Nothing in s 27, or elsewhere in the Bankruptcy Act, discloses an intention to deprive a State court of the power to determine the status of a proceeding before it. Although the Bankruptcy Act requires every court seized of an action commenced by a person who subsequently becomes a bankrupt to determine that question, the determination of the question does not involve the exercise of jurisdiction "under or by virtue of [the Bankruptcy] Act". It relevantly involves mere recognition of the binding legal effect of the Bankruptcy Act. Further, every court has the implied or inherent jurisdiction to determine the extent of its jurisdiction and whether there is an impediment in the way of its hearing and determining a proceeding before it. The question presently before me is the effect of s 75(1) of the Bankruptcy Act, in providing that the composition made by Tony Woodward is binding on all of his creditors in so far as it operates as a release in respect of "the debts provable" in his bankruptcy. It is necessary to construe that phrase as it is used in the composition and in Division 1 of Part VI, and in s 82 in particular. That question necessarily impacts on the status of the proceedings before this Court. I consider that the Court has jurisdiction to answer the question. 1. In Coshott v Parker, the plaintiffs, one of whom (Mr Coshott) was an undischarged bankrupt, sought to recover debts allegedly owing by the executors of a deceased estate. The defendants had lodged an amended proof of debt in the bankruptcy that had been accepted by Mr Coshott's former trustee in bankruptcy. Mr Coshott's current trustee in bankruptcy took the position that that the plaintiffs' claim constituted income of the estate not property of the estate. The defendants pleaded by way of defence, statutory set-off under s 86 of the Bankruptcy Act. Adamson J concluded that the Supreme Court did not have jurisdiction because the s 86 set-off defence involved jurisdiction "in bankruptcy" by requiring the Court to determine the existence of mutual debts and the taking of an account, and by reason of s 27 of the Bankruptcy Act could only be exercised by the Federal Court. 2. The plaintiffs submitted that the reasoning in Coshott v Parker with respect to s 86 of the Bankruptcy Act applies by analogy in the present case. I do not agree. A set-off defence under s 86 of the Bankruptcy Act is plainly a matter arising under federal law. However, Coshott v Parker is distinguishable on the facts. The question of whether the defendants were entitled to rely on s 86 set-off was a matter concerning whether the claim by Mr Coshott against the defendants constituted property or income of the bankrupt, that is, a matter concerning the title of Mr Coshott's trustee in bankruptcy to property of the bankrupt. 3. In the present case, the pleading of the defence of release from provable debts under s 230 of the Bankruptcy Act and the reply by the plaintiffs relying upon the fraud exception to provable debts in s 153(2)(b) of the Bankruptcy Act attracts federal jurisdiction. This Court is invested with such jurisdiction under s 39(2) of the Judiciary Act. Both the defence and the reply do no more than ask this Court to recognise the legal effect of the pleaded provisions of the Bankruptcy Act in circumstances where Mr Randell has been discharged from his personal insolvency agreement, the former trustees of his estate are not parties to the proceeding, and no claim is made affecting the title of the former trustees of his estate. 4. In my view, the proceeding does not engage jurisdiction "in bankruptcy" within the meaning of s 27 of the Bankruptcy Act, and does not involve a "special federal matter" within the meaning of s 3(1)(e) of the Cross-vesting Act. Accordingly, the statutory command in s 6(1) of the Cross-vesting Act does not apply to this matter. B. Summary dismissal and strikeout applications Outline of the plaintiffs' pleaded claims 1. The terms of the statement of claim filed on 16 November 2017 are lengthy. In broad outline, the first part of the plaintiffs' claim is based on the allegation that Galtari received no financial benefit in entering into the guarantee of the obligations of Builtsmart Modular Holdings Pty Ltd (Builtsmart Modular) to Buckra Pty Ltd (Buckra) under a loan of $2,000,000 made by Buckra to Builtsmart Modular on 20 July 2012. The plaintiffs allege that given the financial position of Builtsmart Modular at that date it was inevitable that it would not be in a position to repay monies borrowed from Buckra and that Buckra would call upon the guarantee given by Galtari. 2. The plaintiffs further allege that, at the time of the giving of the guarantee, Mr Randell was providing accounting services to Galtari; he was acting as a director of the Builtsmart companies and was also employed by those companies; and he and his firm, Emerson, Randell & Young, had direct knowledge of the financial position of all parties to the guarantee. The plaintiffs allege that Mr Randell never referred any of the parties to obtain independent advice; and that he did not advise any of the parties that the execution of the guarantee was not in their financial interests, in particular, the interests of Galtari. 3. The plaintiffs allege that monies advanced by Buckra to Builtsmart Modular discharged debts owed to various creditors of Builtsmart Modular whose debts had been guaranteed by Mr Randell and also Mr Smith. Insofar as Mr Smith signed the guarantee on behalf of Galtari as power of attorney, the plaintiffs allege that he breached his duties as a director of Galtari. The relief claimed by the plaintiffs against Mr Randell and Mr Smith in relation to the giving of the guarantee by Galtari is outlined at [5(1)] above. 4. The second part of the claim concerns the dividend declared by the directors of Galtari purportedly on 15 July 2013, or on a later date, which the plaintiffs allege was a breach of directors duties and in contravention of s 254T of the Corporations Act because Galtari was insolvent at that time and subsequently. The plaintiffs also allege that Mr Randell was aware of the director's improper purpose in declaring the dividend and that he was an accessory to the director's breaches of duties under Corporations Act ss 181 and 182. 5. In his affidavit, the liquidator deposed to forensic investigations which indicated that the purported dividends declared by Galtari on 15 July 2013 were fictitious in that there was no meeting of directors held on that date, that the purported dividend resolution seems to have been first drafted on about 10 September 2014, and the relevant calculations of the amount of the dividend could not have been undertaken until approximately 12 months after 15 July 2013 when Emerson, Randell & Young prepared the financial statements of Galtari for the year ended 30 June 2014. In short, although not pleaded, the liquidator asserts that the purported dividend resolution was "clearly back-dated for the purpose of creating a façade that a dividend had been declared". The relief claimed against Mr Randell and Mr Smith in relation to the dividend is outlined at [5(2)] above. 6. The third part of the claim concerns the void payment claims. The plaintiffs allege that various payments have been made, relevantly, to Mr Smith or entities associated with him, for non-company expenses in respect of fictional invoices. The relief claimed against Mr Smith in relation to the void payments is outlined at [5(3)] above. Applicable principles Summary dismissal 1. The principles applicable to a summary dismissal application under UCPR, r 13.4 are not in dispute. The issue is whether, having regard to the potential outcome of the litigation, there is an underlying claim that has a real "or more than fanciful" prospect of success. If so, summary dismissal should not be granted. The authorities recognise that the existence of a defence and the pleading of a defence are distinct concepts. 2. A recent statement of the applicable principles is given by Leeming JA (Macfarlan and Simpson JJA agreeing) in Perera v Genworth Financial Mortgage Insurance Pty Ltd (2017) 94 NSWLR 83; [2017] NSWCA 19 at [30]: ... There are of course a variety of formulations of the applicable test where a defendant applies for the summary intervention of the court to prevent a plaintiff's case being determined in the usual way at trial. Barwick CJ collected some in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129: "so obviously untenable that it cannot possibly succeed"; "manifestly groundless"; "so manifestly faulty that it does not admit of argument"; "discloses a case which the Court is satisfied cannot succeed"; "under no possibility can there be a good cause of action" and "be manifest that to allow [the pleadings] to stand would involve useless expense". In part that variety stems from whether the application is made in the court's inherent jurisdiction or under the rules (see Dixon J's analysis in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91-92), which may in turn affect the material available to the court. In part it turns on differences in the rules of different courts, and in particular on the relaxation of the test which has occurred in some courts: see Spencer v Commonwealth of Australia (2010) 241 CLR 118; [2010] HCA 28 at [56]. But for present purposes, two matters are clear. One is that common to all the various formulations is the need for "exceptional caution", as was explained in Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41 at [57] and Spencer at [53]-[55]. The other is that the inquiry is as to the demonstrated certainty of the outcome of the litigation, as opposed to its prospects of success. 1. In a case such as the present, where the only evidence adduced on the application by Mr Randell and Mr Smith is the terms of their respective personal insolvency agreements and that the agreements have been performed, the Court proceeds on the basis that all of the factual allegations made in the statement of claim are to be accepted: Penthouse Publications Ltd v McWilliam [1991] NSWCA 222. Striking out pleadings 1. The applicable principles for striking out a pleading were summarised by Emmett AJA (Macfarlan and Simpson JJA agreeing) in State of New South Wales v Williams [2014] NSWCA 177; (2014) 242 A Crim R 22 at [71], albeit in the context of an application to strike out a defence, as follows: The requirement for establishing that there is no triable issue is a demanding one and the power to strike out a pleading on the basis that it discloses no reasonable defence, or is an abuse of process, should be exercised only in plain and obvious cases. The power should not be exercised in cases of doubt or difficulty or where the pleading raises a debatable question of law. Once it appears that there is a real issue, whether of fact or law, and that the rights of the parties depend upon it, a court should not dismiss a defence raising such an issue, either on the basis that no reasonable defence is disclosed or as an abuse of process (see Dey v Victorian Railways Commissioners [1949] HCA 1; 78 CLR 62 at 91; General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125 at 129-130; Commonwealth v Griffiths [2007] NSWCA 370; 70 NSWLR 268 at [11]-[12] and Spencer v Commonwealth [2010] HCA 28; 241 CLR 118 at 139-140). 1. It has been said that where the defect in the pleading can be cured by amendment, the Court ought to grant leave to amend, rather than exercise the power to strikeout: Wentworth v Rogers (No 5) (1986) 6 NSWLR 534 at 536-537. In deciding whether to grant leave to replead, the Court must seek to act in accordance with the dictates of justice: Civil Procedure Act 2005 (NSW), s 58(1). And for that purpose the Court must have regard to the provisions of ss 56 and 57 of the Civil Procedure Act, importantly, the facilitation of the just, quick and cheap resolution of the real issues in the proceedings (s 56(1)) and also have regard to the matters set out in s 58(2)(b) to the extent to which the Court considers relevant to the management of the proceedings. Pleading of fraud 1. Fraud must be specifically pleaded (UCPR, r 14.14(3)) and particularised (UCPR, r 15.3). Particulars of any fraud on which the party relies must be exactly given: Wentworth v Rogers (No 5) at 538. Likewise an allegation of dishonesty must be pleaded clearly and with particularity. The pleader must not use language which is equivocal, rendering it doubtful whether the pleader is in fact relying on an allegation of dishonesty: Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] 1 Ch 250 at 268 (Buckley LJ). 2. Similar principles apply to claims alleging accessory liability under Barnes v Addy (1874) LR 9 Ch App 244: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [170]; Yeshiva Properties No 1 Pty Ltd v Joan Marshall [2005] NSWCA 23 at [14] (Bryson JA; Mason P and Beazley JA agreeing); Simmons v New South Wales Trustee and Guardian [2014] NSWCA 405 at [74] (Gleeson JA; Beazley P and Barrett JA agreeing). 3. Although UCPR, r 15.4(2) excludes "knowledge" from the meaning of the expression "a condition of mind" and there is no mandatory requirement to give particulars of knowledge that does not preclude the Court requiring a party to provide particulars of the facts from which the inference of knowledge is to be drawn. In addition, UCPR, r 15.10(2) specifically contemplates the Court ordering such particulars that are necessary. Pleading of accessorial liability 1. Corporations Act, s 79 provides that a person is involved in a contravention if, and only if, the person has (relevantly, in the present case) "aided, abetted, counselled or procured the contravention (sub-par (a)) or "in any way, by act or omission directly or indirectly, knowingly concerned in … the contravention" (sub-par (c)) (Emphasis added). 2. The principal authorities dealing with accessorial liability of persons involved in a statutory contravention are Yorke v Lucas (1985) 158 CLR 661; Giorgianni v R (1985) 156 CLR 473; and Pereira v Director of Public Prosecutions (1988) 82 ALR 217. It is well-established from these cases that actual knowledge of the essential facts constituting the contravention is necessary: Yorke at 669-670, 676; Giorgianni at 506-507; and Pereira at 220. See also Lifeplan Australia Friendly Society Ltd (ACN 087 649 492) v Ancient Order of Foresters in Victoria Friendly Society Ltd (ACN 087 648 842) [2017] FCAFC 74; (2017) 120 ACSR 421 at [104]. Meaning of fraud in s 153(2)(b) Bankruptcy Act 1. Counsel for Mr Randell and Mr Smith both accepted that there is a contestable issue with respect to the precise ambit of the fraud exception to the release from provable debts in s 153(2)(b) of the Bankruptcy Act, in particular, whether it has an extended meaning as explained by Young J in Chittick v Maxwell (1993) 118 ALR 728 at 738-740. Those remarks were approved by the Court of Appeal in Maxwell v Chittick [1994] NSWCA 196 at [13] (Mahoney JA; Priestley and Powell JJA agreeing), when noting that the term fraud in the bankruptcy provisions has been given a broad interpretation. Similarly, in Re Bosun Pty Ltd (in liq) [2000] SASC 180; (2000) 34 ACSR 597 at [18], Debelle J observed that fraud in the context of s 153(2)(b) must be given a broad interpretation by recognising that, in equity, that which is unconscionable might constitute fraud, noting the remarks of Mahoney JA in Maxwell v Chittick. 2. Counsel for Mr Randell and Mr Smith also accepted that it is not appropriate on the present applications that the Court determine the ambit of the fraud exception in the bankruptcy provisions, that is whether fraud in s 153(2)(b) means fraud in the common law sense or has the wider meaning in equity. That concession is appropriate given the tests for both summary dismissal or striking out pleadings: see, for example, Skalkos v Smiles [2006] NSWSC 192, where Johnson J refused an application for summary dismissal in proceedings that raised the fraud exception in s 153(2)(b). The parties' submissions 1. Mr Randell's essential complaint is that par 3 of the plaintiffs' reply does not comply with UCPR, r 15.3, which requires that a pleading must give particulars of any fraud on which the party relies. Senior counsel for Mr Randell focussed on two paragraphs of the statement of claim (pars 32 and 57) by way of example of the failure to provide proper particulars. According to the submission, given the absence of proper particulars (in either the statement of claim or the reply), par 3 of the reply should be struck out as disclosing no reasonable cause of action: UCPR, r 14.28(1)(a). 2. Assuming success in striking out par 3 of the reply, Mr Randell further submitted that the proceeding should be summarily dismissed since the effect of s 230 of the Bankruptcy Act provides a complete answer to the plaintiffs' claims for damages or compensation, either in equity or at law (including under statute). That is, Mr Randell is released from all claims made against him in the proceeding, because, by virtue of s 82, these were "provable debts". 3. Mr Smith made a similar complaint that even on the broadest view of fraud, including fraud in equity, the pleading in the statement of claim does not contain the material facts, nor the particulars required to support a pleading of fraud. Mr Smith accepted that if the plaintiffs sought an opportunity to replead the fraud claim, then he could not point to any prejudice. Mr Randell adopted, in effect, a similar position. 4. On the assumption that the fraud pleading was struck out (and no leave to replead was sought or granted), Mr Randell and Mr Smith submitted that the plaintiffs' claims were provable debts, being claims for liquidated damages (or as to the negligence claim against Mr Randell as the first-named fifth defendant, a claim for unliquidated damages which arises out of a contract or promise, being the retainer of that firm by Galtari: s 82(2) of the Bankruptcy Act). The plaintiffs submitted that the claims were not provable debts, being claims for unliquidated damages. It is not necessary to set out the competing arguments and authorities referred to in argument, given that the liquidator ultimately made an oral application to replead the fraud claim, and my conclusion that such leave should be granted. My reasons for that conclusion follow. Decision 1. Having reviewed the pleadings, I am of the view that the fraud pleading in par 3 of the reply incorporating specified paragraphs from the statement of claim is inadequate to plead a claim in fraud, even in the wider sense of fraud in equity. 2. First, the pleading in the statement of claim does not identify the nature of the fraud alleged against each of Mr Randell and Mr Smith. They are entitled to know whether the plaintiffs allege deceit, conscious dishonesty, unconscionable conduct or intentional participation or involvement in breaches of duty by the directors of Galtari. The pleading needs to set out the material facts which identify how it is said that they each incurred the relevant liabilities to Galtari by means of fraud to which they were a party, (and specify the character of the alleged fraud). 3. Second, insofar as the pleading contains allegations that Mr Randell was "aware" of certain matters giving rise to accessorial liability, Mr Randell is entitled to proper particulars of the facts, matters and circumstances from which an inference of knowledge should be drawn. In particular, particulars should be given of the allegations that Mr Randell: 1. was aware as at 20 July 2012 that Galtari would derive no benefit from giving the guarantee (par 66); 2. was aware that no other person, apart from himself, was providing advice, relevantly to Galtari in respect of the deed of loan and deed of guarantee (par 68); 3. was aware that Galtari was relying on him to advise it in relation to the terms of and the decision to enter into the deed of guarantee (par 69); 4. was aware that by entering into the deed of guarantee Galtari was, more likely than not, subjecting itself to a liability to Buckra (par 70); 5. had the knowledge alleged in pars 102 and 103 concerning breaches of duty by the directors of Galtari, including the character of those breaches. 1. Third, the pleading of the dividend claim in pars 113 and 114 is deficient if, as seems to be the case, the plaintiffs intend to allege that the directors minute of 15 July 2013 is fictitious, and that Mr Randell and Mr Smith had knowledge of that matter, and were involved in the preparation of that minute, or the calculations underlying the decision recorded in the directors minute, or the decision of the directors of Galtari to declare the dividend. In particular: 1. the material facts should be pleaded of any allegation that the minute of meeting of directors dated 15 July 2013 was back-dated, that no meeting was held on that day, and of any allegation that there was conscious dishonesty by the directors (and that Mr Randell had knowledge of that matter, or was otherwise involved in that conduct); 2. proper particulars should be given of the advice given by Mr Randell as referred to in par 116; 3. the personal interests of the directors as referred to in particular (a) to par 128 should be specified; 4. proper particulars should be given of the allegations that Mr Randell was "aware" that the directors of Galtari had declared the dividend for the purposes pleaded in par 118, and was "aware" that such purposes were improper as pleaded in par 119 (par 120); 5. the plaintiffs should clarify whether the allegation in par 127 is pressed. 1. Fourth, the allegation of accessorial liability against Mr Randell in pars 104, 132, 134 and 136 should be fully pleaded (or cross referenced to earlier paragraphs) and properly particularised. That includes pleading that Mr Randell knew the essential facts constituting the alleged contraventions by the directors of their duties, s 181(1) (good faith), and s 182(1) (not to improperly use their position), and s 254T(1). It is necessary that the pleading clearly identify what conduct of Mr Randell is alleged to constitute intentionally aiding or abetting, counselling or procuring such contraventions, or knowing involvement in alleged contraventions by the directors of their duties to Galtari and s 254T(1). 2. Fifth, with respect to the claim against Mr Smith for payments made by Galtari to Mr Smith or entities associated with him which are alleged to be either an uncommercial transaction or a breach of directors duty, any allegation that this liability was incurred by Mr Smith by means of fraud to which he was a party, needs to be specifically pleaded and particularised. 3. Sixth, the pleading of the two paragraphs referred to by counsel for Mr Randell in argument is inadequate. Paragraph 32 of the statement of claim pleads that: As at July 2012, [Mr Randell] either in his own right or through a related entity had shareholdings in the Builtsmart Companies. 1. The Buildsmart Companies were identified in par 29 as Timberline Capital Partners Pty Ltd and Builtsmart Holdings Pty Ltd. Given the liquidators contention in effect that Mr Randell was in a position of conflict having regard to his interest in the Buildsmart Companies, Mr Randell is entitled to proper particulars of the "related entity" through which it is alleged, in the alternative, that he held shareholdings in the Builtsmart Companies. 2. Paragraph 57 of the statement of claim pleads: The Loan Funds were, in part, applied by Builtsmart Modular Holdings to pay liabilities for which each of [Mr Randell] and [the] second defendants had provided personal guarantees. 1. Proper particulars should be given of the personal guarantees given by Mr Randell, including to whom and in respect of what liabilities, and what part of the $2,000,000 advanced by Buckra to Builtsmart Modular Holdings was dispersed in favour of the principal debtor the subject of those guarantees. 2. Given the early stage of the proceeding and the absence of any submission of prejudice to Mr Randell or Mr Smith, I am satisfied that it is appropriate for leave to be given to the plaintiffs to replead. As a practical matter, it is preferable that the pleading of fraud be contained in the statement of claim, to avoid any inconsistency between the amended statement of claim and any amended reply which may be filed in due course. Conclusion and orders 1. Mr Randell and Mr Smith have succeeded in demonstrating that the pleading of the fraud allegation in par 3 of the reply is deficient. The liquidator should be given leave to replead the statement of claim to address the pleading deficiencies identified above and any other matters the plaintiffs may be advised so as to properly plead the fraud exception in s 153(2)(b) of the Bankruptcy Act. 2. The appropriate course is to direct the plaintiffs to serve a draft amended statement of claim. Directions will be made requiring Mr Randell and Mr Smith to indicate their consent or otherwise identify any complaints in relation to the draft amended statement of claim and for the matter to come back before the Court for a determination, if necessary. That outcome, however, is not encouraged. It is expected that the parties acting responsibly will address any further complaints in relation to the amended pleadings. 3. As to costs, both Mr Randell and Mr Smith have been substantially successful in relation to their strikeout applications. Given that the plaintiffs only belatedly, during the course of oral argument, sought leave to replead, and given also the amount of time devoted during the hearing to the jurisdictional issue on which the plaintiffs failed, the appropriate order seems to me to be that the plaintiffs pay Mr Randell's and Mr Smith's costs of their respective applications. 4. Accordingly, the Court makes the following orders and directions: 1. Dismiss Mr Randell's amended interlocutory process filed 29 May 2018 and Mr Smith's interlocutory process filed 5 February 2018. 2. Direct the plaintiffs to serve a draft amended statement of claim within 14 days. 3. Direct Mr Randell and Mr Smith to inform the plaintiffs whether they consent to the proposed amended pleading within a further 7 days and if not, to indicate within that period the grounds and reasons for any objections to the draft amended statement of claim. 4. Direct the parties to lodge with the Associate to Gleeson JA by 10 July 2018 draft short minutes of order in the event of agreement in relation to the filing of the amended statement of claim. In the absence of consent to the proposed amended statement of claim, stand over the applications before the Corporations List Judge on 17 July 2018 at 10 am. 5. The plaintiffs pay the costs of Mr Randell's amended interlocutory application filed 29 May 2018. 6. The plaintiffs pay the costs of Mr Smith's interlocutory application filed 5 February 2018. ********** Amendments 02 July 2018 - [25] - s 39B(1A)(c) amended to read s 39B(2) 11 July 2018 - [25] - amend "s 39B(2)" to read "s 39(2)". 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: 11 July 2018