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Supreme Court 21 February 2011

Bofinger v Kingsway

[2011] NSWSC 64

Other
PROCEDURE CIVIL PLEADINGS AMENDMENT STATEMENT OF CLAIM

Citation: Bofinger v Kingsway [2011] NSWSC 64
Court: Supreme Court of New South Wales
Date: 21 February 2011
Judge: Associate Justice Macready

Background

The plaintiffs, a married couple, had personally guaranteed their company's obligations under mortgages over a development property at Enmore. After the mortgaged properties were sold and the first mortgagee was paid out, a surplus remained. The first mortgagee paid that surplus to the second mortgagee rather than to the plaintiff guarantors, who claimed they were entitled to it by subrogation (that is, as guarantors who had paid out the first mortgagee, they argued they stepped into the first mortgagee's shoes and were owed the surplus).

The dispute had already travelled to the High Court. In Bofinger v Kingsway Group Ltd [2009] HCA 44, the High Court held that the first mortgagee had owed fiduciary obligations to the plaintiff guarantors and had breached them by paying the surplus to the second mortgagee instead. The High Court also noted that, if the necessary further facts were established, those findings could engage the "second limb" of Barnes v Addy, which concerns knowing assistance in a breach of fiduciary duty.

Following the High Court's decision, the plaintiffs sought to amend their statement of claim. The Registrar granted leave to file the amended pleading. The first and eighth defendants applied to the Supreme Court to review that decision, targeting in particular a paragraph that characterised the first mortgagee's conduct as a "dishonest and fraudulent design."

  • Whether the review of a Registrar's decision requires demonstration of error, or whether the Court approaches it afresh.
  • Whether the amended statement of claim adequately pleaded a "dishonest and fraudulent design" within the meaning required to engage the second limb of Barnes v Addy.
  • Whether the particulars supporting the dishonesty and fraud allegation were sufficient to sustain the pleading.

Decision

On the standard of review, Associate Justice Macready applied the principles set out in Tomko v Palasty (No 2) [2007] NSWCA 369. A review under the relevant rules does not require demonstrated error and is not confined to the material before the Registrar. However, a court may be less inclined to interfere with case-management decisions that do not terminate proceedings, and the threshold for striking out a pleading remains that the claim must be so clearly untenable that it could not possibly succeed.

The critical question was whether paragraph 36 of the proposed pleading properly alleged a "dishonest and fraudulent design." The second limb of Barnes v Addy imposes liability on a third party who knowingly assists a fiduciary in a dishonest and fraudulent breach of duty. The High Court in Farah Constructions v Say-Dee confirmed that the phrase requires actual dishonesty on the part of the fiduciary, not merely a breach of fiduciary duty.

His Honour found that the pleading's particulars reduced the entire allegation of dishonesty to a single proposition: that the first mortgagee "consciously ignored" the plaintiffs' claims as guarantors. The judgment identified several innocent explanations for such conduct, including acting on legal advice, responding to pressure from the second mortgagee, or simply being uncertain about the validity of the claim. None of those circumstances would constitute dishonest conduct, yet the pleading offered no further facts to narrow the allegation to any of the circumstances that would.

Because the bare allegation of conscious ignorance could not, without more, be characterised as a "dishonest and fraudulent design," paragraph 36 failed to meet the required standard. Associate Justice Macready ordered it struck out. The parties were directed to bring in short minutes to put the remaining pleadings in proper order so the proceedings could continue.

Orders Made

  • Paragraph 36 of the second further amended statement of claim was struck out.
  • The parties were directed to bring in short minutes to address consequential effects on the pleadings.

Key Takeaways

  • An allegation of "dishonest and fraudulent design" for the purpose of second-limb Barnes v Addy liability requires particulars that identify specific conduct capable of being characterised as actually dishonest; a bare allegation that a fiduciary "consciously ignored" a claimant's rights does not suffice.
  • Where multiple innocent explanations are equally consistent with the conduct alleged, a pleading that does not exclude or narrow those explanations will not sustain a fraud or dishonesty claim.
  • Reviewing a Registrar's decision is not an appeal requiring demonstrated error: the Court approaches the matter afresh, but remains less ready to disturb decisions that merely manage the progress of ongoing proceedings rather than terminate them.
  • The High Court's decision in Bofinger v Kingsway Group Ltd [2009] HCA 44 confirmed that a first mortgagee can owe fiduciary obligations to a guarantor in respect of surplus proceeds, and that breach of those obligations can in principle engage Barnes v Addy second-limb liability, provided the necessary further facts are established at a subsequent hearing.
  • Pleadings invoking equitable fraud must do more than recite the legal formula; they must supply particulars that identify the specific conduct said to transgress ordinary standards of honest behaviour.

Legislation and Cases Referenced

Legislation
- Supreme Court Act (NSW)
- Uniform Civil Procedure Rules (NSW)

Cases
- Barnes v Addy (1874) LR 9 Ch App 244
- Bell Group Limited (In liquidation) & Ors v Westpac Banking Corporation [2008] WASC 239
- Bofinger v Rekley Pty Ltd [2007] NSWSC 1138
- Bofinger v Kingsway Group Pty Ltd [2008] NSWCA 332; (2008) 73 NSWLR 437
- Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269
- Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11
- Dey v Victorian Railways Commissioners (1949) 78 CLR 62
- Farah Constructions v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89
- General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125
- House v The King [1936] 55 CLR 499
- Minister for Crown Lands v Tweed Byron Aboriginal Land Council (1990) 71 LGRA 201
- Tomko v Palasty (No 2) [2007] NSWCA 369