Allstate Life Insurance Company v Australia & New Zealand Banking Group Ltd

4 4 ~ ~

JUDGMENT NO. .

.sea -

COURT OF AUSTRALIA )

)

NEW SOIJTII WUES DISTRICT REGISTRY	)	No. G381 of 1994
)
BNERAL DIVISION	)

BETWEEN: ALLSTATE LIFE INSURANCE CO.

& OTHERS

Applicants

AND: AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED h OTHERS

Respondents

&x!EA&:	BEAUMONT J.
-8	6 DECEMBER 1994
WHERE MADE:	SYDNEY

MINUTES OF ORDER

THE COURT ORDERS:

1. Notice of Motion is dismissed.

2. Costs reserved.

FEDERAL COURT OF

AUSTRALIA PRINCIPAL REGISTAY

W : Settlement and entry of orders is dealt with in

Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

) )

NEW SOU	TH WALES DISTRICT REGISTRY	)	No. G381 of 1994
)

GENERAL DIVISION

)

BETWEEN: ALLSTATE LIFE INSURANCE CO.

& OTHERS

Applicants

AND: AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED h OTHERS

Respondents

GORAM:	BEAUMONT J.
m:	6 DECEMBER 1994

REASONS FOR JUDGMENT (No. 41

9n a~~lication

bv Freehills to strike out Daras. 78-9 and 165-8 of the amended statement of claim

.INTRODUCTION

Before the Court is a notice of motion by Freehills, the fifty-fourth respondent, to strike out paras. 78-9 and 165-8 of the amended statement of claim. It is Freehills' contention that these paragraphs of the pleading fail to disclose, even on an arguable basls, the existence of the causes of action pleaded.

The general nature of the case pleaded in the statement of claim is described in my earlier judgments in these proceedings. I there also stated the test to be applied in a motion to strike out a pleading of the present kind.

In order to understand the challenged parts of the

pleading in their context, it will be necessary to describe

some of the earlier allegations in the statement of claim as

follows.

By paras. 10-25 of .the pleading (annexed..to these reasons), it is alleged, inter alia, that Freehills were retained by Linter Textiles to act, and did act, as its Australian solicitors in connection with the proposed debenture issue in the circumstances there pleaded.

The alleaations of contravention of the Fair Tradina Act 1987

pleaded f~aras.

78-91

Paras. 78-9 are as follows:

"78. In the premises, by the failure to speak or alternatively by failing to correct the draft prospectus so as to disclose the release and reinstatement proposal, Freehills has within New South Wales, in trade or commerce, engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of section 42 of the Fair Trading Act 1987 (NSW).

78. As a result of the conduct of Freehills alleged in paragraph 78, the applicants have suffered loss and damage.

Particulars

(a)

The debentures are worthless as senior indebtedness as defined by the Indenture and the Priority Deed substantially exceeds the value of the assets of Linter Textiles and the subsidiaries, and accordingly the applicants have lost the price paid for the debentures.

(b)

The applicants have been deprived of the sums of money respectively paid out by them for the debentures such loss being measured by market interest rates from time to time since the date upon which each of the applicants acquired their debentures, pursuant to the principle in

Hunc7erfords v Walker.

(The reference in para. 78 to "the failure to speak" is a

reference to para. 56 which is as follows:

"56. Each of the subsidiaries, the Linter. officers, Linter Group, Freehills and the initial participant banks neglected and failed to advise or warn persons contemplating the purchase of debentures or the Underwriter or the SEC of the facts, matters and circumstances within their respective knowledge as alleged in paragraphs 52 and 53 (the 'failure to speak')."

By s.42 of the Fair Tradina Act, it is provided as

follows :

"42. (l) A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

(2) Nothing in this Part shall be taken as

limiting by implication the generality of subsection

(l).

By s .4 (l), "trade or commerce" is defined to include "any business or professional activity"

On behalf of Freehills, it is submitted that, by virtue of a solicitor's implied duty to respect the confidences of the client, there can be no basis upon which a person dealing with a party offering debentures can expect the solicitor for the offeror to inform that person of any matter learnt by the solicitor in the course of the retainer. I t

follows, the argument runs, that paras. 78-9 fail to disclose

any arguable claim.

I have difficulty accepting the latter argument even if I accept the former argument that a solicitor has an obligation to respect a client's confidences. That obligation arises under the general law. But the present allegations are grounded in statute and it will be, in essence, a question of fact whether, in all the circumstances, there was misleading conduct, whatever duties the general law may impose in other respects.

Freehills further contended that the reasons (No. 3) for striking out the primary violation alleged in para. 75 were equally applicable here. I cannot agree. As has been seen, the allegations made against Freehills in paras. 10-25, including the claims of their retainer and the performance of that retainer, distinguish their position from that of the banks where no primary role on their part was asserted.

Another argument was put on behalf of Freehills that the failure to speak took place in the United States where "in substance" the cause of action arose (cf. m v Manildra Flour Mills Ptv. Ltd. (1990) 171 CLR 538 at 567) and, it said, the Fair Tradina Act could have no such extra-territorial operation.

At the level of a strike out application, I cannot

accept that the contrary is not reasonably arguable. It is

apparent, as in the case of para. 135 (see reasons No. 3),

that the international aspects of the allegations in para. 78- 9, taken in context, raise difficult questions of private international law even if the difficult threshold question of where, "in substance", the. cause of .action aLleged arose was first resolved.

In my opinion, paras. 78-9 raise arguable questions

for trial.

The alleaations of nealiaence (Daras. 165-81

Paras. 165-8 are as follows:

65.

Freehills knew:

(a)	that persons contemplating purchase of the debentures either on issue or subsequently would rely upon the representations in the prospectus;
(b)	that the representations in the prospectus were misleading, inaccurate and untrue having regard to the release and reinstatement proposal;
(c)	that the release and reinstatement proposal had not been disclosed in the prospectus or otherwise disclosed to persons intending to purchase debentures; and
(d)	that the circumstances were such as to make it reasonable for persons contemplating the purchase of debentures to rely upon the prospectus including the

representations

166. By reason of the matters referred to in paragraph 165, Freehills owed a duty to the applicants to exercise reasonable skill, care and diligence -

(a)	in preparing and settling the prospectus;

(b)

to ensure that the prospectus prepared by them and furnished to Linter Textiles for publication did not contain misleading information.

(c)

to ensure that the prospectus prepared by them and lodged for registration with the SEC did not contain misleading information.

(d)

to ensure that the prospectus prepared by them disclosed matters relating to the true amount of senior indebtedness owed by Linter Textiles and the subsidiaries;

(e)

to disclose the release and reinstatement proposal to prospective purchasers of the

debentures

167. In breach of the duties referred to in paragraph 166 above, Freehills failed to exercise reasonable skill, care and diligence -

(a) in preparing and settling the prospectus;

(b)	to ensure that the prospectus prepared by *them and furnished to Linter Textiles for publication a prospectus did not contain misleading information;*

(C) to ensure that the prospectus prepared by them and lodged for registration with the SEC did not contain misleading information;

(d)	to ensure that the prospectus prepared by *them disclosed matters relating to the true amount of senior indebtedness owed by Linter Textiles and the subsidiaries;*
(e)	to disclose the release and reinstatement *proposal to prospective purchasers of the*

*debentures*	.
*Particulars*

The prospectus prepared and settled by Freehills contained the representations without disclosing the release and reinstatement proposal .

168. In consequence of the said negligence of Freehills the applicants have suffered loss and damage .

Particulars

(a)

(b)

Hunaerfords v Walker.

On behalf of Freehills, it is submitted that no duty of care was even arguably created in the circumstances pleaded. There is no allegation, it is said, of an assumption

of responsibility to the applicants nor of their known

reliance in the sense explained in Hawkins v Clavton (1988) 164 CLR 539 and 576. Again, at the strike-out level, I cannot agree. Both the assumption and the reliance required are, in my view, sufficiently pleaded.

Reliance is also placed by Freehills upon a disclaimer expressed in their letter dated 13 October 1990 to Drexel Burnham Lambert Incorporated and United States Trust Company of New York as follows:

"(X) We have not verified, do not express any opinion upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or of any schedule or other financial and statistical data or notes thereto included or referred to therein other than those statements with respect to the laws

of the State of New South Wales or of the

Commonwealth of Australia set out in:

(i) the section headed 'Enforceability of Certain Civil Liabilities' on page 2;

(ii).the section headed 'Changes in Australian Federal Government Trade Protection Policy' on page 9;

(iii)the section headed 'Defaults and Remedies' on page 46;

(iv)the section headed 'Enforceability of Judgments' on pages 4 7 and 48;

(v) the section headed 'Australian Tax Considerations' on pages 49 and 50."

Whilst this statement may be taken into account as a

relevant circumstance, it does not follow, in my view, that it

is decisive of the issues tendered by paras. 165-8; they

require a consideration of all the relevant circumstances.

In my view, paras. 165 to 168 raise arguable issues

for trial.

ORDERS

The notice of motion is dismissed, with costs

reserved.

I certify that this and the preceding

seven (7) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Beaumont.

-U-

Associate	,	c
Dated:	6 December 1994

Counsel and Solicitors

Mr. A.R. Emmett Q . C . instructed

for applicants:

by Sly & Weigall

Counsel and Solicitors

Mr. P.M.

Jacobson Q . C .

for 54th respondent:

instructed by Norton Smith & Co.

Date of hearing:

6 December 1994

Date judgment delivered:

6 December 1994

m FE:

ALLSTATE LIFE INSURANCE CO. & OIWRS v. AUSTRALIA & NEW ZEAUND BANKING

GK€lUP LIMITED & OTHERS - No. G 381 of 1994.

ANNEXURE TO JUD3EW No. 4

10. In or about July 1988 and at all material tlmes thereafter, Llnter Textiles retained Freehills

to act as its Australian solicitors intonnect~on

with the proposed debenture Issue and, in

particular, to.

(a)	prepare drafts of the Indenture and of the prospectus to be incorporated in the registration statement;
(b)	wnsider, comment upon and settle drafts of the Indenture and of the registration statement and the prospectus incorporated thereln prepared by the US attorneys retained by Linter Textiles ("Skadden Arps"),

(c)

wnsider. comment upon and advise Linter Text~les

and Skadden Arps in relation

to requisitions lrom the SEC and answers thereto concerning the reglstratlon

statement and the prospectus incorporated thereln,

(d)

provide an opinion for inclusion in the prospectus concerning the validity and

enforceabll~ty

of the proposed Indenture and the proposed debentures according to

Australian law,

(e)

wmrnunlcate and liaise with Skadden Arps in relation to matters arlsing under

Un~ted

States and Australian law concerning the proposed debenture issue,

(t)

provide advlce for furnishing to USTC and the initial partic~pant

banks wncermng

the

p r ~ o r ~ t y

of those bankers' debts guaranteed or to be guaranteed by the

subs~diaries

and concerning the val~dity

and enforceability of the proposed

Indenture according to Australian law;

(g)	advise Llnter Textiles and communicate nnd liolse with Skadden Arps in relation to the proposal reterred to in paragraph 70 below

(The retolner is hereatter reterred to us "the Freehills retainer" )

Particulars

The Freehills retainer WIIS made expressly and by implication. Insofar a s it was made expmsly, it was constituted by written communications between Linter Group, Linter

Textiles and Frethills engaging Fwhi l l s a s Linter Textiles'

Australian soliciton in

connection with the proposed debenture issue.

The documents constituting the said

wmmuniationa are in tbe possarsion of Freehills, Iinter Group and Linter Textiles.

Copies of those documents will be provided after diseovny. Insofar UI the Freehilb

retainer was implied, it is to be implied fmm the facts that FreeW entered upon and

perPormed the retainer and did the acts.refen-ed to in pamgrapbs 11, 12, 13, 14, IS,

16, 17, 19,21,25 and 35 below.

Further particulars may be given after discovery.

I I

Pursuant to their retarner. Freehills.

(a)	prepared dralts of the Indenture and of the prospectus to be lnwrporated in the reglstration statement;
(b)	considered and commented upon dratts of the Indenture and of the prospectus which had been prepared by Skadden Arps,
(c)	considered and commented upon drafts of the other documents prepared by Skadden Arps;
(d)	corresponded with Skadden Arps concerning the contents and terms of the Indenture and Prospectus,
(e)	gave an opinion dated 23 September 1988 as to the valldlty and enforceability of the Indenture and debentures in Australia for the purpose of being included as an exhibit to the registration statement,
(f)	acted in relation to the proposed debenture Issue as described in paragraphs 12-17,

19. 21, 25 and 35

12. Between July 1988 and September 1988 Freehllls partinpated in drafting the prospectus

for inclus~on

in the reglstration statement required by United States law to be lodged with

the SEC for approval and reglstrutlon

The d r r h are in writing. Copiea of some of those drafts a rc in the possession of the solicitors for the npplifants and may be inspected a t the offices of those solicitors by appointment.

13	In relation to the question of senlor indebtedness of Linter Text~les.	the 28 July 1988 draft
of the prospedus rewewed by Freehlls stated

"As

, 1988,

the Company had no Senior Debt outstanding.

Ranlung ..

Subord~nated

to all Sen~or

Debt (as defined) As of

1988,

the Company had no Senior Debt outstand~ng.

Subordination

Pnyments to the holders of the Debentures will be subordinated to

all Senior Debt (as such term 1s defined in the Indenture).

Upon complet~on

of the

offerlug of the Debentures, there w ~ l l

be approx~mately

$A million (US$ million)

of Senior Debt oulstand~ng	to wh~ch	the Debentures will be subordinated in r~ght
of payment

If the Company does borrow funds pursuant to such hues of credit then such funds

will rank senior to the Debentures. As of	, 1988	the Company had no
Semor Indebtedness (as defined hereln) "

14. In relation to the stntement in the 28 July 1988 draft of the prospectus that "As of, 1988

the Company had no Sen~or

Indebtedness". Freehllls knew, at the lutest by 8 August 1988

that L~nter

Group had such sen~or

debt und mght have glven to its lenders, as securlty for

that debt, charges or mortgages over the subs~d~aries

or their assets

Particulars

Fmhi l l s informed Skaddeu Arps in writing. A copy of the relevant document is in the possession of the solicitors for Applicants and may be inspected a t the offices of those solicitors by appointment.

In relat~on

to the question of senlor indebtedness of Llnter Textlles, the 17 August 1988

draft of the prospectus rev~ewed

by Freehllls stated

"Ranking

. Subordinated to all Senior Indebtedness (as defined). As of June 30,

1988, after gvlng effect to the Re-organisation, the Company would have had no

Senlor Indebtedness. The Indenture places no linutat~on

on the amount of

Indebtedness (as defined), mncluding Sen~or	Indebtedness, that con be incurred by
the Company "

16 In relation to the statement in the 17 August 1988 draft of the prospectus quoted in paragraph 15, Freehills noted und iniormed Skadden Arps on 18 August 1988 ns tollows

"A statement is made that us of 30 June 1988 alter givlng elfect to the

Re-organisation the Company would have no Senior Indebtedness. Although this

IS, strictly speahng, correct (given that Linter Group Llrmted at present 1s that

only borrower for all Linter compun~es) should this statement be qualified or at

least some reference be made for the need or Intention of Llnter Textlles

Corporation Limted to immediately obtaln worklng capltal facdit~es?"

Particulars

Freehills informed Skadden Arps in writing.

A copy of the relevant document is in

the possession of the solicitors for the Applicants and may be inspected a t the offices

of those solicitors by appointment.

17 In July and August 1988, Freehllls requested Skudden Arps to provide it with a

memorandum of adv~cc

upon the civil l~abilit~es

ot the Issuers of a prospectus under

United States law, lncludlng under the Securities Act of 1933 dnd the Securities awarded thereunder

Particulars

The requests are in writing.

Copies of some of the requests are in the possession of

the solicitors for the Applicants and may be inspected a t the ofices of those solicitors.

18.

On 4 August 1988, Skadden Arps sent to Freehills a memorandum and materials, the Securities Exchange Act 1934 and Rule lob-5 promulgated thereunder, describing the

civil liabilities of the issuer of a prospectus which arise under United States law and the

types of judgments and remedies that nught be awarded thereunder

Particulars

The memorandum and materials a re in writing and are in the possession of Freehills.

19 Freehills considered the memorandum and materials forwarded to it by Skadden Arps, including the text of sections 11 and 12 of the Securities Act 1933 and section 10@) of the Securities Exchange Act 1934 and Rulelob-5 promulgated thereunder including textbook and journal articles relating to the said Acts and Rule for the purpose of expressing an opinion, to be included in the prospectus, upon the enforceability 01 c iv~ l liabilities under these laws in Australian courts

20. At some time in 1988 but at the latest by 21 September 1988, Linter Group proposed to the initial participant banks that they should, prior to the issue ot the debentures, release the guarantees (as defined in paragraph 31) on condition that

(a)	prior to such relense.

(i) Lintcr Group and Linter Textiles would give to initial participant banks a conformed mpy of the Underwriting agreement between Linter Textiles and the underwnter,

(11)

Linter Textiles would irrevocably undertake to pay the net proceeds of the

issue to Linter Group. '~nd

(iii)

Linter Group would undertake to keep the net proceeds received lrom Linter Textiles on deposit until the matters set out in (b) below were implemented. and

(b)

after the issue of the debentures. Llnter Textlles would guarantee Linter Group's

liabllit~es

to the llutial partic~paat

banks and the subsidiaries would guarantee

Lintcr Textiles' liab~lities

to the lnltial partlclpant banks, including the liabil~tics

under the tlrst mentioned guarantees

(The proposal is hererndter referred to as "the release and reinstatement proposal" )

21.

At all material tlmes, Freeh~lls

were aware of the release and rerustatemen1 proposal and

had adv~sed

upon and tormulated the same

Particulars

The knowledge is to be inferred from the facts referred to in paragraphs 10-20 above and, in particular, from the fact that Skadden Arps and Freehills correspond with each other concerning the release and reinstatement proposal and gave opinions to the initial participant banks a t the request of Linter Textiles, as hereafter referred to.

F r e e h i a k a drafted the undertakings (as defined in paragraph 33).	Further
particulars may be given after discovery.

22.

As at early September 1988,

the draft prospectus lncorporated in the dratt reglstratlon

statement, which had been prepared and considered by Freehills and lodged by Skadden

Arps with the SEC, stated

"Payments to the holders of the Debentures will be subordinated to all Senior

Indebtedness (as such term is defined in the Indenture).

As of June 30, 1988,

after giving effect to the Reorganisat~on.

the Company would have had no Sen~or

Indebtedness

The Indenture places no limtation on the amount of Sen~or

Indebtedness that can be incurred by the Company."

On 26 September 1988, Skadden Arps ~ntormed

Freeh~lls

that the SEC had made a

number of requisltlons on the draft prospectus lncorporated in the draft reg~stration

statement and that the SEC had requested that Linter Textiles should respond to these

requlsltions by fil~ng

an interlm amended registration statement and prospectus

One of

the requ~sitions

related spcc~tically

to the statement in the draR prospectus set out in

paragraph 22 and read

"State whether or not the Company has any current plans or

intentions to Issue my Senior Indebtedness

If so. describe such plans "

Particulars

Skndden Arps so informed Freehills in writing. A copy of the relevant document is in the possession of the solicitors for Applicnnts and may be inspected a t the oHices of those solicitors by appointment.

24. On 28 September 1988, Skadden Arps forwarded to Freehills an amended registration

statement incorporating an amended prospectus purporting to deal with the requlsit~ons

the SEC. The passage in the drnCt prospectus quoted in paragraph 22 above had been

amended to read as follows.

"As of June 30, 1988. alter giving effect to the Re-organisation, the Company had

no Sen~or Indebtedness Senior Indebtedness and other Indebtedness (as such term

is defined in the Indenture) may be lncurred by the Company, from time to time,

subject to certoln restrictions in the Indenture The Company expects to arrange

senior bank facilities in the amount of A$50 nullion to cover working capital

needs and a facility of up to As75 mllion to be used for capital expenditures on a

stand-by basis. Pending the arrnngemcnt of such facilities, worlung capital will be

provided to the Company by LGL

In the event that LGL borrows from thlrd

party lenders to provide such worlung capital, the Company may guarantee such

borrowings by LGL . "

25. On 29 September 1988, Freehllls lnkormcd Skadden Arps that it had reviewed the latest draft of the reglstratlon statement of 28 September 1988. Freehllls made no comment to Skadden Arps concernlug the statement in the prospectus quoted in paragraph 24.

Particulars

Freehills so informed Skadden Arps in writing.

A copy of the relevant document is in

the possession of the solicitors for Applicant and may be inspected a t the offrees of

those solicitors by appointment.

[1994] FCA 948

6 Dec 1994