Bolitho v Banksia Securities Ltd (No 2)
[2014] VSC 184
•30 April 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2012 7185
| LAURENCE JOHN BOLITHO | Plaintiff |
| v | |
| BANKSIA SECURITIES LTD (ACN 004 736 458) & ORS | Defendant |
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JUDGE: | Ferguson J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11 April 2014 | |
DATE OF RULING: | 30 April 2014 | |
CASE MAY BE CITED AS: | Bolitho v Banksia Securities Ltd & Ors (No 2) | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 184 | |
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PRACTICE AND PROCEDURE – Group proceeding – Application for leave to amend statement of claim – Allegation of trustee failing to exercise reasonable diligence – No pleading as to acts or omissions said to constitute failure – Pleading deficient – Corporations Act 2001 (Cth) s 283DA.
PRACTICE AND PROCEDURE – Group proceeding – Application for leave to amend statement of claim – Allegation that trustee breached obligation not to allow the mixing of trust assets – Trustee held charge over borrower’s assets on trust but not alleged to hold assets subject to the charge on trust – Pleading deficient.
PRACTICE AND PROCEDURE – Group proceeding – Application for leave to amend statement of claim – Whether claim against auditor in relation to statement in prospectus must allege that auditor consented to the inclusions of statements based on statement of auditor – Pleaded claim not one that has no reasonable prospect of success – Pleading not deficient in this regard – Corporations Act 2001 (Cth) s 729(1).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N O’Bryan SC with Mr J Castelan | Mark Elliott |
| For the Third Defendant | Mr I Waller SC with Mr P Liondas | Clayton Utz |
| For the Fourth Defendant | Mr A Kelly SC with Mr B Jellis | Moray & Agnew |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
Pleading principles............................................................................................................................ 1
The pleading and relevant legislation........................................................................................... 2
Does the Proposed Pleading satisfy the pleading rules so far as Trust Co is concerned?. 13
Have the contraventions of s 283DA been adequately identified?..................................... 14
Is the claim in relation to mixing of trust assets deficient?................................................... 18
Is the pleading of causation deficient?.................................................................................... 19
Should leave be granted if a large number of the group members must necessarily fail? 21
Is the pleading of the claim against RSD under s 729(1) deficient?....................................... 21
Conclusion......................................................................................................................................... 24
HER HONOUR:
Introduction
This group proceeding[1] is brought by Laurence John Bolitho on behalf of himself and on behalf of all persons who held debentures issued by Banksia Securities Limited on 25 October 2012 and who suffered loss and damage as a result of the conduct of the defendants. Mr Bolitho seeks leave to file and serve a further amended statement of claim. The application is opposed by two defendants: The Trust Company (Nominees) Ltd,[2] (‘Trust Co’) which was the trustee for the Banksia debenture holders under a trust deed entered into with Banksia, and the auditors of Banksia, RSD Chartered Accountants,[3] (‘RSD’).
[1]Supreme Court Act 1986 (Vic) pt 4A.
[2]The third defendant.
[3]The fourth defendant.
An earlier application for leave to file an amended statement of claim was refused.[4] For ease of reference and where apposite, I will repeat what I said in relation to that earlier application.
[4]Bolitho v Banksia Securities Ltd & Ors [2014] VSC 8.
Essentially, Mr Bolitho claims that he and the other group members have suffered loss and damage as a result of the non‑disclosure of material and adverse matters in three prospectuses issued by Banksia. He lays the blame for this at the feet of the defendants.
Pleading principles
As I said in relation to the earlier application for leave to amend, the principles for pleading are well known. A pleading must contain, in summary form, a statement of all the material facts on which the party relies.[5] There are good reasons why material facts must be pleaded.[6] Among other things, such a pleading enables a party’s opponent and the Court to know what the case is that is to be met. Further, it discloses whether the party has a claim or defence (whichever may be the case) which is known to law. Ordinarily, leave to amend a pleading will not be granted where the pleading would be liable to be struck out. So, for example, leave to amend a statement of claim is unlikely to be granted where the proposed pleading does not disclose a cause of action or may prejudice, embarrass or delay the fair trial of the proceeding.[7]
[5]Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 13.02(1)(a).
[6]Dare v Pulham (1982) 148 CLR 658, 664.
[7]The grounds for striking out a pleading are described in Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 23.02.
The pleading and relevant legislation
The proposed form of a further amended statement of claim which is the subject of these reasons is dated 8 April 2014 (‘Proposed Pleading’). In the Proposed Pleading, it is alleged that between 6 October 2009 and 25 October 2012, Banksia offered debentures to the public. Mr Bolitho alleges that Banksia did this by accepting new moneys which were deposited in Banksia for fixed terms and at call by members of the public and by automatically rolling over the fixed‑term deposits when they matured. In this regard, Mr Bolitho pleads that Banksia did this by using Product Disclosure Statements and supplementary Product Disclosure Statements (‘PDS Documents’) which invited members of the public to deposit moneys with Banksia and thereby take up Banksia debentures.[8] The relevant prospectuses are Prospectus No 16 (6 October 2009), Prospectus No 17 (15 October 2010) and Prospectus No 18 (17 October 2011).[9] So far as the facts concern him personally, Mr Bolitho has provided particulars that:
(a)he initially invested $8,000 on 1 April 2005 to acquire Banksia debentures to be held for a term of six months at an interest rate of 6.25 per cent;
(b)on 3 October 2005, the amount of $8,255.43 was ‘rolled over’ for a further period of six months at 6 per cent;
(c)the pattern of ‘rollover’ continued thereafter on a six‑monthly basis,[10] with the final ‘rollover’ occurring on 10 October 2012 when the amount of $11,662.10 was invested for a period of six months at 4.9 per cent;
(d)Mr Bolitho does not know what Banksia did in respect of his investment in Banksia debentures when it matured on 10 October 2012, but it has not been repaid to him in full.[11]
[8]Proposed Pleading [25].
[9] The supplementary prospectuses are alleged to be those dated 11 February 2010 and 8 June 2012.
[10]Mr Bolitho says that he withdrew $1,000 on 20 June 2007, but otherwise the balance of his investment (principal and interest) was ‘rolled over’ each six months.
[11]Proposed Pleading [1] particulars.
Mr Bolitho alleges that each of the PDS documents contravened s 728 of the Corporations Act 2001 (Cth). In part, that section provides:
(1)A person must not offer securities under a disclosure document if there is:
(a)a misleading or deceptive statement in:
(i)the disclosure document; or …
(b)an omission from the disclosure document of material required by section 710, 711, 712, 713, 714 or 715 ...
If this section is contravened, there is a right to recover under s 729(1) which is in the following terms:
(1)A person who suffers loss or damage because an offer of securities under a disclosure document contravenes subsection 728(1) may recover the amount of the loss or damage from a person referred to in the following table if the loss or damage is one that the table makes the person liable for. This is so even if the person did not commit, and was not involved in, the contravention.
People liable on disclosure document [operative] These people... are liable for loss or damage caused by... 1 the person making the offer any contravention of subsection 728(1) in relation to the disclosure document 2 each director of the body making the offer if the offer is made by a body any contravention of subsection 728(1) in relation to the disclosure document 3 a person named in the disclosure document with their consent as a proposed director of the body whose securities are being offered any contravention of subsection 728(1) in relation to the disclosure document 4 an underwriter (but not a sub‑underwriter) to the issue or sale named in the disclosure document with their consent any contravention of subsection 728(1) in relation to the disclosure document 5 a person named in the disclosure document with their consent as having made a statement:
(a) that is included in the disclosure document; or
(b) on which a statement made in the disclosure document is based
the inclusion of the statement in the disclosure document 6 a person who contravenes, or is involved in the contravention of, subsection 728(1) that contravention
Among other things, s 283DA of the Corporations Act provides that the trustee of a trust deed entered into under s 283AA must:
(a)exercise reasonable diligence to ascertain whether the property of the borrower (in this case, Banksia) that is or should be available will be sufficient to repay the amount deposited or lent when it becomes due;
(b)exercise reasonable diligence to ascertain whether the borrower has committed any breach of the terms of the debentures, the provisions of the trust deed or provisions including ss 283BB and 283BF of the Corporations Act;
(c)notify ASIC[12] as soon as practicable if the borrower has not complied with s 283BF.
[12]Australian Securities and Investments Commission.
In respect of Prospectus 16 (2009), Mr Bolitho alleges in paragraph 27 of the Proposed Pleading that each of the following statements was a misleading or deceptive statement in a disclosure document in breach of s 728:[13]
[13]Proposed Pleading [29].
(a)Page 2: “About the Banksia Financial Group
The Company predominantly invests funds in registered mortgages over real estate throughout Australia and more particularly mortgage loans managed by Banksia Mortgages Limited (BML), a member Company of Banksia. The remaining funds are invested in Australian banks and other investments as permitted under the Trust Deed….
(b)We expect the company should continue to demonstrate a high ability and efficiency in managing and servicing its asset portfolio The `Stable’ outlook on Banksia’s servicer ranking reflects our expectation that the company will continue to operate in an effectively controlled and stable servicing environment. The company’s operations are managed by an industry-experienced management team, with clearly defined business strategies that respond to current market conditions. Banksia’s management expects to continue to focus on meeting high-quality loan-servicing standards by implementing conservative lending policies and prudent underwriting standards.
(c)Page 4:“BENCHMARK 2 – Liquidity
Statement by the Company:
“The relativity of maturing investments and loans is a daily risk management exercise. Projections are made out to 24 months into the future to monitor the liquidity position based on maturing loans. Because investments and loans mature at different times the asset and liability mismatch is the focus of careful analysis and management.”
(d)Page 6:“As at 30 June 2009 the Company has 21 mortgage investments totalling $12,686,143 where arrears of interest payments are more than 90 days overdue. Recovery proceedings have commenced. This represents 3.2% of the total debenture holder funds in the Company. Where appropriate, the Company has made loans non-interest accruing.
(e)The Company has made provision for bad and doubtful debts of $1,947,000 in the event of non-recovery of the full amount of an investment.
(f)The Company also has Net Tangible Assets exceeding $20.6 million, as at 30 June 2009….
(g)Page 8: “4.3 Risk Management
Market risk is managed via daily monitoring of the Company’s asset/liability position and through continuous monitoring of changes in general economic and market conditions. Credit risk is managed through BML’s loan assessment and management procedures (see Section 7.2).
The Company operates in accordance with Banksia’s comprehensive risk management program, which is based on the standards set in AS/NZS 4360 and is central to Banksia’s policy of continuous improvement.
Ongoing review of all identified risks to the operations of the group as a whole is maintained by select committees appointed from responsible personnel to develop and apply risk management covering:
•Finance and security;
•Legal and regulatory requirements;
•Comprehensive insurance;
•Market and economic conditions;
In managing risk to investors, Banksia operates in accordance with practices and procedures which include:
•appropriate due diligence during the loan assessment and credit approval process;
•a Compliance Plan;
•a Compliance Committee comprising a majority of external members;
•Statutory external audits;
•a Board Credit Committee;
•a Board Audit & Corporate Governance Committee.
The program requires regular meetings of all committees at which sources of risk are identified and managed. The action which results flows to policy and procedure adjustments throughout Banksia’s operations. The Managing Director is involved in all facets of the program and reports to the Board twice yearly on the operation and detail of the risk management program.”
…
(i)Page 20:“Balance Sheet as at 30 June 2009:
“NET ASSETS $20,612,939.”
(j)Page 25:“Independent Accountant’s Report”
“… The audit reports for the financial years ended 30 June 2008 and 30 June 2009 were unqualified.
2)In our opinion, there have been no material items, transactions or events subsequent to the balance date which relate to conditions existing at the balance date and which require comment on, or adjustment to, the figures dealt with in our report. To the best of our knowledge and belief, there have been no material items, transactions or events subsequent to the balance date which, although they do not relate to the conditions existing at balance date, would cause reliance on the figures shown in this report to be misleading…
RICHMOND SINNOTT & DELAHUNTY
Chartered Accountants.”
(k)Page 26:“Directors’ Report
“The Directors report that for the period 30 June 2009 to the date of this prospectus they have not become aware of any other circumstances which have or will materially affect the trading and profitability of the Company.
The Directors are of the view that having regard to the Company’s past performance and current market activities, the Company will continue to trade successfully in the coming year.
The Directors of the Company are of the opinion that the Company will be in a position to meet, as they fall due, interest and principal payments on investments accepted under this prospectus.”[14]
[14]Proposed Pleading [27].
These statements are defined in the Proposed Pleading as the ‘2009 Banksia Prospectus statements’. Mr Bolitho alleges that RSD made the statement in paragraph 27(j) above and in paragraph 27A alleges that the other statements set out above were all based upon RSD’s Independent Accountant’s Report which was published in full in Prospectus 16. He pleads that each of the 2009 Banksia Prospectus statements was a misleading or deceptive statement in a disclosure document in breach of s 728 of the Corporations Act by reason of a number of matters (‘2009 Actual position’).
Mr Bolitho also alleges that there are a number of matters (defined as the ‘Banksia undisclosed matters’ and the ‘2009 Banksia Financial Matters’) that ought to have been, but were not, disclosed by Banksia including the value and condition of a loan portfolio acquired in and after March 2009 from Statewide Secured Investments Ltd (‘Statewide’).
The alleged misleading or deceptive statements and the omissions of the Banksia undisclosed matters and the 2009 Banksia Financial matters are defined in the Proposed Pleading as the ‘2009 Banksia Prospectus Contraventions’.
Mr Bolitho pleads that following the publication of Prospectus 16 (6 October 2009), Banksia Group Members purchased Banksia debentures and rolled over their existing Banksia debentures when they matured and did not withdraw or seek to withdraw their investments.[15] He then pleads:
[15]Proposed Pleading [33].
34.If the 2009 Banksia Prospectus Contraventions had not occurred, but instead the Banksia undisclosed matters, the 2009 Banksia Financial Matters and the [2009 Actual position] had been disclosed in the 2009 Banksia Prospectus, Banksia’s poor financial position and its poor financial prospects following the Statewide Acquisition would have been publicly revealed in October 2009 and one or more of the following things would then have occurred:
(a)Bolitho and many of the Banksia Group Members would have quickly learned about Banksia’s poor financial position and its poor financial prospects following the Statewide Acquisition and would have taken steps to withdraw their investments from Banksia immediately. Those of the Banksia Group Members who invested after 2009 would not have invested at all in Banksia and would have suffered no loss;
Particulars
Bolitho and most of the Banksia Group Members live and have at all material times lived in country towns in rural Victoria where Banksia was a large local business with a substantial presence. News (including any substantial rumour) of any threat to Banksia’s long‑term viability (such as those posed by the Banksia undisclosed matters and the 2009 Banksia Financial Matters) would have quickly come to the attention of Bolitho and most Banksia Group Members because of:
(i)the profile and importance of Banksia in the rural towns in Victoria where it had its principal operations; and
(ii)the number and value of the investments which Bolitho and most Banksia Group Members had made in Banksia debentures.
That news would have caused Bolitho and the Banksia Group Members to take steps to withdraw their investments from Banksia and not to invest any further money in Banksia.
(b)Banksia would have disclosed breaches, alternatively impending breaches, of the Banksia AFSL Solvency and Liquidity Requirements particularised in paragraph 3(f) above;
(c)Banksia would have been obliged to notify ASIC of the breaches of the Banksia AFSL Solvency and Liquidity Requirements;
Particulars
Banksia had an obligation to disclose such breaches pursuant to s.912D(1B) of the Corporations Act.
(d)Banksia would have been obliged to notify Trust Co (which would in turn have been obliged to notify ASIC) of the breaches of the Banksia AFSL Solvency and Liquidity Requirements;
Particulars
Banksia had an obligation to notify Trust Co under clause 6.08(j) of the Banksia Trust Deed. Trust Co had an obligation to notify ASIC under s.283DA(e) of the Corporations Act.
(e)had Banksia or Trust Co notified ASIC of Banksia’s breaches of the Banksia AFSL Solvency and Liquidity Requirements, the Banksia AFSL would have been suspended or cancelled by ASIC, further or alternatively Trust Co or ASIC would have applied to the Court for orders under s.283HB(1) of the Corporations Act.;
Particulars
It is reasonable to infer that, had the circumstances identified in the previous sub‑paragraphs of this paragraph occurred, ASIC would have taken immediate steps to suspend or cancel Banksia’s AFSL under s.915B(3) of the Corporations Act, further or alternatively Trust Co or ASIC would have applied to the Court under s.283HB(1) of the Corporations Act.
If one or more of the events described in sub-paragraphs (a) to (e) inclusive above had occurred, then within a few weeks thereafter:
(f)Banksia would have ceased to accept further deposits or to issue or roll over debentures and its business would have ceased;
(g)steps would have been taken by one or more of the defendants, Banksia debentureholders or ASIC (for example, by application to the Court under s.283HB(1) of the Corporations Act) to prevent any further harm coming to Banksia and the Banksia debentureholders from the matters alleged in the following paragraphs of this statement of claim:
(i)paragraphs 17(c) and (d) (namely the progressive rollover into Banksia debentures and the payment out of Statewide debentureholders at 100 cents in the dollar, when in fact Statewide was insolvent at the time of the Statewide Acquisition, and accordingly Statewide debentures were worth much less than 100 cents in the dollar. The total amount of Statewide debenture rollovers exceeded $238M and the total amount of Statewide debenture payments out by Banksia exceeded $100M (see V4.388). Each such rollover and payment of 100 cents in each dollar of Statewide debentures by Banksia constituted a transfer to the Statewide debentureholders of Banksia’s assets which ought to have been available — and would otherwise have been available — to pay Banksia debentureholders in full);
(ii)paragraphs 18, 19 and 20 (namely the progressive transfer of impaired Statewide loans to Banksia at inflated book values and in breach of the 70% LVR in the Banksia Trust Deed, which had the effect of progressively devaluing the Banksia loan book during the time that the transfers took place (2009–2011) and thereafter because the value of the loans in the Statewide loan book continued progressively to deteriorate following the Statewide Acquisition in March 2009, as disclosed by the documents which appear at V1.064, V1.065, V1.066, V1.067, V1.364, V1.393, V1.415, V1.445, V2.001, V2.032, V2.053, V2.139, V2.203, and V11.016-V11.048);
(iii)paragraphs 22 and 23 (the purported underwriting of BMF loans using Banksia debentureholders’ funds, which constituted a preference given by Banksia to unitholders in BMF at the expense of Banksia’s debentureholders and a misuse of Banksia’s property which ought to have been preserved in order to pay Banksia’s debentureholders in full);
(h)if the steps described in sub-paragraph (g) above had been taken, because the matters alleged in paragraphs 17–23 above were both unlawful (because they involved the mixing of Statewide’s debenture trust assets and liabilities with Banksia’s debenture trust assets and liabilities in breach of trust, as alleged in paragraphs 74E–74H below) and harmful to Banksia and its debentureholders, they would have been stopped immediately or very shortly after they were publicly disclosed, for example by the appointment of external administrators to Banksia, or by other judicial proceedings commenced by ASIC, Trust Co or the Banksia debentureholders, for example under s.283HB(1) of the Corporations Act;
(i)had one or more of the events described in sub-paragraphs (f)–(h) above occurred in 2009, it is likely that Bolitho and the Banksia Group Members would have suffered no loss at all because Banksia was solvent in 2009 prior to and for some time following the Statewide Acquisition;
Particulars
The time when Banksia became insolvent will be the subject of expert evidence which will be filed and served prior to trial.
(j)because the matters alleged in paragraphs 17(c) and (d), 18, 19, 20, 22 and 23 above did not cease until after the appointment of receivers and managers to Banksia in October 2012, Bolitho and the Banksia Group Members suffered a substantial and progressive decrease in the value of Banksia’s assets, and a substantial and progressive increase in the value of Banksia’s liabilities as a result of the adverse effect of those matters continuing from March 2009 until October 2012;
(k)had the matters alleged in paragraphs 17(c) and (d), 18, 19, 20, 22 and 23 above been stopped earlier, Bolitho and the Banksia Group Members would have suffered no loss (if the matters had been stopped in 2009), alternatively less loss than they have in fact suffered as a result of those matters being allowed to adversely affect the value of Banksia for 3 years and 7 months until October 2012.
35.By reason of the 2009 Banksia Prospectus Contraventions, Bolitho and some Banksia Group Members (being those who were adversely affected by the 2009 Banksia Prospectus Contraventions in the manner alleged in paragraph 34 above):
(a)suffered loss and damage;
Particulars
The loss is the unpaid principal in respect of the Banksia debentures since 25 October 2012. Interest will be sought pursuant to the Supreme Court Act 1986 (Vic).
(b)are entitled, pursuant to section 729 of the Corporations Act, to recover the loss or damage suffered by them from each of: …
(ii)RSD….
Particulars
…RSD were persons named in Prospectus 16, having given their consent to being named as the auditor and the provider of an expert report relating to Banksia and having signed the Independent Accountant’s Report on page 25 of Prospectus 16 and having made or been responsible for the statements alleged in paragraph 27A above….
Analogous allegations are made in respect of prospectuses 17 (2010) and 18 (2011).
So far as Trust Co is concerned, Mr Bolitho alleges that Trust Co was trustee for the Banksia debenture holders pursuant to a trust deed with Banksia dated 12 December 1994.[16] He also alleges that Trust Co was the trustee for the Statewide debenture holders.[17] Mr Bolitho alleges that, in breach of its obligations under s 283DA of the Corporations Act, Trust Co failed:
(a)to exercise reasonable diligence to ascertain whether the property of Banksia that was or should have been available (whether by way of security or otherwise) was likely to be sufficient to repay the amounts deposited with or lent to Banksia when they became due;[18]
(b)to exercise reasonable diligence to ascertain whether Banksia had committed any breach of the Banksia Trust Deed;[19]
(c)to exercise reasonable diligence to ascertain whether Banksia had committed any breach of its obligation to carry on and conduct its business in a proper and efficient manner in accordance with Banksia’s obligations under s 283BB of the Corporations Act;[20]
(d)to exercise reasonable diligence to ascertain whether Banksia had breached its obligations under s 283BF of the Corporations Act to provide quarterly reports;[21]
(e)to notify ASIC as soon as practicable (or at all) of Banksia’s failure to comply with s 283BF of the Corporations Act.[22]
[16]Proposed Pleading [5](c), (d).
[17]Proposed Pleading [5](e).
[18]Proposed Pleading [74].
[19]Proposed Pleading [74A].
[20]Proposed Pleading [74B].
[21]Proposed Pleading [74C].
[22]Proposed Pleading [74D].
Mr Bolitho alleges in paragraph 75 of the Proposed Pleading that if Trust Co had not breached its obligations under s 283DA of the Corporations Act the events described in sub‑paragraphs 34(a)–(h)[23] would have occurred with the consequence that he and the group members would have suffered no loss (had those events occurred in 2009), alternatively less loss than they have in fact suffered as a result of the adverse effects alleged in sub‑paragraphs 34(j) and (k)[24] continuing until October 2012.[25] Mr Bolitho then pleads in paragraph 76 that because Trust Co contravened s 283DA, he and the Banksia group members have suffered loss and damage and are entitled, pursuant to s 283F, to recover that loss and damage from Trust Co.
[23]See above [13].
[24]Ibid.
[25]Proposed Pleading [75].
Mr Bolitho also alleges that Trust Co was under a duty not to allow the mixing of Statewide trust assets and liabilities with Banksia Trust assets and liabilities.[26] He alleges that Banksia mixed Statewide trust assets and liabilities with Banksia trust assets and liabilities by accepting rollovers from and paying out Statewide debenture holders using Banksia’s funds and by transferring Statewide loan assets across to Banksia.[27] He pleads that Trust Co knew that Banksia was mixing Statewide trust assets and liabilities with Banksia trust assets and liabilities and that in breach of the duty not to allow the mixing of trust assets, Trust Co allowed the mixing of trust assets and took no steps to prevent Banksia doing so.[28]
[26]Proposed Pleading [74E].
[27]Proposed Pleading [74F].
[28]Proposed Pleading [74G]–[74H].
Does the Proposed Pleading satisfy the pleading rules so far as Trust Co is concerned?
Trust Co has four complaints in respect of the Proposed Pleading. They are that:
(a)it does not adequately identify the contraventions of s 283DA of the Corporations Act;
(b)the claim in relation to mixing of trust assets is deficient;
(c)the pleading of causation is deficient; and
(d)a large number of the group members on behalf of whom Mr Bolitho brings the claim, must necessarily fail on the basis of the pleaded claim.
I will deal with each of these matters in turn.
Have the contraventions of s 283DA been adequately identified?
Trust Co criticises the pleading in respect of the alleged breach of s 283DA as being merely a recitation of the words of the section with no identification of the case which Mr Bolitho seeks to make against Trust Co. Trust Co drew on an analogy — it is not sufficient to make an allegation of contravention of s 1041H of the Corporations Act simply by reciting that a person engaged in conduct that is misleading or deceptive without providing details of why the conduct is misleading or deceptive. Similarly, it submitted, it is insufficient to allege a contravention of s 283DA by the mere recitation of the statutory language without providing any details of what it is that is said to constitute the alleged contravention. So, it submitted, a pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand.[29]
[29]Young Investments Group Pty Ltd v Mann [2012] FCAFC 107 [7] (Emmett, Bennett and McKerracher JJ).
Mr Bolitho contends that Trust Co’s submissions ignore the earlier parts of the pleading which allege:
(a)Trust Co’s obligations under s 283DA(a) of the Corporations Act to exercise reasonable diligence to ascertain whether the property of Banksia would be sufficient to repay the amounts deposited with or lent to Banksia when they became due;
(b)that Banksia’s property was insufficient to repay those amounts;
(c)a gradual and steady decline in Banksia’s financial capacity to repay the debenture holders following the acquisition of Statewide.
Mr Bolitho contends that the plea that Trust Co failed to exercise reasonable diligence to ascertain whether the property of Banksia that was or should have been available was likely to be sufficient to repay the amounts deposited with or lent to Banksia when they became due builds upon the foundations of the earlier allegations set out above in (a)–(c). He submitted that this is a simple and clear allegation of breach of a straightforward obligation imposed upon Trust Co by s 283DA(a) which is clearly and plainly alleged in the Proposed Pleading. In this regard he relies on paragraph 67 of the Proposed Pleading which is in the following terms:
With respect to Trust Co’s obligation alleged in paragraph 66(a) above, the property of Banksia that was or should have been available (whether by way of security or otherwise) was insufficient to repay the amounts deposited with or lent to Banksia in respect of the Banksia debentures when those amounts became due.
Particulars
Banksia ceased to pay any amounts of principal or interest in respect of the Banksia debentures following the appointment by Trust Co of the Receivers and Managers on 25 October 2012. The Receivers and Managers have recently estimated that the loss of principal for Banksia debentureholders will be between 15 and 20 cents in each dollar owed to them. The plaintiff refers to the Receivers and Managers’ Circular to Debenture Holders dated 16 December 2013, which may be inspected by prior appointment.
Mr Bolitho contends that what Trust Co ought to have done but did not do is clearly alleged, namely to discharge its obligation under s 283DA(a) to exercise reasonable diligence to ascertain whether the property of Banksia would be sufficient to repay the debenture holders when payment was due. Mr Bolitho submitted that it is not necessary to plead what Trust Co should have done in order to exercise reasonable diligence. In this regard, he relied on what was said by the plurality in Forrest v Australian Securities and Investments Commission.[30]In that case, their Honours were critical of the confusion in ASIC’s statement of claim of allegations of fraudulent misrepresentations with allegations of negligent misrepresentations. ASIC alleged first, that the relevant statements conveyed to their intended audience that Fortescue Metals Group Ltd had made binding contracts and secondly, that those statements also conveyed to the audience that Fortescue had a genuine and reasonable basis for making the relevant statement. The plurality said:
The second allegation added nothing to the case of misleading or deceptive conduct which ASIC set out to make. As explained in this Court, ASIC’s case was that the impugned statements conveyed facts which ASIC said were not true. If that was ASIC’s case, the reference to Fortescue’s state of knowledge was unnecessary and inappropriate. The allegation served only to distract attention from two questions critical to ASIC’s misleading or deceptive conduct case: first, what ASIC alleged that the impugned statements conveyed to their intended audience; and secondly, whether what was conveyed was misleading or deceptive or likely to mislead or deceive.
ASIC sought to explain and justify the inclusion in its statement of claim of a plea that Fortescue had no genuine or reasonable basis for making the statements as a plea that anticipated Fortescue alleging that the impugned statements were expressions of opinion not fact. But it was neither necessary nor appropriate for ASIC to attempt to use its statement of claim to meet an answer that had not been made.
This is no pleader’s quibble. It is a point that reflects fundamental requirements for the fair trial of allegations of contravention of law. It is for the party making those allegations (in this case ASIC) to identify the case which it seeks to make and to do that clearly and distinctly. The statement of claim in these matters did not do that.[31]
[30](2012) 247 CLR 486.
[31]Ibid [23]–[25] (French CJ, Gummow, Hayne and Kiefel JJ).
Senior Counsel for Mr Bolitho submitted that it would be wrong at this point for Mr Bolitho to be engaged in a purely hypothetical exercise of trying to identify what he says without the benefit of knowing really anything at all about what Trust Co actually did (other than what he had learnt through the public examinations of the directors). Senior Counsel contended that if Trust Co’s defence is that it did exercise reasonable diligence, then particulars will be sought and Mr Bolitho will deal with the defence by way of reply. He went on to say that if it turns out that Mr Bolitho is wrong in his claim against Trust Co, then he will suffer the consequences of being wrong in that respect. Senior Counsel submitted, however, that at the pleading level, what has been pleaded against Trust Co is entirely appropriate.
I do not agree. Whilst Mr Bolitho pleads the obligation imposed upon Trust Co under s 283DA and that certain things happened, he does not plead the material facts as to the alleged failure of Trust Co to comply with s 283DA. Mr Bolitho pleads the terms of the Trust Deed which imposed obligations on Banksia and the alleged breaches of those terms by Banksia.[32] He pleads that the property of Banksia was insufficient to repay the debenture holders.[33] Mr Bolitho pleads the obligation imposed on Banksia by s 283BF(4)(c)(i) of the Corporations Act to provide quarterly reports and Banksia’s alleged failure to provide reports which complied with its obligations.[34] However, he does not plead what Trust Co ought to have done, other than to say in the broadest of terms that it failed to exercise reasonable diligence as it was required to do. That does not tell Trust Co or the Court what steps or action Trust Co did not take that Mr Bolitho alleges should have been taken. For example, if Mr Bolitho’s case were that Trust Co failed to make enquiries of Banksia about these matters and failed to take action to ensure compliance by Banksia, then that should be pleaded, including some detail of the steps that Mr Bolitho alleges ought to have been taken by Trust Co in exercising reasonable diligence. Trust Co could then plead to those precise allegations. It may admit them. It may deny that it did not take those steps. It may plead that it was not required to take the steps alleged. The issues will then be defined with the necessary degree of certainty. It is no answer to say that Mr Bolitho does not know what Trust Co did and that should it turn out that it did nothing wrong, he will suffer the consequences. It is essential that the pleading articulate the claim that he seeks to make in sufficient detail to enable Trust Co to deal with precise allegations rather than a general statement of breach as currently formulated. Requiring Mr Bolitho to do this does not amount to requiring him to do what the plurality in Forrest v ASIC warned against. Rather, it is akin to doing that which was said to be required in relation to pleading a misleading or deceptive conduct claim; that is why what was alleged was misleading or deceptive. In effect, what Mr Bolitho seeks is to place the burden of proof on Trust Co to establish why it has done nothing wrong. However, it is his case and he has the onus in that regard to plead and establish his claim.
[32]Proposed Pleading [68]–[69].
[33]Proposed Pleading [67].
[34]Proposed Pleading [70]–[73].
Leave will not be granted to file the Proposed Pleading containing paragraphs 74, 74A, 74B, 74C and 74D.
Is the claim in relation to mixing of trust assets deficient?
The claim against Trust Co in relation to the mixing of trust assets is a new claim that Mr Bolitho proposes to bring.
Mr Bolitho contends that as trustee of the Banksia and Statewide debentureholders’ trusts, Trust Co was under a simple legal obligation to ensure that the trust assets and liabilities of those two trusts were not mixed. In support of this proposition, he relied on Johns v Law Society of New South Wales,[35] in which Mahoney JA observed that ‘a trustee should not mix his own property with trust property or indeed, mix the property of two separate trusts’.[36] That proposition is uncontroversial.
[35][1982] 2 NSWLR 1.
[36]Ibid 24.
The difficulty, however, that I see with Mr Bolitho’s proposed mixing claim is that it is not pleaded that Trust Co held the assets of Banksia and Statewide on trust. It was not a trustee of those assets. Rather, what is alleged is that Trust Co held a fixed and floating charge over all of the assets of Banksia on trust for the debenture holders.[37] That is, the trust asset is the charge, not the underlying assets which are subject to the charge. There can have been no mixing of the charge with any other asset. More importantly, there is no allegation of this nature. Senior Counsel for Mr Bolitho submitted that the distinction between the charge and the underlying assets is of no significance in a statutory regime pursuant to which the trustee is given complete supervisory control of all the assets and undertaking of the borrower by dint of the provisions of the Corporations Act and the trust deed which the trustee is obliged to enter into with the debenture issuer. I do not agree. In my view, the charge and the charged assets are separate and distinct. Separate rights and liabilities are associated with each. In any event, the Proposed Pleading as presently framed does not allege that the charged assets themselves were either actually or in effect under the control of Trust Co in any capacity, whether as trustee or otherwise.
[37]Proposed Pleading [5(c)(ii)].
Senior Counsel for Mr Bolitho also submitted that the nature of the relationship which the Corporations Act creates between the trustee, the issuing company and the debenture holders means that at the pleading level it is entirely appropriate to articulate (as has been done in the Proposed Pleading) an obligation not to allow the mixing of the assets of one trust with another trust and not to allow the mixing of the liabilities of the trusts. Accepting for the purposes of the argument that that is so, it is of no assistance to Mr Bolitho. The allegation is in relation to the mixing of ‘Statewide trust assets and liabilities with Banksia trust assets and liabilities’. However, the Proposed Pleading does not include any allegation that Statewide’s assets or Banksia’s assets were held on trust either by them or some other entity. As I have said, all that is pleaded is that Trust Co held the charge over Banksia’s assets on trust.
Leave will not be granted to file the Proposed Pleading containing those paragraphs in which allegations of the mixing of trust assets are made.[38]
[38]Proposed Pleading [74E]–[74H].
Is the pleading of causation deficient?
It follows from what I have said above that the claims against Trust Co will need to be reformulated by Mr Bolitho if he wishes to proceed against that defendant. It is therefore not necessary to deal with the other complaints made by Trust Co in respect of the pleading against it. Nevertheless, I will briefly set out my views as to those matters.
Damages under s 283F of the Corporations Act are available where a person suffers loss or damage because another person contravened specified provisions, including s 283DA. It is therefore necessary for Mr Bolitho to plead facts which establish a causal connection between the contravention by Trust Co and the loss claimed.
The causation case against Trust Co relies on sub-paragraphs (a)–(h) of paragraph 34 of the Proposed Pleading.[39] Mr Bolitho pleads that if Trust Co had not breached its obligations under s 283DA of the Corporations Act, then the events described in those sub-paragraphs would have occurred. For the purposes of this part of my reasons, I will assume that the allegations of breach are sufficient. Nevertheless, one difficulty that Trust Co sees with the proposed causation case is how Mr Bolitho intends to establish the link between the alleged breach and the alleged consequence. In my view, this is not a question of the pleading of causation, but rather a matter for evidence and submission at trial. Trust Co’s real criticism is that in fact, any breach by it did not lead to the consequences pleaded by Mr Bolitho in sub-paragraphs 34(a)–(h).
[39]See above [13].
Additionally, Trust Co contended that the Proposed Pleading is unclear as to whether Mr Bolitho alleges that the consequences set out in paragraph 75 would have flowed as a result of all of the alleged contraventions of s 283DA, or as a result of each of them, or as a result of some combination of them. Trust Co submitted that it was entitled to know whether it is Mr Bolitho’s case that any one of the breaches alleged in paragraphs 74–74D would have led to the loss claimed, or whether he intends to advance a case that it is those breaches cumulatively that led to the loss (thereby requiring him to succeed in proving each breach). In response to this submission, Senior Counsel for Mr Bolitho submitted that the breaches alleged are cumulative. In my view, that is sufficient to bind Mr Bolitho to that interpretation of the claim as alleged in the Proposed Pleading.[40]
[40]This part of the pleading has been revised since the publication of Bolitho v Banksia Securities Ltd & Ors [2014] VSC 8.
Consequently, if I had been persuaded that the claim for breach of s 283DA or the wrongful mixing of trust assets had been properly pleaded against Trust Co, I would also have been persuaded that the causation case against Trust Co was properly pleaded.
Should leave be granted if a large number of the group members must necessarily fail?
Trust Co submitted that it appears that Mr Bolitho’s case in the Proposed Pleading is that had the migration of Statewide debenture holders been halted, then they would have been left to be creditors of Statewide, and because there were few assets in Statewide, they would have received little or no return. According to Trust Co, on Mr Bolitho’s case, some members of the group (that is, former Statewide debenture holders) do not have a viable claim. Consequently, Trust Co contended that this subgroup, which is apparent from the Proposed Pleading, ought to be pleaded specifically and distinctly so as to identify the basis on which it is said that members within this subgroup might have suffered compensable loss. Without such a pleading, Trust Co says that the statement of claim masks real issues in the proceeding. That is, the plaintiff should be required to identify any subgroups whose claims must involve ‘materially different causation narratives’.[41]
[41]Melbourne City Investments Pty Ltd v Leighton Holdings Limited [2014] VSC 7 [7], [14].
The group members are defined as those ‘who were on 25 October 2012 holders of debentures … issued by Banksia and who suffered loss and damage as a result of the conduct of the defendants’. It follows that any former Statewide debenture holder who did not suffer any loss will not be a group member. Whilst there may need to be consideration as to sub-groups of debenture holders, it seems to me that Trust Co’s main criticism, as set out above, does not provide a sound basis for refusing leave to file the Proposed Pleading.
Is the pleading of the claim against RSD under s 729(1) deficient?
As I have noted above, Mr Bolitho alleges that RSD made the statement set out in paragraph 27(j) of the Proposed Pleading[42] and that all of the statements set out in paragraphs 27(a)–(g), (i) and (k)[43] (‘Indirect Statements’) were based on RSD’s Independent Accountant’s Report which was published in full in Prospectus 16.[44] He claims that he has suffered loss and damage which he is entitled to recover from RSD and others. To recap, the particulars that he gives in this regard read:
RSD were persons named in Prospectus 16, having given their consent to being named as the auditor and the provider of an expert report relating to Banksia, having signed the Independent Accountant’s Report on page 25 of Prospectus 16 and having made or been responsible for the statements alleged in paragraph 27A above.
[42]See above [9].
[43]See above [9].
[44]Proposed Pleading [27A].
RSD submitted that there is a critical omission in the Proposed Pleading — that it contains no allegation that RSD was a person named in Prospectus 16 with its consent as having made a statement on which the Indirect Statements were based. Critically, RSD contends, the Proposed Pleading does not allege that RSD consented to the inclusion of the Indirect Statements. It submitted that on a proper construction of s 729, an element of the claim is that there was consent to the inclusion of the Indirect Statements not just consent to the inclusion of the statement on which the Indirect Statements are based. RSD contended that the proposed claim in respect of the Indirect Statements has no reasonable prospect of success, and leave to file the Proposed Pleading insofar as it relates to that claim should be refused. RSD urged the Court to determine the issue now, rather than leave it for trial. It submitted that it is a pure question of law and presents a short question of statutory interpretation that will not be altered by evidence at trial.[45] It also contended that it is necessary to determine the question now in order to ascertain whether all material facts necessary to establish the claim have been alleged. RSD argued that approaching the matter in the way it urged is consistent with the overarching purpose of the Civil Procedure Act 2010 (Vic) that seeks to facilitate the just, efficient, timely and cost‑effective resolution of the real issues in dispute[46] and is also consistent with the objectives of the Commercial Court.[47]
[45]Tomasevic v State of Victoria [2012] VSC 148 [16] which concerned an application for summary judgment. See, however, the authorities referred to by Croft J in Clarke v Great Southern Finance Pty Ltd (2011) 80 ACSR 218 [13]–[14] in relation to determination of questions of law in a strike out application.
[46]Civil Procedure Act 2010 (Vic) ss 7–9.
[47]Practice Note No 10 of 2011 para 2.1.
RSD also submitted that the statement extracted in paragraph 27(j) is an expression of opinion and Mr Bolitho has not pleaded the material facts which are necessary to establish that this opinion was misleading or deceptive.
In relation to Mr Bolitho’s earlier application for leave to file an amended statement of claim, I said:
Mr Bolitho submitted that the ‘consent’ referred to in the table to s 729 is consent not to the inclusion of a statement (as contended by RSD) but rather consent to the naming of the person in the disclosure document. In my view, whether that is correct and whether any representations by RSD were statements of fact (as contended for by Mr Bolitho) or simply opinions (as contended for by RSD) and whether that distinction has any relevance when the claim is brought under s 729 are matters that ought be left for determination at a later stage. Again I would note that this provision has not yet been the subject of any reported judicial consideration and what Mr Bolitho contends for is not in the category of having no reasonable prospect of success. The issue is not sufficiently clear cut to put an end to it at the pleading stage of the proceeding.[48]
[48]Bolitho v Banksia Securities Ltd & Ors [2014] VSC 8 [69].
I remain of that view. In my opinion, in a case such as the present which involves substantial claims and multiple defendants, courts should exercise caution in refusing to grant leave to file an amended pleading and should not do so unless it is clear that the proposed claim has no reasonable prospect of success.[49] It is important when implementing the overarching purpose of the Civil Procedure Act not to ignore the fact that one of the objectives is the just resolution of disputes. In my opinion, it is not just to shut out a plaintiff at the pleading stage where the claim as alleged cannot be categorised as having no reasonable prospect of success. Case management is not an end in itself. Rather, it is a tool to be used. Importantly, RSD will not lose the right to argue the point fully.
[49]See the observations of the Court of Appeal about the caution courts should exercise in summary judgment applications: Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2013] VSCA 158.
At a pleading level, the claim as alleged by Mr Bolitho is not deficient and ought be permitted to proceed. Given that the issue will be one for later determination, it is not desirable that I express my view on this application as to which of the parties has the better argument.
Conclusion
Mr Bolitho’s application for leave to file the Proposed Pleading will be refused to the extent that it contains paragraphs 74 and 74A–74H. A further amended statement of claim, with those paragraphs excluded may be filed.
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