Borg v Northern Rivers Finance Pty Ltd
[2003] QSC 112
•9 May 2003
SUPREME COURT OF QUEENSLAND
CITATION:
Borg & Ors v Northern Rivers Finance Pty Ltd & Ors [2003] QSC 112
PARTIES:
ANDREW JAMES BORG
(first plaintiff)
JASON MARK BYRNE
(second plaintiff)
ROBERT STUART CHRISTENSEN
(third plaintiff)
GLEN ANGELLO COPPO
(fourth plaintiff)
LAURENCE ROY DIXON
(fifth plaintiff)
IAN ANTHONY GLAZEBROOK
(sixth plaintiff)
MICHAEL CHARLES GOTTKE
(seventh plaintiff)
BRIAN KENNETH HINCHEY
(eighth plaintiff)
ROBERT MICHAEL McCLOY
(ninth plaintiff)
NANCY MARY MONTGOMERY
(tenth plaintiff)
HENRY ALEXANDER MONTGOMERY
(eleventh plaintiff)
GORDON EDWARD PARISH
(twelfth plaintiff)
GORDON JOHN REID
(thirteenth plaintiff)
JAMES MICHAEL ROACH
(fourteenth plaintiff)
GLEN ALAN SCOTT
(fifteenth plaintiff)
GASPAR SICH
(sixteenth plaintiff)
NEIL GREGORY CAMERON
(seventeenth plaintiff)
COLIN SCOTT PURDIE
(eighteenth plaintiff)
GEOFFREY DAVID RAPSON
(nineteenth plaintiff)
DREW KINGSLEY WOODMAN
(twentieth plaintiff)
NIKO JOZINOVIC
(twenty-first plaintiff)
v
NORTHERN RIVERS FINANCE PTY LTD
(first defendant)
INVESTMENT LICENCING PTY LTD
(second defendant)
NORTHERN RIVERS PLANTATION MANAGEMENT LTD
(third defendant)
DARREN PAWSKI and RALPH MARCEL NUNIS trading as “SecurInvest Accounting Services”
(fourth defendant)
DREW GRAHAM FRANCIS
(fifth defendant)
BASE METALS EXPLORATION NL
(sixth defendant)
EXPLORERS AND PROSPECTORS FINANCE LIMITED
(seventh defendant)
DARREN CHARLES HORNER
(eighth defendant)
JOHN MEARES
(ninth defendant)
BANALASTA OIL PLANTATION
(tenth defendant)
SAFEINVEST PTY LTD
(eleventh defendant)
KAREN EVANS
(twelfth defendant)
PLANTATION EQUITY PTY LTD
(thirteenth defendant)FILE NO:
SC No 191 of 2000
DIVISION:
Trial Division
PROCEEDING:
Civil Trial
ORIGINATING COURT:
Supreme Court at Mackay
DELIVERED ON:
9 May 2003
DELIVERED AT:
Brisbane
HEARING DATE:
11 February 2002; 12 February 2002; 13 February 2002; 14 February 2002; 15 February 2002; 18 February 2002; 19 February 2002; 20 February 2002; 21 February 2002; 22 February 2002; 5 April 2002
JUDGE:
Mackenzie J
ORDER:
Findings of fact and liability of fourth, eighth, tenth and thirteenth defendants delivered.
Consideration of thirteenth defendant’s counterclaim, quantum, final orders and costs adjourned to a date to be fixed.
CATCHWORDS:
TRADE PRACTICES AND RELATED MATTERS – CONSUMER PROTECTION – MISLEADING, DECEPTIVE OR UNCONSCIONABLE CONDUCT – REPRESENTATIONS – IN GENERAL – where three tax minimization schemes – where plaintiffs’ claims allowed by ATO in 1997 and 1998 – where notices of reassessment issued in 2000 on basis that schemes disallowed – where deductions disallowed in third scheme – where investment schemes did not provide lawful tax deductions and were not approved by ATO – whether salesmen engaged in misleading or deceptive conduct or conduct likely to mislead or deceive – whether plaintiffs induced by deceptive and misleading conduct to enter investment scheme/s – whether representations made as to existing facts
TRADE AND COMMERCE – SECURITIES INDUSTRY – DEALING IN SECURITIES – GENERALLY – where salesmen made recommendations to invest – whether a securities recommendation – whether salesmen defendants were securities advisors – whether breach of s 851 Corporations Law – whether recommendations reasonable and appropriate in the circumstances – whether no reasonable basis for making securities recommendations – whether plaintiffs acted in reliance – whether reasonable for them to do so – whether loss or damages was suffered as a result
TRADE AND COMMERCE – SECURITIES INDUSTRY – DEALING IN SECURITIES – GENERALLY – whether breach of s 849 Corporations Law – whether failure to disclose commission and brokerages payable
EVIDENCE – ADMISSIBILITY AND RELEVANCE – IN GENERAL – OTHER CASES – where no representative or class action pleaded – where no application to amend pleadings – where counsel sought to introduce evidence of representations made to plaintiffs generally – where sought to show plaintiffs were a class – where sought to bring evidence outside the case technically pleaded – where evidence not clearly identified or pleaded – whether evidence admissible – whether case presented went beyond a mere variation, modification or development of pleadings to amount to a new, separate, distinct or radical departure from case pleaded
EVIDENCE – ADMISSIBILITY AND RELEVANCE – SIMILAR FACTS – IN GENERAL – RELEVANT PRINCIPLES – whether evidence that similar representations made to plaintiffs admissible as similar fact evidence
CONTRACT – PARTICULAR PARTIES – PRINCIPAL AND AGENT – RELATIONS BETWEEN PRINCIPAL AND THIRD PERSONS – WHAT ACTS OF AGENT BIND THE PRINCIPAL – IN GENERAL – where agency admitted by fourth defendant in respect of provision of investment advice by fifth and eighth defendants – whether fourth defendant liable as principal for actions of fifth and eighth defendants – whether fourth defendant liable for actions of Mr Nunis as partner of company – whether tenth and thirteenth defendants liable as principals for fourth and eighth defendants
Corporations Law (Cth), s 9, s 77, s 765, s 819, s 849, s 851,
s 852, s 995, s 995A
Fair Trading Act 1989 (Qld), s 52
Trade Practices Act 1974 (Cth), s 51AF, s 51A, s 82, s 87
Uniform Civil Procedure Rules, r 65, r 75D.F. Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597, cited
Gates v City Mutual Life Society Ltd (1982) 43 ALR 313, cited
Howland-Rose v Commissioner of Taxation [2002] FCA 246; (2002) 118 FCR 61, explained
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 192 ALR 1, considered
Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23, cited
NMFM Property Pty Ltd & Ors v Citibank Ltd (2000) 107 FCR 270, considered
Sheldon v Sun Alliance Australia Ltd (1988) 50 SASR 236, cited
Sykes v Reserve Bank of Australia (1998) 158 ALR 710, applied
Waghorn v George Wimpey & Co Ltd (1970) 1 All ER 474, citedCOUNSEL:
P E Hack SC, with Dr R C Schulte, for the plaintiffs
J S Douglas QC, with I A Erskine, for the fourth and eighth defendants
C Wilson for the tenth and thirteenth defendantsSOLICITORS:
Macrossan & Amiet for the plaintiffs
Gateway Lawyers for the fourth and eighth defendants
Mullins and Mullins for the tenth and thirteenth defendants
INDEX
Part 1 – General Issues
Background to the Actions¼¼¼¼¼¼¼¼¼¼¼¼¼.¼¼..¼¼¼¼.. 6
Credibility- Salesmen¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.. 8
Credibility of Plaintiffs - Overview…¼¼¼.¼¼¼¼¼¼¼¼¼¼..¼¼ 13 Structure of Plaintiff’s Cases¼¼¼¼¼¼...¼¼¼¼¼¼¼¼¼¼¼..¼ 13 (a) Recommendations Case¼¼¼¼¼¼¼..¼¼¼¼¼¼¼..¼¼.. 15
(b) Representations Case¼¼¼¼¼¼¼¼¼¼¼..¼¼¼…¼....¼ 24
Miscellaneous Matters
(a) Pleadings¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼….¼¼¼.... 26 (b) Material Departure from Case Pleaded¼¼¼¼¼¼.¼¼..¼¼¼ 26 (c) Similar Fact Evidence¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼.¼.. 29 (d) Taxation Advice¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼…..¼¼...¼ 29
The Case Against the Fourth and Thirteenth Defendants¼¼¼..¼¼¼¼¼ 30 The Case Against the Tenth and Thirteenth Defendants¼¼¼¼¼¼¼..¼ 31
(a)Representations Case¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼¼... 31
(b)Recommendations Case¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼.. 32
Part 2 – Analysis of individual cases
Mr Borg¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼¼¼¼¼.¼. 34 Mr Byrne¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼….¼¼... 42 Mr Coppo¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼..¼¼.. 47 Mr Dixon¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼.¼…. 50 Mr Glazebrook¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼¼¼.¼ 55
Mr Gottke¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼.¼ 57
Mr Hinchey¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼. 60 Mrs Montgomery¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼¼. 62 Mr Montgomery¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼…¼..¼..¼ 67 Mr Parish¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼.¼¼¼ 68 Mr Reid¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼ 71 Mr Roach¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼..¼¼¼ 74 Mr Scott¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼…¼.¼¼¼ 77 Mr Sich¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼..¼...¼ 80 Mr Cameron¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼….¼.¼¼¼ 82 Mr Purdie¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼¼.¼...¼ 85 Mr Rapson¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼..¼…¼.. 87 Mr Jozinovic¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼¼.¼¼.… 89
Part 3 –Liability of Fourth and Eighth Defendants ¼¼¼¼¼¼.¼.¼¼¼ 91
Part 4 – Liability of Tenth and Thirteenth Defendants¼¼¼¼¼¼..¼¼¼ 91
Part 5 – Summary of Findings¼¼¼¼¼¼¼¼¼¼.¼¼¼¼¼¼¼.¼¼ 91
Case law
D.F. Lyons Pty Ltd v Commonwealth Bank of Australia (1991) 28 FCR 597¼¼.. 29 Gates v City Mutual Life Society Ltd (1982) 43 ALR 313¼¼¼¼¼¼¼.¼..¼ 29 Howland-Rose v Commissioner of Taxation [2002] FCA 246; (2002) 118 FCR 1… 7
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 192 ALR 1.¼ 25
Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23¼..¼ 29 NMFM Property Pty Ltd & Ors v Citibank Ltd (2000) 107 FCR 270¼¼¼¼.¼ .21
Sheldon v Sun Alliance Australia Ltd (1988) 50 SASR 236¼¼¼¼¼¼¼.¼... 29 Sykes v Reserve Bank of Australia (1998) 158 ALR 710¼¼¼¼¼¼¼¼¼¼. 32 Waghorn v George Wimpey & Co Ltd (1970) 1 All ER 474¼¼¼¼¼¼¼¼... 28
PART 1 – GENERAL ISSUES
Background to the Actions
These actions had their origins in three tax minimisation schemes marketed in the coalfields of Central Queensland and the Mackay area where a number of employees in the coal mining industry resided. The trial concerned the cases of the first and second, fourth to eighth, tenth to nineteenth and the twenty-first plaintiffs against the fourth and eighth defendants, the sellers of two of the schemes and the tenth and thirteenth defendants which were respectively the manager and financier of the project underlying the third scheme.
Not all plaintiffs were involved in all schemes. The first scheme, marketed in respect of the financial year ending 30 June 1997, concerned the Northern Rivers Tea Tree Project (“Northern Rivers”). The second in the year ending 30 June 1998, concerned the Base Metals Exploration and Prospecting Project (“Base Metals”). The third, in the year ending 30 June 1999, concerned the Banalasta Oil Plantation (“Banalasta”). The Northern Rivers Scheme was to produce tea tree oil; the Base Metals Scheme was to engage in mineral exploration; and the Banalasta Scheme was to produce eucalyptus oil and related products.
The salesman who actually dealt with the respective plaintiffs was, in respect of the Northern Rivers Scheme, Drew Francis, the fifth defendant, against whom judgment by default had been entered by the time of trial. He was called under subpoena to give evidence in the case for the fourth and eighth defendants. He had been employed as a consultant by the fourth defendant in connection with selling the scheme. In respect of the Base Metals Scheme, Mr Nunis, one of the partners in the partnership which is the fourth defendant, or Mr Horner, the eighth defendant, were the salesmen. In respect of Banalasta it was Mr Horner. Mr Horner was also employed by the fourth defendant in connection with selling the schemes with which he was involved.
The problem which led to the proceedings was that the plaintiffs had claimed, in respect of schemes in which they were involved, taxation deductions for expenditures to which they had committed themselves under the schemes. These deductions were claimed under the self-assessment taxation regime. Notices of assessment on the basis that the deductions were allowable were initially issued and refunds paid accordingly in respect of the Northern Rivers and Base Metals Scheme. Notices of reassessment were issued, mostly in early 2000, on the basis that those deductions were disallowed. Notices of assessment based on disallowance of the deductions in respect of Banalasta were issued in the first instance. In some cases individual plaintiffs received independent advice that there was a risk that the deductions would be disallowed and lodged amended returns.
A general description of the case of each of the plaintiffs is that each of them was persuaded by the salesman to become a party to what became known as a “mass marketed tax scheme” on the basis of recommendations and representations made by the salesman. The pleadings allege that in the case of each plaintiff representations that investments in each of the schemes were lawfully tax deductible and that each of the schemes was approved by the Australian Taxation Office (“ATO”) had been made. It was also alleged in the pleadings that, in truth and in fact, investments in each of the schemes did not provide lawful tax deductions and that each of the schemes was not approved by the ATO. The plaintiffs had suffered loss and damage because the recommendations were neither genuine nor made in accordance with the law and the representations were misleading and deceptive.
The schemes operated on the concept that a substantial amount of the moneys refunded by the ATO on the basis that the expenditure was lawfully tax deductible was paid into the schemes once the refund had been received. The effect of the schemes was that the plaintiffs who were earning in the vicinity of $70,000 upwards were able to reduce their taxable incomes to varying sums in the vicinity of $20,000. Some plaintiffs gave evidence that they were told that at that level of income they would be entitled to benefits from the social security system which they would not otherwise be eligible for. Some said that they had not taken advantage of this opportunity because they thought it would be immoral.
It is apparent from the evidence that the existence of schemes of this kind was a common topic of conversation at the mines. Many of the plaintiffs were persuaded by this talk to inquire about the schemes, with the result that they either invited the salesmen to discuss the schemes with them or attended presentations by the salesmen. The result was that there was usually a conjunction of eager sellers and eager purchasers. In many cases the documents were signed on the spot without any further inquiry, without reading any of the documentation. In some cases the plaintiffs who ultimately purchased were more wary.
The Taxation Commissioner’s decision to reassess the tax liability of participants in the first two schemes and to disallow deductions in respect of the third scheme led to the present litigation, as has already been noted. The decision of Conti J in Howland-Rose v Commissioner of Taxation (2002) 118 FCR 61; [2002] FCA 246 which was delivered, after the evidence had been heard, on 18 March 2002 is an example of a scheme in respect of which the Commissioner’s approach was vindicated. The costly and time consuming task of the matter coming to trial had reached the fourth day of the trial when the Taxation Commissioner announced a settlement offer for mass marketed scheme investors. The Taxation Commissioner’s offer will have an impact on the level of damages recoverable in any cases where liability is established.
Analysis of the legal framework of the plaintiffs’ cases can be put aside for the time being. One underlying proposition is that conduct that was misleading or deceptive or likely to mislead or deceive was engaged in by the salesmen of the schemes. It is desirable at this point to refer to a broad formulation of the case for the plaintiffs. In paraphrase the submission on behalf of the plaintiffs was that the case should be treated as one where everyone was taken advantage of by unscrupulous and predatory salesman. Coal industry workers who earned high incomes but were financially unsophisticated were targeted by salesmen who came the long distance from Western Australia to lure them, by use of aggressive marketing techniques and disseminating incorrect advice concerning ATO approval of schemes, into schemes that were supposed to be tax effective but were actually fraudulent. It was submitted that the salesmen were able to create a “tax effective schemes culture” and that the proper approach is to look at the plaintiffs as a class who were systematically targeted by the salesmen defendants and were susceptible to the apparently considerable benefits of each of the schemes.
This approach involves a degree of overstatement. Firstly, it attempts to minimise differences between individuals and the evidence in individual instances. Secondly, it seeks to avoid, by generalisation, the need to form a conclusion in individual cases as to issues such as what was actually said, how what was said is to be categorised for the purpose of legal analysis and the degree of reliance by individuals upon what is found to have been said. Related submissions to the effect that the “broad brush” approach implicit in these submissions is wrong in principle will be returned to later. Further, whether one describes the formation of the decision to invest in some instances as being due to trust and understanding induced by slick salesmanship, or a reckless desire, no matter what was said, not to miss out on what others in the mines were describing to anyone who cared to listen as a way to beat the taxation system and benefit under the Social Security System as well, may vary according to the perspective from which one views it. Such a dichotomy also creates the risk of obscuring subtleties in individual sets of circumstances.
Credibility - Salesmen
One thing may be stated with clarity. Although the three salesmen involved in the relevant schemes describe themselves as financial planners, they did not perform financial planning in any real sense. Their function and purpose was to sell the scheme with which they were currently involved, without regard to the overall financial situation or needs of the client. The only analysis of a financial nature engaged in was to obtain an estimate of the plaintiffs’ income for the current taxation year, work out what investment was necessary to achieve the optimum taxation outcome and to illustrate the contemplated kinds of deductions and tax savings to the client.
Since there is a gulf between what the plaintiffs in most cases say they were told and what the salesmen say they told the plaintiffs it is necessary to resolve issues of credibility and reliability of evidence. The two issues are important since an adverse finding as to credibility may not necessarily mean that the contrary version will be acceptable since there are also issues of reliability of that account as well.
One specific aspect of credibility concerns the eighth defendant Horner. Exhibit 116 is a letter dated 4 February 2002 under the hand of Mr Leach, instructing solicitor for the fourth and eighth defendants. Relevantly it says the following:
“Further to our earlier communications with you, our clients have instructed that settlement may be able to be reached in accordance with the terms of the enclosed draft Deed, provided the terms of settlement are agreed promptly, and are substantially in accordance with the enclosed draft.
Further, the terms of settlement will most likely need to be resolved today, otherwise circumstances will then dictate that the issue will not be able to be resolved by settlement between our respective clients.
Kindly advise by urgent return as to your response in relation to the proposed terms of settlement.”
The draft deed referred to in the letter shows the releasees as the fourth defendants and the eighth defendant. The critical part for present purposes is that part of the consideration for settlement of the action referred to in cl 2.1(b) was that Mr Horner would sign an affidavit in the form annexed to the deed. The effect of the affidavit was that, in respect of the cases of each of the plaintiffs with whom Mr Horner dealt, he admitted that he had, with the actual authority of the fourth defendants made the representations alleged, undertaken and performed the conduct alleged and made the agreements alleged by each plaintiff. The effect of swearing the affidavit would have been that his evidence in court that he used essentially a standard presentation not including the representations alleged against him, for the most part, would have been diametrically the opposite of what was in the affidavit.
This led to an exploration of the circumstances surrounding the giving of the instructions implicit in the letter. In the cross-examination of Mr Horner, the following appears:
“… I’ll ask, did you give instructions on that date to your solicitors that you would be prepared to swear an affidavit confirming the fact that you made the representations alleged in the statement of claim?-- I’m not too sure what letter we’re talking abate (sic).
Look at this document please? And I want you to read that to yourself please?-- Where’s my signature?
Shall I repeat the question?-- Yes, please do.
On or about that date, did you give instructions to your solicitors that you would be prepared to swear an affidavit confirming the fact that you made the representations alleged in the statement of claim?-- No, I can’t remember saying that.
Remember giving instructions that you were prepared to swear an affidavit?-- At that stage, no I wasn’t.
I didn’t ask you whether you were. Do you recall giving instructions to a solicitor that you were prepared to swear an affidavit? It was the week before the commencement of this trial?-- Mmm. I’m trying to think. To my - did I say to my solicitor?
Yes?-- No, I wouldn’t have done.
I’m sorry?-- I wouldn’t have done.
You wouldn’t have done?-- No, ‘cause I didn’t talk to my solicitor.
Did you talk to Mr Nunis and he talked to Mr Leach?-- No, not Mr Nunis.
Mr Pawski?-- I had a conversation with Mr Pawski about what they were offering.
Well don’t want to go into that. What I want to know is whether you gave instructions directly or indirectly to your solicitors that you were prepared to swear an affidavit?-- No, I didn’t say that to Mr Pawski.
I’ll repeat the question. Did you instruct your solicitors directly or indirectly that you were prepared to swear an affidavit?-- Based on these terms here, is it?
Just forget those terms for the moment. Did you tell your solicitor directly or indirectly that you were prepared to swear an affidavit? We’ll come to the terms of it in a moment. Did you say that?
…
WITNESS: No, I didn’t.
…
MR HACK: Either by speaking to him directly or by communicating with him through another person?-- No.
…
Is it not the case at about the 4th of February you were prepared to swear an affidavit saying that you did say to the various plaintiffs in this case the things that they allege?-- No.”
Reading this passage of evidence in the form of transcript does not fully convey the length of time involved and the extent of deliberation on the part of Mr Horner when giving the evidence.
Mr Leach swore an affidavit exhibiting some correspondence preceding and subsequent to Exhibit 116. On 8 January 2002 Macrossan & Amiet for the plaintiffs sent a letter to Gateway Lawyers referring to an earlier letter which is not exhibited. Macrossan & Amiet’s letter stated that their clients were keen to progress settlement negotiations on the basis outlined in the earlier letter. A proposal was put by Macrossan & Amiet that either Gateway’s clients would be available to give evidence for the plaintiffs confirming that the representations alleged in the statement of claim were in fact made, or alternatively, that they provide an affidavit confirming that the representations as alleged in the statement of claim for each relevant plaintiff were in fact made. It was stated that the purpose of this was to assist to resolve the matter with what would be the remaining outstanding parties, the tenth and thirteenth defendants.
On 16 January 2002 Macrossan & Amiet replied to further correspondence from Gateway (which is not exhibited to Mr Leach’s affidavit). In it was discussion of a proposed affidavit, the purpose for which it was intended to be used and the tactical advantages to be taken of it if the tenth and thirteenth defendants went to trial. The letter also urged the fourth and eighth defendants to have regard to the advantages of settlement as a result of the affidavit being given.
On 4 February 2002 Exhibit 116 was forwarded to Macrossan & Amiet but on 7 February 2002 Macrossan & Amiet were advised as follows:
“Further to our earlier without prejudice discussions, it seems that Mr Horner has received independent advice to not swear the affidavit in any form as proposed by you.
As you may appreciate, this will then probably result in the end of our settlement negotiations, given that the form of the affidavit was a central requirement to your clients’ position.”
In his affidavit Mr Leach explained Exhibit 116 as follows:
“When I used the words ‘settlement may be able to be reached in accordance with the terms of the enclosed draft Deed’ in exhibit 116 I was not acting on direct instructions from Mr Horner but as a result of a conversation with another of my clients.”
In cross-examination on his affidavit he gave the following evidence:
“… you say that ‘At no stage had Mr Horner or any of my clients given me instructions that Mr Horner was willing to swear the affidavit’. Did you have instructions that Mr Horner may be willing to swear the affidavit?-- No. Not maybe willing. What I was told that he was reluctant to swear the affidavit.
Well you were told though that he was considering swearing the affidavit?-- He was certainly considering it, yes.”
In re-examination he said that Darren Pawski had informed him of that. Mr Pawski was not called by any party.
Mr Hack invited me to conclude that Mr Leach’s evidence that he had been told by Mr Pawski that Mr Horner was prepared to consider signing the affidavit established that Horner was disposed to swear falsely either in his evidence or in the affidavit. He submitted that his credit was damaged because of this to such an extent that his evidence should be disregarded where it conflicted with that of the plaintiffs and their witnesses. I am not persuaded in the absence of any more extensive account of how the notion of Mr Horner swearing the affidavit in the terms proposed was conceived that I should draw the conclusion suggested by Mr Hack. As the evidence stands Mr Leach’s proposal seems to have been based on information from Mr Pawski as to Mr Horner’s possible acquiescence in the proposal. Even allowing for an inference that may be drawn from the absence of evidence from Mr Pawski that any such evidence would not have helped the fourth and eighth defendants’ case, Mr Horner’s manner of denial in the witness-box and Mr Leach’s evidence lead to the conclusion that I should base my weighing of Mr Horner’s evidence on other factors rather than this.
It is apparent from the evidence that Mr Horner was regarded by many of those with whom he dealt as a likeable person. No doubt this predisposed them to treat him as sincere and trustworthy. The results he achieved show that he was a very effective salesman. He also had the advantage, in many cases, of selling to people who had in previous years received the predicted benefits from other schemes and were therefore conditioned to accept that history would repeat itself in connection with the scheme he was then selling.
His presentation in the witness-box was superior to that of the other salesman. His explanation of how he went about his business was more detailed and precise than theirs, although Mr Nunis also gave an example of his standard presentation as well. His credibility presents the greatest problem of any of the salesmen for those reasons. He gave evidence that each of his presentations followed a set form and that he did not make representations in a form that was deceptive or misleading. A description of the content of his standard presentation was given in cross-examination. He said that it was subject to amplification by explanations given in answer to questions from the client but that such explanations did not include deceptive or misleading statements. Subject to what follows, the issue of his credibility needs to be addressed in conjunction with the question of reliability of individual plaintiffs.
As will appear from the analysis of individual cases, some of the plaintiffs were for various reasons more compliant than others and needed little persuasion to enter into the particular scheme. Others were inclined to try to understand the scheme in more detail. There are sufficient indications in the evidence that Mr Horner used well tried sales techniques to persuade plaintiffs to join. I am prepared to accept his evidence that he used a fairly standard form of presentation. The accounts of it given by Mr Purdie and Mr Rapson, which are among the most detailed, support this. I am also satisfied that he was astute enough to be cognisant of the limits which should be observed in informing the plaintiffs about the nature of the scheme.
However I am also satisfied that he was capable of moulding his presentation to suit the exigencies of the particular case. The conclusion upon which I have acted in assessing the individual cases is that where he was preaching to the converted who approached the transaction uncritically it was sufficient to substantially follow the standard format to make a sale. Where on the other hand the person was cautious, indecisive, or, in the worst case situation, wavering between signing or not, Mr Horner was prepared to say what was necessary to clinch a sale.
With regard to the issue whether he sufficiently informed plaintiffs concerning his right to commission, to comply with s 849 of the Corporations Law (Cth), I am satisfied on the balance of probabilities that it was part of his presentation to tell clients that he would get a commission or brokerage at a particular percentage rate. It is, however to be noted that when tested as to what sum the percentage was based on, he had difficulty articulating his understanding. When dealing with cases of individual plaintiffs later, if there is no specific reference to Mr Horner’s evidence in the section relating to “conclusion” it may be assumed that I have acted in that instance in line with the view expressed in this paragraph.
It can also be said at this point that neither Mr Francis nor Mr Nunis was an impressive witness. Their evidence was generally lacking in detail and unconvincing. Their evidence must be subjected to severe scrutiny for those reasons while recognising that there is also a need to consider the reliability of competing evidence in forming ultimate conclusions as to whether individual plaintiffs have established their cases. Overall, I would be less prepared to accept Mr Francis’ evidence than Mr Nunis’, as will appear later.
It is convenient to note at this point that that Mr Francis and SecurInvest parted company at a time between the selling of the first and second schemes in circumstances resulting in an uncomplimentary letter about him being sent to clients. Some plaintiffs gave evidence that they were told about it as well when the Base Metals scheme was being introduced to them. Mr Francis, who had set himself up as SafeInvest, responded to the allegations in a letter he distributed similarly. It is also convenient to note, in the context of the allegation that Mr Francis said that the Northern Rivers scheme was ATO approved when selling it to clients, that a letter (which Mr Francis said was sent without his authority) containing the following was sent to Mr Borg, the first plaintiff, on 14 July 1997:
“At present we are looking at new projects for the 1997/98 financial year, but of course we can’t introduce these products until they have the appropriate licence and approvals from the Australian Securities Commission and Australian Tax Office, as soon as these are in place we will be in contact.”
Credibility of Plaintiffs - Overview
With regard to the plaintiffs and their witnesses, one of the real difficulties as to reliability of any version from them is that, on any view of it, the evidence given must represent what is an impressionistic and condensed view of what the witness believed was said in a presentation, in some cases interrupted by questions and answers, extending over a much longer period than the version given in evidence extended. In most cases the format was that the particular salesman spoke to the potential client and was asked questions of various descriptions by the client. In the course of the meeting the salesmen filled out the tax management worksheet and explained it and also, at least in some cases, took the person’s personal particulars for incorporation into the documentation. It is also fair to say that the degree of interaction and questioning by potential clients varied from client to client. In short, it would be beyond argument that by the time the documents were signed the client believed that he or she would obtain the deductions referred to in the tax management work sheets. Otherwise the transaction would not have made economic sense. However, issues remain, firstly, about the extent to which there were misleading or deceptive statements which led the plaintiffs to enter into the transactions, given that a number of them were plainly predisposed from what others had told them or from previous experience to enter into the transactions and, secondly, about the extent to which individual plaintiffs relied on what they were told by the salesmen.
Structure of Plaintiff’s Cases
It now is necessary to examine in more detail the structure of the case presented on behalf of the plaintiffs before individual cases are examined. The statement of claim alleged that a number of matters were common to each plaintiff. It was said that there were “common representations” that:
(a) investments in each of the schemes were lawfully tax deductible; and
(b) that each of the schemes was approved by the Australian Taxation Office.
It was also alleged that there were “common truths” that:
(a)investments in each of the schemes did not provide lawful tax deductions; and
(b)that each of the schemes was not approved by the ATO.
It was also alleged that there was “common conduct” consisting of:
(a) completion of a tax management worksheet;
(b) requiring only details of gross income;(c)requiring no other financial information (including information concerning investment objectives, financial situation and particular needs); and
(d)not considering a recommendation to invest in the scheme made with the benefit of that financial information.
In respect of each plaintiff the case as pleaded followed a general pattern. Typically the structure was as follows:
· a description of the occasion when the plaintiff and the salesman discussed the
scheme;
· a description of the representations “expressly and orally” made;
· reference to undertaking the common conduct and to other things the salesman
did or did not do;
· reference to an alleged tax planning agreement and a duty of care in relation
thereto;
· an allegation of knowledge that the plaintiff would rely on the representations;
· facts pleaded as evidence of reliance on the representations when the
agreement was entered into;
· the common truths concerning the scheme and allegations of other false
representations;
· alleged breaches of the Corporations Law;
· alleged breaches of the Fair Trading Act 1989 (Qld);
· alleged breaches of the Trade Practices Act 1974 (Cth);
· breach of contract and negligence;
· damages.
As the matter was finally presented the focus was on whether there had been misleading or deceptive conduct, or specific contraventions of the Corporations Law with regard to disclosure and investment advice. No submissions were made concerning the causes of action pleaded in breach of contract and negligence. It was accepted that the concept of misleading or deceptive conduct was common to the Corporations Law, the Trade Practices Act and the Fair Trading Act.
As the case crystallised, it was said to rest on two bases, the “recommendations case” and the “representations case”. The former was alleged to rely on breaches of ss 849 and 851 of the Corporations Law and s 852 which provides a remedy in certain circumstances. The “representations case” was based on the proposition that the relevant defendants had engaged in conduct that was misleading or deceptive or likely to mislead or deceive (which for convenience will be referred to generically as misleading or deceptive conduct). The combination of the presentation by the salesmen and the nature of the schemes was said to have represented to the plaintiffs expressly or impliedly and orally or in writing that the schemes were tax office approved and/or provided lawful deductions.
(a) Recommendations case
The basis of the allegation relating to s 849 was an alleged failure to disclose commission or brokerage payable. The contravention of s 851 was based on an alleged failure to have a reasonable basis for making a securities representation. It was submitted that the fourth defendant was an investment adviser as defined by the Corporations Law, that the fifth defendant and the eighth defendant were securities representatives of the fourth defendant and that each of the fourth defendant (through Mr Nunis), Mr Francis and Mr Horner was a securities adviser. It was submitted that there was in each instance the making of a securities recommendation defined by s 9 of the Corporations Law, namely a recommendation with respect to securities or a class of securities, made expressly or by implication.
Section 849 is concerned with a situation where a securities adviser makes a securities recommendation to a client who may reasonably be expected to rely on it. There is no doubt that each plaintiff might reasonably be expected to rely on the recommendation. I do not accept that the failure of the plaintiffs to take steps to familiarise themselves with the documents if given to them by the salesmen, made it unreasonable to expect that they would rely on the recommendation. In most instances, the way in which the transaction occurred was not designed to encourage reading or enquiry. In respect of that category of person a securities adviser is required to disclose particulars of any commission or fee that the security adviser or an associate will or may receive in connection with the making of the recommendation or a dealing by the client in securities as a result of the recommendation. If the recommendation is made orally the information about a commission or fee must be disclosed orally. If the recommendation is made in writing it must be disclosed in writing.
As will appear in more detail later when dealing with individual cases, there is evidence in many instances that plaintiffs signed Disclosure Statements setting out in various ways the fact that commission was payable to the salesman. ASIC Policy Statement 122 with reference to s 849 and s 851 was tendered. It is not determinative of whether there has been a contravention of either section, but is useful as an indication of aspects of the requirements that need to be considered by persons making recommendations. At [PS 122.77], it is stated that a blanket or generic disclosure, examples of which are given, does not comply with the obligation of s 849. [PS 122.78] says that disclosure should be made in a manner that is clear and easy for the client to understand. The level of sophistication of the client is a factor to be taken into account when deciding on an appropriate level of detail and suitable format. [PS122.79] says that if the client is unlikely to be familiar with the concept of percentage, it is advisable to disclose the information in dollar terms. The point that is obvious from the document is that there is no rigid requirement; there is flexibility on a case by case basis.
What has just been said is of some relevance because in the case of the Banalasta scheme, it was submitted that there was a breach of s 849 because the disclosure statement refers to a “rate of commission of 5%” to be received by Mr Horner. It was submitted that this amount, since Mr Horner was not sure of the basis of calculation, was not capable of calculation and was uncertain. It was submitted that there was a breach of s 849(2).
Section 852 of the Corporations Law provides a remedy if four matters coincide. Section 852 also relates to breaches of s 851 to which reference will be made later. The four matters are:
(a)the security adviser contravenes the relevant provision in relation to a security recommendation to a client;
(b)the client, in reliance on the recommendation, does or omits to do, a particular act;
(c)it was reasonable for the client to do, or omit to do, the act in reliance on the recommendation; and
(d)the client suffers loss or damage as a result of the act or omission.
If those four matters coincide, a securities adviser is liable to pay damages in respect of the loss or damage, subject to s 852(3), in the case of s 849 and s 852(4) in the case of s 851.
With respect to (b), (c) and (d), subject to s 852(3), provided it is established that a client relied on a recommendation to invest in a scheme, and it was reasonable in all of the circumstances for the client to act on the recommendation, upon proof of loss or damage as a result of acting on the recommendation (i.e. as a result of entering into the scheme) the security adviser would be liable to pay damages in respect of the loss and damage.
In the case of s 849, there must be reliance on the recommendation as a result of which loss is caused. The fact that the recommendation to enter into the scheme was made must be proved to be a motivating factor for the particular client entering into the scheme. That is the first causal link required. The next question posed by
s 852(3) is whether loss resulted from entering into the scheme. The final question is whether, in any instance where s 849 was not complied with, it is proved a reasonable person in the client’s circumstances, even if told in appropriate terms that the salesman was entitled to the commission, would have entered into the scheme. This involves an objective element. It is not a question whether it is proved that the particular client could be expected to enter into the scheme but whether a hypothetical reasonable person in the client’s circumstances could be expected to have done so. On the view I take of the facts, except where otherwise indicated, a reasonable person having been told that commission at the rate of 5% would be due to the salesman could be expected to have gone ahead anyhow with the scheme.
A submission was made on behalf of the fourth and eighth defendants to the effect that this basis of liability had not been established because there was no causal link established between the failure to inform the plaintiff of the right to commission and the loss and damage suffered. In its abstract form I do not accept this argument. The structure of s 852 does not require the loss to be causally connected to the failure to inform. The required causal connection is between the act or omission done in reliance on the recommendation made by a person who has not made disclosure of his commission and the loss and damage. That is to say the causal connection must be between entering into the scheme and suffering loss and damage.
Section 851 applies where a securities adviser makes a securities recommendation to a person who may reasonably be expected to rely on it and the securities adviser does not have a reasonable basis for making it. The concept of not having a reasonable basis for making a recommendation is defined, for the purposes of the section, as involving the following: the securities adviser does not have a reasonable basis unless;
(a) he or she has given such consideration to and conducted such investigations of the subject matter of the recommendation as is reasonable in the circumstances, in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person’s investment objectives, financial situation and particular needs; and
(b) the recommendation is based on that consideration and the investigation.
It was submitted that the salesmen had not given reasonable consideration to or conducted reasonable investigations of the subject matter of the recommendation, that is to say, the underlying investment.
Each of Mr Francis, Mr Nunis and Mr Horner saw themselves as salesmen whose authority was limited to advising as to the particular product currently being marketed. They did not consider themselves as financial advisers in any wider sense. I am satisfied that many of the plaintiffs were principally interested in reducing their taxable income, had heard of the particular scheme from others and knew anecdotally of the benefits of schemes of this kind or the scheme itself before they met the salesman. They formed a cohort of the willing when it came to entering into the scheme. A few plaintiffs were more cautious, having heard about the scheme but wanting to know more about it before committing themselves.
I am satisfied that each plaintiff was a person who might reasonably be expected to rely on the recommendation inherent in the way the sales pitches were conducted. In respect of such a person s 851(2) required:
(a) that the matters in (b), (c) and (d) be set in the context of the information the securities adviser has about the person’s investment objectives, financial situation and particular needs;
(b) such consideration of the subject matter of the recommendation by the securities adviser as was reasonable in the circumstances;
(c) such investigation of the subject matter of the recommendation by the securities adviser as was reasonable in the circumstances; and
(d) that the consideration and investigation be carried out purposively; it was to be done in order to ascertain that the recommendation was appropriate in the required context.
There was little evidence that some of the plaintiffs had any particular objective in mind except reducing their taxable income and increasing their refund. Some, in their evidence at least, expressed purposes related to retirement and future family expenditure from income from the scheme.
The evidence does not suggest persuasively that any of the salesmen conducted any inquiry at the time the project was being discussed about the particular plaintiff’s investment objectives beyond a desire to reduce taxation by involvement in the scheme nor as to their particular needs. Indeed in some cases, such as Mrs Montgomery’s and Mr Reid’s, the fact that their financial circumstances would be considerably worse in the subsequent year did not cause any cautionary comment, in the case of Mr Reid, or according to Mr Horner, any comment other than if Mrs Montgomery got into difficulties a proposition would be put to the scheme to restructure her commitments. Some other plaintiffs who expressed concern that their financial position may deteriorate because of volatility in the industry were not cautioned concerning participation. They were told much the same as Mrs Montgomery.
It was submitted that a critical omission was that each salesmen had failed to ascertain each person’s individual objectives, financial situation and particular needs. There is a degree of subjectivity in s 851(2)(a). Literally it focuses on information that the “securities adviser has” about the person’s investment objectives financial situation and particular needs. The drafting of the provision is not apt to cast a direct obligation on the investment adviser not to make a recommendation unless he has complete information about such matters. For example if a person sought advice from an investment adviser on a specific subject and chose not to reveal any other information, the investment adviser would not be in breach of s 851 merely because he had not ascertained that information. It may, however, be imprudent for an investment adviser not to, at least, seek such information. As [PS 122.102] says, “ Section 851 does not expressly require reasonable inquiries to be made of the client’s needs and circumstances. However ASIC considers that this is implicit in the underlying purpose of the s851 obligation and the general law obligations of the securities adviser as a fiduciary”. [PS 122.106] and [PS 122.107] deal with the case of a client who wishes not to fully disclose personal information. But, in the end, it would not constitute an offence if the recommendation was appropriate on the basis of such information as he had, provided he had conducted such consideration and investigation of the subject matter of the recommendation as were reasonable in all of the circumstances and the recommendation was based on that consideration and investigation.
Further, s 852(4) provides that in a case of contravention of s 851, the securities adviser is not liable to pay damages in respect of loss suffered by reason of entering into the scheme if it is proved that the recommendation was reasonable in the circumstances having regard to the information the securities adviser had about the client’s investment objectives, financial situation and particular needs. The provision focuses on the state of knowledge of those things at the time the recommendation was made.
Each of the salesmen gave evidence bearing on the extent of their consideration and investigation of the subject matter of the recommendation. This is simply put on record to show that little if any independent research into the schemes was done by them. Given the level they occupied, the fact that they essentially gave a set presentation, supplemented if necessary in the case of a particular client, is not surprising. Mr Francis gave no evidence concerning the state of his knowledge of the Northern Rivers scheme other than that he had referred to the prospectus during the course of his presentation.
Mr Nunis said that he was introduced to the Base Metals scheme by Mr Hooker a director of the manager and financier. He also spoke to other directors although what was said in these conversations is unspecified. He spoke to a geologist involved with the project and said he relied on his opinion concerning the prospects discussed. He said that he had gone to New Caledonia (in company with a friend who was a geologist) where he saw drilling sites. There was also a journey to a place near Tamworth to view a site but this proved abortive because the person who was to show them could not come for a couple of days. He said that he had read the prospectus, and referred to its contents during the presentation. He had not personally done any search of or read any ASIC documents concerning relevant companies. He did not realise that the tax opinion in the prospectus was given by the company’s auditors. He did not make any inquiry of the Stock Exchange about the companies which held the tenements upon which the prospecting was to be done.
Mr Horner said that he had visited the Banalasta scheme land on at least two occasions, one of which may have been after the relevant period. One purpose was to check the feasibility of the project with reference to the existence of trees and infrastructure and to find out about marketing prospects for the products. He did not investigate the financial structure or circumstances of relevant companies.
A passage of cross-examination of Mr Horner was directed at the proposition that there had been analysis of the personal financial situation of plaintiffs, as asserted in a document given to them after they joined the scheme. He admitted that he did no analysis of their personal financial situation. He believed his function was to take clients’ personal details and to find out their financial situation, put it in the computer and calculate how many units they should purchase. He said that he had sold schemes to about 300 people and only two people were advised not to enter into them. Notwithstanding a description on his business card as “financial planner” the scheme he was selling was the only scheme he was authorised to recommend. A passage of the cross-examination illustrates, in summary, what he saw his position to be:
“You said, ‘The Base Metals scheme, or the Banalasta scheme, which as the case may be, this is the scheme for you’, is that correct?-- It’s the only scheme I could recommend.
Is that what you said to them?-- Yes, that’s true.
‘This is the scheme for you’. You see, you did have an option. You could say, ;This is not your scheme. You should go and see a real financial planner’, that was an option, wasn’t it?-- I was there to sell the product. I wasn’t there on the financial planning capacity as looking at shares and all that. I wasn’t licensed in any other areas to be able to comment on it.”
He was questioned about Mrs Montgomery’s case. He admitted that he did not advise her that the scheme was not suitable for her. He maintained he was acting in her interests notwithstanding that her capacity to meet payments in the second year of the scheme was contingent on her finding another office job paying of the order of $50,000 per annum. He maintained that he was acting in her interests by selling her the scheme and telling her that they would “look at” doing something by way of readjusting the costings of her investment in respect of the second year if she did not get a job.
In cross-examination of Mr Francis in connection with his dealing with Mr Borg in respect of the Northern Rivers scheme he admitted that the only financial information he obtained from Mr Borg was his taxable income. He said that he did not find out what his financial objectives were but qualified it by saying that it was under Mr Borg’s instructions. He elaborated on this in re-examination, saying that he asked Mr Borg if he wanted him to do any more financially and whether Mr Borg wanted to give him any more of his financial situation but Mr Borg declined. Mr Francis agreed that he had found out nothing about Mr Borg’s particular needs. He denied that he had recommended the scheme or that he persuaded plaintiffs to enter the scheme but admitted that he was a salesman and that it was his job to sell the scheme.
In cross-examination Mr Nunis agreed that prior to meeting Mr Borg in connection with the Base Metals scheme, all he knew was that he was a married miner. In the course of the meeting he asked for his taxable income. He did not ascertain his investment objectives nor his financial situation beyond his taxable income. He accepted that he was there purely to sell him an investment in the Base Metals scheme which was the only scheme he was authorized to sell. He believed that being in three speculative tax minimization schemes was a form of risk diversification. In a general way his method is summarized in the following passage:
“When you arrived to have a presentation with one of your clients, or potential clients, you were not there to give them financial planning advice, were you?-- No, I was there to show them the product.
You were there to sell them the scheme, weren’t you? -- The Base Metals project, yes.
And the scheme operated on the basis of your telling them that these payments would be allowable deductions, that they would get a refund and out of that refund the money would pay for the participation; is that correct?-- Yes.
You were not interested in giving them a recommendation that suited their particular needs, their particular finances, were you?-- They were products specific. They actually wanted to speak to us about that particular product.
You were not interested in selling them something that was geared to their needs or their circumstances, were you?-- I didn’t have the capacity to do so.
Shall I ask the question again? -- No.
Well would you answer it, please?-- No. The answer is no.
You were there to sell your tax scheme?-- The Base Metals exploration project.”
It is probably futile to attempt to define comprehensively the minimum level sufficient to comply with s 851 or to establish that a person is within the exemption from liability in s 852(4). Each case will depend on its own facts. There are two issues. One is whether there has been a contravention of s 851. The second is whether notwithstanding any such contravention it is proved that the recommendation was appropriate in any event.
There is little authority on s 851. However, in NMFM Property Pty Ltd & Ors v Citibank Ltd (2000) 107 FCR 270, Lindgren J was primarily concerned with an allegation of negligent advice in recommending to clients that they refinance to borrow to purchase units in an investment product. The inquiries concerning the individual plaintiffs’ financial position and aspirations were more detailed than in the present case. At 361, he said:
“After speaking with the Investors, usually at some length and more than once, and at least purporting to listen to them and to take cognisance of their individual circumstances, the Advisers recommended a radical restructuring of their financial affairs that involved substantial borrowings on the security of their homes and of the units purchased. The borrowings gave rise to heavy interest commitments, which, in many cases, consumed most if not all of the Investors’ income from their employment. The increased interest liability was supposedly to be met by the returns from the units and the tax savings arising from the ‘negative gearing’ aspect of the investment. The Package was far more complicated and risky than a simple investment in units in the Trust.”
He also said at 360:
“The Package involved the Investors in substantially increasing their indebtedness as part of an arrangement which, for them, was unfamiliar and extraordinary. They were entitled to expect that an unqualified recommendation to invest in accordance with the Package would not be made if there were associated risks that were not made clear to them, or if their income was or might well prove insufficient to service their borrowings, or if the Package was or was likely to be unsuitable for them.”
There was also a claim of contravention of s 851 of the Corporations Law, which he presumed proved in the circumstances. Because of this, it can only be inferred that Lindgren J would have considered that the procedure followed by the advisers in that case was insufficient compliance with the requirements of s 851. In my assessment of the two cases, the conduct of the salesmen in the present case falls short of that in NMFM.
In the case of the Northern Rivers scheme the Letter of Instruction commences substantively with the sentence “I advise that I am interested in receiving advice in relation to the class of products generally known as TAX EFFECTIVE products”. It will be noted that the interest is in advice in relation to the class of products, not necessarily an individual product. Then there are paragraphs expressed as alternatives. The first instructs the second defendant to provide the client with recommendations and to collect such information as is necessary to provide an appropriate recommendation. The second states that the client does not wish to provide any personal information and merely requires the second defendant to advise on the feature of whatever tax effective products the second defendant has available. It also instructs that the client will make his own decision and purports to exclude liability of the second defendant or its agents, officers or employees as to the appropriateness of the selected product for the client’s circumstances.
Despite the fact that the two instructions are different and expressed as alternatives and the form says “delete whichever paragraph is not applicable”, neither of the alternatives was crossed out.
The features of the disclaimer referred to above are substantially the same with regard to the Base Metals scheme, with the exception that the instruction to cross out whichever alternative is not applicable is not included. The fact that they are alternatives is clear but one of them is not crossed out on any of the disclaimers except in one case where there appears to have been a crossing out at some time after the document was completed. Later there is a reference to the words of s 851 and a statement that the Securities Recommendation Report was based on personal information provided by the plaintiff. There was also an invitation to the client to bring any misinterpretation of the information or some other personal details, needs or objectives that have been overlooked to the attention of the second defendant before placing the investment.
The essential nature of the case against the fourth and eighth defendants has been summarised earlier in these reasons. In cases where the eighth defendant has been found to have contravened s 851 of the Corporations Law or the prohibition against misleading or deceptive conduct, his liability to the particular plaintiff is established. Where Mr Francis, Mr Nunis or Mr Horner have been found to have contravened provisions prohibiting misleading or deceptive conduct or s 851 of the Corporations Law, the fourth defendant is liable for their actions.
PART 4 – LIABILITY OF TENTH AND THIRTEENTH DEFENDANTS
The broad structure of the plaintiffs’ case against the tenth and thirteenth defendants is summarised earlier in these reasons. For reasons expressed in detail earlier, the recommendations case alleging liability of the tenth and thirteenth defendants for any contraventions of s 851 of the Corporations Law by the fourth and eighth defendants fails. The representations case against the tenth and thirteenth defendants succeeds in cases where contraventions by salesmen are established.
PART 5 – SUMMARY OF FINDINGS
The following is a summary of the findings. The intention is that the parties have the opportunity to make submissions concerning the appropriate final orders to be made on the basis of the findings. Of necessity, issues of quantum, including the consequences of the Taxation Commissioner’s decision referred to in paragraph [8] of these reasons and the thirteenth defendant’s counterclaim, which the parties agreed should be deferred, could not be finalised at this time. They may be the subject of further submissions. Plainly, the more agreement there is on these issues, the more expeditiously they can be disposed of. The issue of costs remains to be decided at a later time also. The findings are as follows:
BORG
(a) Northern Rivers Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation only. Fourth defendant liable for Mr Francis’ conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Francis’ conduct.
(b) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Nunis’ conduct.
(c) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
BYRNE
(a) Northern Rivers Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation.
Fourth defendant liable for Mr Francis’ conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Francis’ conduct.
(b) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Nunis’ conduct.
(c) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of “get out” clause only.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
COPPO
(a) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
DIXON
(a) Base Metals Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation.
Fourth defendant liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
GLAZEBROOK
(a) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
GOTTKE
(a) Base Metals Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of ATO representation.
Fourth defendant liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
HINCHEY
(a) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of “hardship clause” only.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
MRS MONTGOMERY
(a) Northern Rivers Scheme
· Representations Case
Not proved.
· Recommendations Case
Not proved in respect of s 849 or s 851.
(b) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(c) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of “hardship clause” only. Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
MR MONTGOMERY
(a) Northern Rivers Scheme
· Representations Case
Not proved.
· Recommendations Case
Not proved.
PARISH
(a) Base Metals Scheme
· Representations Case
Misleading or deceptive conduct proved.
Fourth defendant liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
REID
(a) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
ROACH
(a) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Misleading or deceptive conduct proved.
Fourth, tenth and thirteenth defendants liable for Mr Horner’s conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
SCOTT
(a) Base Metals Scheme
· Representations Case
Misleading or deceptive conduct proved in respect of Mr Nunis.
Fourth defendant liable for Mr Nunis’ conduct.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Nunis’ conduct.
SICH
(a) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
CAMERON
(a) Base Metals Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
(b) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
PURDIE
(a) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Not proved.
RAPSON
(a) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
JOZINOVIC
(a) Banalasta Scheme
· Representations Case
Not proved.
· Recommendations Case
Contravention of s 849 not proved.
Contravention of s 851 proved; exemption from liability under s 852(4) not proved. Fourth defendant liable for Mr Horner’s conduct.
4
2
1