Christie v Mastores - [2016] WADC 137

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: CHRISTIE -v- MASTORES [2016] WADC 137

CORAM: SWEENEY DCJ

HEARD: 16-17 SEPTEMBER 2015

DELIVERED : 13 SEPTEMBER 2016

FILE NO/S: CIVO 244 of 2013

BETWEEN: NICHOLAS IAN CHRISTIE
Plaintiff
AND
JUSTIN PETER MASTORES
Defendant

Catchwords:

Misleading or deceptive conduct - Silence or non-disclosure - Expired prospectus - Section 725 Corporations Act - Section 1325 Corporations Act - No jurisdiction to make orders pursuant to s 1325 Corporations Act - Section 708(8) Corporations Act - Sophisticated investor

Legislation:

Corporations Act 2001 (Cth) s 708(8), s 725, s 1041H, s 1325
District Court of Western Australia Act 1969 s 55

Result:

Award of damages to plaintiff

Representation:

Counsel:

Plaintiff: Mr R J Price
Defendant: Mr T J Porter

Solicitors:

Plaintiff: Focused Legal
Defendant: Consult Solicitors

Case(s) referred to in judgment(s):

Henville v Walker [2001] HCA 52
Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31
Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 221 CLR 568
Argy v Blunts (1990) 26 FCR 112; (1990) 94 ALR 719
Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211
Bonnington Castings Ltd v Wardlaw [1956] AC 613
Browne v Dunn (1893) 6 R 67
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592
Caffey v Leatt-Hayter [No 3] [2013] WASC 348
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Commercial Developments Pty Ltd (t/as Don Rogers Motors Pty Ltd) v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1991) 5 WAR 208
Commonwealth Bank v Mehta (1991) 23 NSWLR 84
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
Gould v Vaggelas (1985) 157 CLR 215
Grassby v The Queen [1989] HCA 45; (1989) 168 CLR 1
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546; (1988) 79 ALR 83
Houghton v Arms [2006] HCA 59; (2006) 225 CLR 553
HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653
IOOF Australia Trustees (NSW) Ltd v Tantipech (1998) 156 ALR 470
Keen Mar Corp Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 46-048
Kenny & Good v MGICA (1992) 199 CLR 413
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506
Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239
Miller & Associates Insurance Broking Pty Ltd v BMW [2010] HCA 31; (2010) 241 CLR 357
Morellini v Adams [2011] WASCA 84
Murcia & Associates (a Firm) v Grey [2001] WASCA 240; (2001) 25 WAR 209
National Exchange Pty Ltd v Australian Securities & Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90
Oraka Pty Ltd v Leda Holdings (1998) ATPR 41-601
Potts v Miller (1940) 64 CLR 282
R v Forbes; Ex parte Bevan [1972] HCA 34; (1972) 127 CLR 1
Smith New Court Securities Ltd v Scrimegour Vickers (Asset Management) Ltd [1997] AC 254
Smith v Moloney (2005) 92 SASR 498
Smith v Noss [2006] NSWCA 37
Sutton v AJ Thompson Pty Ltd (in liq) (1987) 73 ALR 233
Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Westpac Banking Corporation v Jamieson [2015] QCA 50; (2015) 104 ACSR 657

Table of Contents

Introduction
Overview of the plaintiff's pleaded case
The obligations of a company to issue a prospectus
Was the plaintiff a sophisticated investor?
Misleading or deceptive conduct – general principles
A preliminary comment about credibility
The operation of GR Finance
The plaintiff first hears of GR Finance
Evidence about the telephone call of 3 June 2011
Prospectus No 7 expires
Evidence about the telephone call of 16 June 2011
The telephone call of 21 June 2011
The plaintiff sends in his application form
The plaintiff transfers $500,000 to GR Finance on 29 June 2011
The GR Finance letter to the plaintiff of 30 June 2011
The defendant's understanding that the plaintiff was a 'sophisticated investor'
The financial position of GR Finance in mid-2011
The delay in the lodgement of Prospectus No 8 and the need for a replacement prospectus
The aftermath of GR Finance's decline
Further findings about the two telephone conversations
Was the conduct objectively misleading or deceptive?
Is the defendant personally liable for acts done as a director of GR Finance?
Reliance – general principles and findings
Causation – general principles and findings
Could the plaintiff have redeemed his notes, or was he locked in?
Clause 30 trust deed – waiver and release of liability
General legal principles as to damages
Findings as to damages
No reduction of damages on account of the plaintiff's own conduct
Proportionate liability

SWEENEY DCJ:

Introduction

In June 2011, the plaintiff was retired and, having sold his security business in Sydney, had a significant amount of money to invest. He heard about GR Finance Ltd via a friend.
Its business was to issue first ranking notes to investors and, with the funds it received, lend money to approved borrowers, charging the borrower interest at a higher rate than it paid its investors by way of return on their notes. The notes it issued were first ranking notes in GR Finance, offered for various set periods, with a fixed interest rate. The investor received interest payments at a frequency nominated by him. According to the defendant, GR Finance had more than 200 investors.
The offer to investors to purchase such notes was contained within a prospectus, lodged with and approved by the Australian Securities and Investments Commission (ASIC) and then published on GR Finance's website. It was also sent out in hard copy to existing and prospective investors.
Each prospectus had a shelf life of 13 months and, as its expiry date loomed, GR Finance began work on getting the next prospectus ready for lodgement with ASIC. Ideally, of course, there would be a smooth flow‑on from one prospectus to the next. In 2011, however, Prospectus No 7 expired with no ready prospectus to replace it. Prospectus No 8 was not lodged with ASIC until more than a month later. It was never approved. Replacement Prospectus No 8 was not lodged until 9 August 2011.
When the plaintiff first heard about GR Finance, Prospectus No 7 was the current prospectus. By the time he invested $500,000 in first ranking notes in GR Finance, it had expired, with no new prospectus in place.
Not long after the plaintiff parted with his $500,000, GR Finance went into administration. Eventually, it went into liquidation. The plaintiff's money is gone. He now seeks to recover it from the defendant, the person at GR Finance with whom he predominantly dealt.
It is not necessary to detail the financial structure by which the notes were issued pursuant to a trust deed, to be held on trust for the noteholder together with the right to enforce the right to payment under the notes. The plaintiff is not suing for recovery of a debt owing. Rather, his case alleges misleading and deceptive conduct on the part of the defendant.
The plaintiff's case is that, by a combination of representations and failure to provide necessary information, the defendant misled him, holding out that Prospectus No 7 was current at the material time. He also asserts that the defendant misled him into believing that his application to invest would be dealt with under Prospectus No 7, when it could not be. The plaintiff asserts that, had he been told the truth, namely that Prospectus No 7 was about to expire and, by the time he invested, had expired, and his investment could not be dealt with under Prospectus No 7, he would never have invested. Accordingly, he seeks compensation for the money he invested, or damages. The plaintiff bears the onus of proving his case on the balance of probabilities.
For the reasons detailed below, I find that the defendant did engage in misleading or deceptive conduct which caused the plaintiff to invest in the GR Finance notes and that, had he instead told the plaintiff the truth, the plaintiff would not have invested, and would not have lost his money. I have awarded damages to the plaintiff.

Overview of the plaintiff's pleaded case

It is common ground that the first ranking investment notes offered by GR Finance amounted to a 'financial product' within the meaning of s 763A of the Corporations Act 2001 (Cth) (the Act), and that any conduct which occurred, occurred in relation to that financial product.
Because of that, it is also common ground that, amongst the several State and Commonwealth statutes dealing with misleading and deceptive conduct, the statute governing this case is the Act. Section 1041H (1) of the Act provides:
A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
The plaintiff alleges that the defendant made four key representations to him. He alleges that, during the first phone call between the two men on 3 June 2011, the defendant impliedly represented to him that Prospectus No 7 was the correct and current prospectus in relation to investing in GR Finance (which, at that time, it was). That is the first representation alleged. It is said to have been a continuing representation.
The plaintiff's case is that, from 11 June 2011, when Prospectus No 7 expired, that representation became false and misleading or deceptive, or likely to mislead or deceive, and neither the defendant nor GR Finance corrected the false impression left by that representation.
The second alleged representation arises out that same conversation. It is to the effect that the expiry date for Prospectus No 7 was not imminent (namely, eight days away). That alleged representation is said to have been false and misleading or deceptive, or likely to mislead or deceive, at the time it was made.
Further, the plaintiff alleges that, during the second phone call between the two men on 16 June 2011, by which time Prospectus No 7 had expired, the defendant impliedly represented that Prospectus No 7 and its accompanying application form were still current. That is the third representation alleged. It is said to have been false and misleading or deceptive, or likely to mislead or deceive, at the time it was made.
The fourth representation alleged arises out of that same conversation. It is to the effect that the plaintiff's investment application would be dealt with in accordance with Prospectus No 7. It is said to have been a representation as to a future matter when, at the time of making the representation, the defendant did not have reasonable grounds to make it and/or it was impossible for the application to be dealt with in accordance with Prospectus No 7.
In circumstances in which the defendant knew the plaintiff was considering investing in GR Finance, knew the expiry date of Prospectus No 7 and knew, during the second conversation, that it had expired, the plaintiff alleges these representations all amounted to misleading and/or deceptive conduct.
Those allegations focus on express words uttered by the defendant. That is the plaintiff's primary case.
As a secondary position, the plaintiff alleges that he had a reasonable expectation that, if Prospectus No 7 had in fact expired before he invested, he would have been informed of that fact by GR Finance or the defendant, and was not. The plaintiff alleges that the defendant's failure to disclose also constituted misleading or deceptive conduct. That case, in essence, asserts that the defendant was under a duty to disclose the fact that the prospectus had expired and his silence amounted to misleading and/or deceptive conduct.
Firstly, then, the plaintiff must prove that one or all of the representations were made, impliedly or by way of a failure to disclose that which ought to have been disclosed and, secondly, that any such conduct was misleading or deceptive or likely to mislead or deceive. Second, he must prove the defendant is personally liable for that conduct. That is not the end of the matter, however.
Before he can be given any remedy, he must also prove that he relied upon the alleged conduct. His case is that, had he been informed that Prospectus No 7 had expired and was no longer current, he would never have invested in GR Finance and would simply have left his $500,000 in an interest bearing account. His case is that no transaction would have occurred.
He further pleads that, once he had invested his money, he had no right to redeem his investment prior to its maturity date. In other words, he says he was locked in to the investment. He pleads that, given that his application to invest was received by GR Finance after Prospectus No 7 had expired, and that Prospectus No 7 on its terms stated that no notes would be issued once it expired, GR Finance was in fact obliged by law to deal with his money pursuant to s 725 of the Act, in effect by returning it, which it failed to do. That is not pleaded as a cause of action in itself, but as a circumstance supporting his case that he has been misled and suffered loss and damage.
The plaintiff seeks damages, or compensation. He is willing, upon payment of any compensation, to transfer the notes at the defendant's nomination.
It is important to understand what is not pleaded by the plaintiff.
It is not pleaded or suggested that any information contained in Prospectus No 7, published 12 May 2010, was misleading when it was published. Prospectus No 7 contained information about GR Finance's financial position, designed to enable a potential investor to make an informed decision about the risk attached to his investment. ASIC has developed certain 'benchmarks' or standards against which a potential investor may measure an investment to enable him to assess its potential rewards and, importantly, its potential risks.
These eight benchmarks were addressed in Prospectus No 7 under the heading 'Section Four: ASIC Benchmark Disclosures'. Each was dealt with in turn, with some accompanying explanation, either confirming that the benchmark was met, or explaining why it was not. The information provided under 'Benchmark 5: Loan Portfolio' included a breakdown of the loans to GR Finance's borrowers by classes of activity and geographic regions, a breakdown of the primary security for the loans, the amount of the largest loan and the total of the top 10 loans, as well as details of any loans in arrears for more than 90 days.
It is also not suggested that such information can reasonably be expected to remain current for the duration of the prospectus' life, given that it has a shelf life of 13 months. This is also not a case in which it is suggested that any supplementary disclosure document was required to be lodged by GR Finance.
It is not pleaded that any information contained in Replacement Prospectus No 8 was misleading. When it was eventually published on 9 August 2011, the financial position of GR Finance had clearly deteriorated.
The plaintiff's case is not pleaded on the basis that he made his investment based on outdated and inaccurate financial information. It is not pleaded that, had he known the true financial position as outlined in Replacement Prospectus No 8, he would not have invested in the notes. The contrast between the content of the two prospectuses is not the basis of the plaintiff's case. Discussions during trial confirmed that position. The plaintiff's case was put squarely on the basis that the conduct which is said to be misleading and deceptive went to the currency of Prospectus No 7.
It is also not pleaded that the defendant engaged in misleading or deceptive conduct by providing false or misleading financial information to the plaintiff during any of their telephone conversations. The alleged misleading and deceptive conduct is confined to the issue of the currency and status of Prospectus No 7.
Because of that, objection was taken generally and at times specifically to documents and evidence exploring the financial position of GR Finance after the plaintiff had made his investment. I took the documents into evidence on the basis that I would disregard them if, on proper analysis of the issues, I considered them to be irrelevant. I also allowed cross-examination of the defendant as to his knowledge of the financial position of the company, both at the time of the investment and afterwards.
As will emerge during this judgment, I consider the evidence and documents to have substantial relevance to the issues in the case as they bear on the defendant's state of mind at the relevant time. The question of whether conduct was misleading or deceptive is to be judged objectively, and a person might engage in such conduct innocently, with no intention to deceive. But before the court can decide whether the conduct was objectively misleading or deceptive, it must determine what conduct occurred. In this case, there is some conflict in the evidence. If it be shown that the defendant had significant motive to mislead, then such evidence has bearing on his credibility generally and assists in the fact‑finding exercise.
I turn now to consider the general concept of a prospectus, and GR Finance's obligations under the Act. Both have significant bearing on the defendant's conduct and the issue of misleading or deceptive conduct by silence.

The obligations of a company to issue a prospectus

Chapter 6D of the Act governs the obligations of a company wishing to fundraise by offering securities to potential investors. Unless the Act expressly provides otherwise, any such offer requires the company to provide potential investors with a disclosure document: s 706. The Act provides for several different types of disclosure documents, the standard such document being a prospectus, as was issued in this case: s 705. From this point I will refer to a disclosure document as a prospectus.
Some offers of securities do not require such disclosure to an investor. These include personal offers to specific investors with whom the company is already acquainted provided certain limits on the number of investors and the amount concerned are adhered to: s 708(1) and (3). Offers to senior managers and their families do not require disclosure: s 708(12).
Offers to 'sophisticated investors' do not require disclosure. It is part of the defendant's case that the plaintiff was a sophisticated investor. I will deal with that issue below, but in essence sophisticated investors are high income or asset rich investors or investors investing large sums.
Similarly, no disclosure is required to be made to those who receive an offer through a licensed dealer who reasonably believes them to be sufficiently experienced in such investments to assess the offer: s 708(10).
The rationale behind such exemptions from the disclosure requirements is that such investors are thought likely to have sufficient resources to obtain independent professional advice or, because of the size of their investment, to have sufficient leverage over the company to obtain the information required: 'Fundraising' by R Stewart & Ors (2012) published in Australian Corporations Law: Principles and Practice Vol 2, Butterworths (quoting the Explanatory Memorandum to the Corporate Law Economic Program Act 1999, par 8.54).
But assuming the offer does require disclosure to investors, a company must not offer securities that require disclosure, nor distribute any application form for any offer of such securities, unless a prospectus for the offer has been lodged with ASIC: s 727(1). It must not advertise the intended offer, or publish any statement that refers to it, or is reasonably likely to induce someone to apply for the securities, except by means of identifying the offeror and the securities and informing would‑be investors that a prospectus will be made available at the time of the offer, and advising them to consider the prospectus in deciding to invest: s 734. Nor can the company offer securities in the course of, or because of, an unsolicited meeting or telephone call with the investor (known as 'hawking'): s 736(1). Such securities are liable to be returned by the investor who is entitled, if he returns the securities within one month, to a refund of his money.

Any offer must be contained in, or accompanied by, the prospectus: s 721. Securities may only be issued or transferred in response to the application form which was included in the prospectus: s 723.
The company must prepare its prospectus, ensuring it is dated and contains 'all the information that investors and their professional advisers would reasonably require to make an informed assessment' of the offer, including all specific information that is required by the Act to be contained therein: s 710 ‑ s 716. The date of the prospectus must be the date it is lodged with ASIC: s 716. It must be lodged with ASIC if it is to be used as an offer of securities: s 718. The company must not accept any application for non-quoted securities (that is, securities not quoted on the stock exchange, as in this case) or issue or transfer any such securities until the period of seven days after lodgement of the prospectus with ASIC has elapsed. ASIC may extend that period by notice in writing, but not beyond 14 days after lodgement: s 727(3).
All application money received from potential investors applying for an issue or transfer of securities under a prospectus must be held on trust until either the securities are issued or transferred, or the money is returned: s 722.
A person or company commits an offence if it offers securities under a prospectus which contains a misleading or deceptive statement, or if there arises a new circumstance after its lodgement which would have been required to be disclosed, had it existed at the time of lodgement, and if the misleading or deceptive statement, or the new circumstance, is materially adverse from the point of view of the investor: s 728. An investor has a right in such circumstances to return his securities within one month and be refunded his money, even if the company is being wound up. If the company does not refund his money, the directors are personally liable: s 737.
It is defence to a charge for breach of s 728 if the person made all reasonable enquiries and believed on reasonable grounds either that the statement was not misleading or deceptive, or that there was no omission from the prospectus, respectively: s 731 (described in the Act as the 'due diligence defence'). A supplementary or replacement prospectus may be lodged to correct the deficiency, following which further offers may be made.
Finally, it is necessary to set out s 725 of the Act in full. It is quite critical to this case. It provides:
Expiration of disclosure document
(1)If a person offers securities under a disclosure document and the disclosure document passes its expiry date, the person must deal with applications for the securities under the document in accordance with subsections (2) and (3).
(1A)An offence based on subsection (1) is an offence of strict liability.
(2)If an application is received on or before the expiry date, the person may issue or transfer securities to the applicant.
(3)If an application is received after the expiry date, the person must either:
(a)return any money received by the person from the applicant; or
(b)give the applicant:
(i)a new disclosure document; and
(ii)1 month to withdraw their application and be repaid; or
(c)issue or transfer the securities to the applicant and give them:
(i)a new disclosure document; and
(ii)1 month to withdraw their application and be repaid
If the application is received on the expiry date, the company may issue the securities to the investor. If the application is received after the expiry date, that is not fatal to the investor's application to invest in notes. It does not prevent a company from receiving applications to invest in its notes, nor in dealing with those applications.
The company has choices as to how it will deal with such applications and must follow one of the procedures set out. It may simply give the applicant his money back. Alternatively, it may hold his money and send him the new prospectus, giving him a month to consider the new prospectus and decide whether he still wants to invest. The third option is to issue him his notes immediately but be prepared to refund him his money if, on consideration of the new prospectus, he reconsiders his investment.
The section does not expressly oblige a company to inform the investor of these three options, nor to give him the choice, but the company itself must follow one of the three options.
Its choice in which option to choose, however, is limited by its ability to follow that option lawfully. Section 725(3)(b) and s 725(3)(c) contemplate a new prospectus being available to be given to the applicant.
And s 725 does not stand in a vacuum. It needs to be read with s 727(3), which provides that the company must not accept any application for non‑quoted securities, nor issue or transfer any such securities, until the period of seven days after lodgement of the prospectus with ASIC has elapsed.
It also needs to be read with s 722, which provides that all application money must be held on trust until either the securities are issued or transferred, or the money is returned. Section 725 does not expressly or impliedly dispense with or relax those requirements purely because a prospectus has expired, and nor would one expect it to.
Section 725(3)(c) is a curious section to a legal mind, in that, even if there is a new prospectus, lodged with ASIC for more than seven days, the section contemplates issuing securities to an investor on the strength of an offer that has not yet been disclosed to him, which seems contrary to the general scheme of disclosure contained in Chapter 6D. It was put to the defendant in cross‑examination that it would be 'fanciful' to suggest that the plaintiff made an application for notes under Prospectus No 8 because there was no Prospectus No 8 at the time he applied, which seems a sensible enough proposition, yet s 725(3)(c) does contemplate an investor being issued with securities prior to seeing the relevant prospectus, subject however to being able to demand a refund.
It is not necessary for me to concern myself with that curiosity, however, because, as will emerge, when the plaintiff in this case sent his application form from an expired prospectus in to GR Finance, there was no new prospectus lodged with ASIC at that time, and not for some time to come.
I consider the effect of s 725 is that, where an application form and accompanying money is received after the date of expiry of an old prospectus, and the company has at that time a new prospectus which has been lodged with ASIC for seven days (and ASIC has not extended that timeframe) then all three options are available to the company. Should it choose the option in s 725(2), it must hold the money on trust and send the potential investor the new prospectus, giving him a month to withdraw his application. Should it choose the option contained in s 725(3)(c), then it can issue securities to the investor and send him the new prospectus, giving him a month to request his money back.
The section does not provide a time limit within which the company must exercise one of its options. However, given that the money must either be refunded or held on trust, that it will not earn any competitive rate of interest while held on trust, and that there is a time limit imposed on the investor once he is sent the new prospectus, I consider the section should be read as implying a time limit that the company should respond as soon as reasonably possible. That would afford a little latitude then if the application is received shortly prior to the elapse of seven days post‑lodgement of the new prospectus with ASIC.
But if there is no such new prospectus lodged with ASIC at the time the company receives an application form under an old prospectus, then it cannot even accept the application for securities, let alone purport to issue securities to the investor, notwithstanding s 725(3)(c), because to do so would breach s 727(3). Nor can it make a pre-emptive offer of such securities prior to having a lodged prospectus, such as by sending a draft prospectus to the would-be investor, or by foreshadowing for him in a telephone call what it will contain, because to do so would breach s 727(1) and s 734.
With no new prospectus lodged with ASIC, the company is simply in no position to choose to comply with the second or third option. It can only comply with the first option, by refunding the money.
While this is not a prosecution of GR Finance, or the defendant, for breach of s 725 of the Act, that legal context of the company's obligations is, as will later emerge, critical to this case.
Finally, it should be noted that, while the lawfulness of any offer of securities which require a prospectus is dependent upon the currency of a prospectus, the existence of such notes is not. The notes exist as a product independent of whether any offer to invest in them is current, or not. As mentioned earlier, the notes could be separately offered to individual potential investors, such as senior managers and their families, or sophisticated investors within the meaning of that term in the Act, without any reference to a prospectus, whether or not one was current at that time. The currency of the prospectus goes to the lawfulness of the offer of the product at that time, and the information which is disclosed to potential investors. It does not go to the validity of the notes themselves.
I turn now to another aspect of the legislation which is significant in this case, namely whether the plaintiff was a 'sophisticated investor'.

Was the plaintiff a sophisticated investor?

The defendant in his pleadings contends that the plaintiff was a 'sophisticated investor' because he invested $500,000, and hence GR Finance was not obliged to give him a prospectus in any event. In cross‑examination the defendant said that the plaintiff was a sophisticated investor. By this contention the defendant seeks to side-step the significance of s 725, discussed above, and the plaintiff's entire case that the currency of the prospectus induced him to invest in the notes.
The plaintiff could only be a 'sophisticated investor' if he met the definition contained within s 708(8) of the Act as follows:
708Offers that do not need disclosure
(8)An offer of a body's securities does not need disclosure to investors under this Part if:
(a)the minimum amount payable for the securities on acceptance of the offer by the person to whom the offer is made is at least $500,000; or
(b)the amount payable for the securities on acceptance by the person to whom the offer is made and the amounts previously paid by the person for the body's securities of the same class that are held by the person add up to at least $500,000; or
(c)it appears from a certificate given by a qualified accountant no more than 6 months before the offer is made that the person to whom the offer is made:
(i)has net assets of at least the amount specified in regulations made for the purposes of this subparagraph; or
(ii)has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for the purposes of this subparagraph a year; or
(d)the offer is made to a company or trust controlled by a person who meets the requirements of subparagraph (c)(i) or (ii).
The assets requirement was $2.5 million and the income requirement $250,000. No reliance is put on s 708(8)(c) or s 708(8)(d).
The plaintiff does not come within s 708(8)(a). That focuses not on the amount actually paid by the plaintiff, nor on the amount actually payable by the plaintiff on acceptance of the offer, but rather on the minimum amount payable on acceptance of the offer. In other words, s 708(8)(a) captures an offer which requires, as a minimum, up-front expenditure of $500,000 to invest. It is aimed at the magnitude of the investment on offer.
That is likely to be based on a rationale that such an offer could only be aimed at high income or asset rich investors (including investors managing the combined funds of much smaller investors), being the sort of investors who would be expected to take some independent advice, rather than modest investors.
Prospectus No 7 provided for a minimum amount payable of only $1,000. So did Replacement Prospectus No 8. There is no evidence of any offer being made to the plaintiff, whether under Prospectus No 7, No 8, or via a separate offer not connected to a prospectus, whereby he was informed that he had to invest a minimum of $500,000 in order to invest in the notes. I find he did not fall within s 708(8)(a).
Section 708(8)(b) is less obvious in its meaning. It focuses on the amount payable, not the minimum amount payable. That is one clear point of distinction between it and s 708(8)(a).
But it also focuses on the total amount payable for the securities currently on offer and securities of the same class previously purchased. Does s 708(8)(b) require a person to be investing for a second time to meet the definition? In this case, $500,000 was the amount payable by the plaintiff on acceptance of the offer, but he had made no previous payment for similar securities.
I have not been referred to any authorities as to its meaning, and nor have I found any. Nor did the parties make any submissions on this precise issue, the plaintiff arguing that, even if the plaintiff was a sophisticated investor, that is irrelevant in any event, and the defendant simply assuming that the plaintiff falls within its ambit.
One could argue that it is not necessary that an investor have previously invested at all and that, in the plaintiff's case, the total payable by him for the securities on acceptance of the offer - $500,000 - and the amount he had invested in previous securities – nil – totalled $500,000, and he was therefore a sophisticated investor. On that interpretation Parliament simply intended that anyone who invests $500,000 is a sophisticated investor, and that $500,000 can be achieved by an accumulation of investments, past and present.
There are three reasons why I reject that interpretation, however.
Firstly, Parliament could easily have specified that a person is a sophisticated investor where 'the amount payable for the securities on acceptance by the person to whom the offer is made is at least $500,000'. It could then have provided an additional subparagraph capturing those whose total investments in the same class of security add up to $500,000.
Or, if Parliament meant to capture both investors who pay $500,000 in one investment, and investors whose total investments in those securities amount to $500,000, in a single paragraph, it could have specified that a person is a sophisticated investor where 'the amount payable for the securities on acceptance and any amounts previously paid' for similar securities from the company totals at least $500,000.
Parliament did neither, however. The wording implies the necessity of a previous investment in similar securities.
Second, the whole purpose of the strict requirements for disclosure to potential investors is to enable them to make a fully informed decision about the product. Section 708(8)(a) captures very high end investments where a minimum of $500,000 is needed to get the investor in the door. Section 708(8)(b) captures a potentially less high-end investor, although the investment must be substantial, but it also – if my interpretation be correct – captures an investor who has invested previously by acquiring a similar type of note and so is likely to have previously been given a disclosure document providing most of the information which would be contained in any later disclosure document, had one been required. The only way he would not have been given such a prospectus would be if he were otherwise a sophisticated investor, for example, because there was a minimum payment of $500,000, or because he was senior management or connected family.
I infer that the rationale behind this definition of a sophisticated investor in s 708(8)(b) is that he is both a substantial investor and also one to whom disclosure has previously been made, or who has at least experience and familiarity with the product from a previous investment.
Third, if the requirement for a disclosure document turns purely upon the question of whether the investor invests $500,000, without more, then it will not be apparent that a person is a sophisticated investor under s 708(8)(b) until they have decided to invest $500,000. In the meantime, it is prohibited to make them an offer of the securities without a disclosure document having been lodged with ASIC (s 727(1)) unless they are a sophisticated investor. If s 727(1) does apply, it is prohibited to advertise the intended offer, or publish any statement that refers to it or is reasonably likely to induce someone to apply for the securities. Any offer must be contained in the disclosure document. Nor can one offer securities in the course of, or because of, an unsolicited meeting or telephone call with the investor: s 736(1). In other words, the only way in which one could ascertain whether an investor is a sophisticated investor pursuant to s 708(8)(b) planning to invest $500,000, and hence not requiring a prospectus, is to lodge a prospectus, give it to him and wait to see if he applies for $500,000 worth of notes, which defeats the whole purpose of dispensing with the requirement for a prospectus.
But as I have interpreted s 708(8)(b), the investor will be known to the company already as having acquired its securities previously, likely a substantial amount, the quantity of which is already known, such that if he later enquires about potentially acquiring more of the same sort of security, it can then be ascertained – without even making an offer - what quantity he is considering so as to ascertain if he will qualify as a sophisticated investor or not.
And in s 708(8)(a), the company will know from the outset that it is dealing with sophisticated investors because it sets the minimum investment required at $500,000.
The only commentary I have found on this definition deals with a different point, but is not inconsistent with my interpretation. The author of 'Fundraising' (previously mentioned) explains:
In addition, a disclosure document is not required to offer securities to a person if the amount payable on acceptance of the offer, when added to amounts previously paid for securities of the same class that are held by the person, add up to at least $500,000 … This means that someone who invested $500,000 in securities of a particular type can buy more of those securities, without restriction as to amount. Previously it was not clear whether additional investments could only be accepted of at least another $500,000.
The previous non-disclosure requirements (to be found in s 66(3) of the Corporations Law before ch 6D was inserted in 2001) had no accumulation of amounts invested. Section 708(8)(b) does enable the accumulation of amounts paid. The last sentence quoted, however, does not clarify whether the author is suggesting that the mere payment of $500,000 makes one a sophisticated investor, or whether the company had to offer a minimum investment of $500,000 in additional securities to dispense with the need for a prospectus for a previous investor wishing to purchase more. It does not assist the defendant.
I find that, to be a 'sophisticated investor' pursuant to s 708(8)(a) or s 708(8)(b) one must either be investing in a product which requires a minimum investment of $500,000 to get in the door, or one must have previously invested in the same product and be investing a total (across the current and previous investments in that product) of at least $500,000.
The plaintiff in this case did not previously invest in these notes. This was his first contact with GR Finance. I find then that he did not meet the definition of a 'sophisticated investor' simply by virtue of a decision to invest $500,000 in the notes.

The plaintiff argues that, in any event, the question of whether the plaintiff was or was not a 'sophisticated investor' is irrelevant, because the company offered the notes pursuant to a prospectus, and the plaintiff applied for the notes pursuant to a prospectus.
If my interpretation of s 708(8) is incorrect, and if the plaintiff was a sophisticated investor, I consider the plaintiff's submission in this regard is correct in any event. Section 708(8) of the Act simply provides that an offer of securities does not need disclosure to an investor if he falls within the definition of a sophisticated investor. GR Finance, however, did publish a disclosure document, Prospectus No 7, and the plaintiff came into possession of it. It is common ground that, at the time he spoke to the defendant on 3 June 2011, both parties were aware that the plaintiff was in possession of Prospectus No 7 which contained the offer of the notes. On the defendant's evidence, he confirmed with the plaintiff that he had the current prospectus, and then either he or Mr Strachan, the investment services officer at GR Finance, emailed Prospectus No 7 to the plaintiff. Irrespective of whether GR Finance needed to provide a prospectus to this investor, it did, and he applied for the notes by filling in the application form in that prospectus.
Further, s 725, which I have dealt with earlier, commences:
Expiration of disclosure document
(1)If a person offers securities under a disclosure document and the disclosure document passes its expiry date, the person must deal with applications for the securities under the document in accordance with subsections (2) and (3).
Section 725 applies if the company has offered the securities under a prospectus, whether it was required to do so, or not. It is uncontroversial that the plaintiff sent in an application form which had been acquired from Prospectus No 7. The defendant accepted in cross-examination that the plaintiff did not apply for notes pursuant to the yet-to-be-lodged Prospectus No 8, which he could not possibly have seen at the time he applied for notes. Section 725 therefore applied to the plaintiff's application for notes in GR Finance, irrespective of whether or not he was a sophisticated investor.
This concept of a 'sophisticated investor' remains relevant, however, to my consideration of the credibility of the two witnesses in this case. It casts light on the defendant's conduct in this case, and so it will rear its head again when I discuss his testimony later in this judgment.

Misleading or deceptive conduct – general principles

Section 1041H (1) of the Act provides:
A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
It is common ground that the GR notes amounted to a financial product and it is not in issue that any conduct of the defendant in this case was in relation to a financial product.
The concept of 'misleading or deceptive conduct' is common to the various enactments containing similar provisions and so authorities which deal with s 52 of the Trade Practices Act 1974 (Cth), and now s 18 of the Australian Consumer Law, are informative of the meaning of s 1041H of the Act.
The section is aimed at 'conduct', and so is not confined to representations: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546; (1988) 79 ALR 83, 555 (Lockhart J).
The terms 'misleading' and 'deceptive' are not synonymous. The term 'misleading' is a broad one, capturing conduct which leads astray or leads into error. A person might innocently, unwittingly engage in misleading conduct. Intent is therefore not an element of 'misleading or deceptive conduct', and need not be established, although to deceive implies ensnaring or getting the better of someone by trickery and implies an element of deliberateness: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd(No 1) (554 – 5) (Lockhart J).
Conduct is 'likely' to mislead or deceive if there is a real and not remote possibility that it will do so: Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, 88. What must be determined is whether the conduct viewed as a whole had a tendency to lead a person into error: Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 [25] (French CJ). That question is to be determined objectively: Campbell v Backoffice Investments [25] (French CJ).
A representation to an individual that is reasonably capable of bearing more than one meaning, one of which is misleading or deceptive, is likely to mislead or deceive: Caffey v Leatt-Hayter[No 3] [2013] WASC 348 [237]. Conduct which could only mislead an 'extraordinarily stupid person', however, is not objectively likely to mislead (see, for example, Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177, 181).
The conduct may consist of representations, consisting either of what was said, or a combination of what was said and what was left unsaid. When information is given for a purpose, such as to enable a person to make an informed decision, then unless that disclosure gives full and fair disclosure of all the facts needed to make that decision, the combination of what was said and what was left unsaid may result in misleading or deceptive conduct: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. A representation may be literally true, but still amount to misleading conduct when viewed as part of a whole set of circumstances: National Exchange Pty Ltd v Australian Securities & Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90 [49] – [52].
Silence alone may also constitute misleading or deceptive conduct where there is either a duty at law to disclose some fact, or where the circumstances as a whole raise a reasonable expectation that, if some fact exists, it would be disclosed such that the failure to disclose it raises, objectively, the inference that the fact does not exist: Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357. The duty to disclose is not confined to cases where there exists a particular relationship such as lawyer and client, imposing a duty to disclose: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (557) (Lockhart J). In that case the duty to disclose arose from the fact that the vendor, through his unwitting agent, had already created a misleading impression to the purchaser and failed to disclose the true facts prior to sale.
It is not essential that there be a general duty to disclose before silence can be said to be misleading. Silence may simply be an element of the overall conduct which viewed as a whole amounts to misleading or deceptive conduct: Commonwealth Bank v Mehta (1991) 23 NSWLR 84, 88.
But the section does not of itself impose a duty of disclosure: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. It does not require a party to commercial negotiations to volunteer information which will be of assistance to the other party, nor to volunteer information in order to protect the other party from his own careless disregard of his own interests: Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd. So absent some general duty to disclose, or circumstances which as a whole raise a reasonable expectation that, if some fact exists, it would be disclosed, mere silence is unlikely to constitute sufficient grounds to infer a fact does not exist, such as to constitute misleading or deceptive conduct: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, 41 (Gummow J).
The resort to the concept of a 'reasonable expectation' does not derive from the statute itself, but arises out of applying an objective standard to the conduct to direct attention to the likely effect of non-disclosure, as opposed to subjective moral expectations held by an individual which may exceed the responsibility placed on an individual by the statute: Miller v BMW Australia Finance Ltd [21].
But information or advice which fails to cover every contingency will not be misleading or deceptive thereby unless the circumstances as a whole raise a reasonable expectation that it would cover every contingency: Commonwealth Bank v Mehta (88).
The question of whether the conduct complained of was, objectively, misleading and deceptive or likely to mislead or deceive logically precedes the question of whether a person suffered loss thereby: Campbell v Backoffice Investments Pty Ltd [25] (French CJ).
Even when the conduct occurs in the context of commercial negotiations between individuals (as opposed to conduct aimed at the public), the task of characterising the conduct as misleading and deceptive or likely to mislead or deceive involves consideration of a notional cause and effect relationship between the conduct and the state of mind of the relevant person: Campbell v Backoffice Investments [25] (French CJ).
There is a practical distinction to be drawn, however, between those cases dealing with the public, and those dealing with a specified individual. In the latter, it is not necessary that he be reconstructed into a hypothetical ordinary person. The defendant's conduct may be analysed in relation to the plaintiff alone, bearing in mind what each knew about the other as a result of their dealings: Campbell v Backoffice Investments [25] – [27] (French CJ), citing Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592.
It is no answer for a person who has engaged in misleading or deceptive conduct to say that the other person could have discovered the truth for himself: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (588) (Lockhart J). In Sutton v AJ Thompson Pty Ltd (in liq) (1987) 73 ALR 233, the Full Court remarked (239) 'It is a bold submission which says, in effect, ''You should not have believed me when I misled you'' '. Nevertheless, a plaintiff may be so negligent in protecting his own interests that the representation complained of was not in the circumstances a real inducement to his entering into the contract: see Argy v Blunts (1990) 26 FCR 112; (1990) 94 ALR 719, 744.
Because the task is objective, it is to be assessed without reference to the subjective intentions or motivations or beliefs of the maker of the statement, or its audience, but the facts and circumstances known to each and their knowledge of what each knew about the other is relevant to the objective task.
It is important to identify what precisely is said to amount to the misleading or deceptive conduct. That will usually amount to making findings about what was said or done and, in the case of representations, whether the statement is said to amount to one of present fact, or a statement of opinion, or a statement as to future intention.
Under general law, a statement by a person as to his future intention is a statement of fact as to his current intention. It may also be a statement of opinion as to a future matter, and is therefore a statement of fact that the person holds that opinion, and may also impliedly be a statement that he has reasonable grounds for holding that opinion: Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239 [19] – [22] (McLure JA). That is picked up in s 769C(1) of the Act which provides that, for the purposes of ch 7 of the Act (which includes s 1041H (1)) if a person makes a representation with respect to any future matter (including the doing of any act), the representation is taken to be misleading if the person does not have reasonable grounds for making the representation.
Once the objective task of characterising the conduct has been undertaken, and conduct found to be misleading or deceptive or likely to mislead or deceive, the court must then determine whether the plaintiff has established the causal link between that conduct and the loss. That process may require account to be taken of subjective factors. If a misleading representation is made to a person who does not believe it, it would not ordinarily be causative of any loss: Campbell v Backoffice Investments [27] – [28] (French CJ).
Before turning to the key question of whether the defendant objectively engaged in misleading or deceptive conduct, it is necessary to consider the evidence – some of which is in conflict – to make factual findings about the conversations and the aftermath of those conversations. That involves making decisions about the credibility of both the plaintiff and the defendant. Their subjective intentions at the time bear on their credibility and also cast light on why both of them acted the way they did.

A preliminary comment about credibility

There were only two witnesses in the trial, the plaintiff and the defendant. It is notoriously difficult for witnesses, including honest witnesses, to accurately recall conversations years after the event. In this case, some four years had passed between the dealings between the two men and the trial. The difficulty in reliably recounting such dealings can only be increased by both men being painfully aware of the sum of money at stake and the importance of their conversations in mid-2011. The most honest witness may be susceptible to wishful thinking and the power of suggestion, without being aware that their memory has conveniently filled in gaps for them.
Their memories were assisted, obviously, by the emails which passed between them and other parties, together with other documents, such as minutes of meetings and correspondence. The documents before the court were, however, produced by the liquidator of GR Finance and there is no guarantee of every relevant document being before the court.
The plaintiff was a straightforward enough witness, polite and non‑defensive. While his evidence was self-serving, naturally, it did not come across as contrived. I formed the view that he was an honest witness.
That does not necessarily make him a reliable witness, however. The longer a person has adhered to a particular viewpoint about the facts, particularly one that suits his case, the more likely he is to genuinely believe it to be accurate and hence to be consistent in his recall.
The plaintiff agreed in cross-examination that, prior to having access to the defendant's telephone records which indicated the first telephone call had occurred on 3 June 2011, he had recalled it as having occurred on 6 June 2011. He had sworn an affidavit on 20 December 2013 mentioning that date. He agreed that was his best memory at that time but that viewing the telephone records had caused him to correct the date to 3 June 2011. I see nothing in that. What matters is what was said during the conversation.
He also agreed that the defendant's telephone records indicate that there was a third telephone call of 21 June 2011 lasting 5 minutes 27 seconds. He agreed that such a phone call had not been mentioned by him in his evidence, nor in the previously mentioned affidavit. He agreed that 21 June 2011 was the same day he had sent the application form in to GR Finance. He testified that he can recall it now that he has seen it in print but that, at the time he had earlier sworn an affidavit, he did not recall it. That was not further explored. Both counsel appeared to be in agreement that he had no recollection of that conversation.
The plaintiff agreed it is difficult to recall the details of telephone calls. He accepted that he had forgotten about that telephone call, but maintained that everything else he had said in evidence he believed was quite accurate to the best of his recollection.
The plaintiff's failure to remember such a call in an affidavit sworn much closer to the time is more significant. It was a conversation on the very day that he filled in his application form. It was not a fleeting conversation. As will emerge later, I can infer that the two men discussed the likely timing of the plaintiff's investment.
Defence counsel, however, failed to put any version of that conversation to the plaintiff in cross-examination, and objection was then taken to the defendant testifying about the contents of the conversation on the grounds of unfairness. Defence counsel chose not to pursue the point, although it might have been pursued, despite the obvious unfairness.
The absence of evidence as to the contents of the conversation does not detract from the plaintiff's complete failure to recall the phone call at all. That does not reflect upon his honesty, but it does support my view that it is very difficult for an honest witness to accurately recall specific conversations years after the event.
The defendant was at times a defensive witness, even a little arrogant. In fairness to him, however, the tone and content of the opening address for the plaintiff put the defendant on notice that he was being accused of sharp practice and conduct which was not only misleading and deceptive, but very deliberately so. The cross-examination followed suit, making it unlikely the defendant would not be defensive. That is no criticism of the plaintiff's counsel but, in the circumstances, I have made allowance for some defensiveness.
The defendant had the benefit of being present in court during the plaintiff's evidence. He saw his counsel cross-examine the plaintiff, putting the defendant's case to him. Something was sought to be made of that by the plaintiff's counsel. The defendant is not to be criticised for his presence in court, but it may have had the effect of galvanising certain points of his own case into his memory.
It is fair to say, however, that pending litigation may have that effect upon any witness, no matter how honest. Further, an honest witness may not be a reliable witness in any event, and the impact of litigation may increase that unreliability.
I am entitled to accept some parts of a witness's evidence, and not others. I have accepted large portions of both witnesses' evidence, but rejected significant parts of the evidence of both. I have rejected certain important aspects of the plaintiff's evidence. His case does not depend, however, upon my accepting every aspect of his evidence, or every aspect of his case. Much depends upon the drawing of inferences, and the objective impact of the conduct.
I turn now to the general facts of the case and the findings about the conversations.

The operation of GR Finance

GR Finance was established mid-2000. The defendant is a qualified accountant and at all relevant times was one of its executive directors. Specifically, he was the finance director of the company and a member of its finance committee. He was also the company secretary from 2007. I infer that he must have had a reasonable working knowledge of the Act and the requirements placed on a company in relation to the offer of securities to potential investors.
While he had not personally invested in notes sold by the company to investors, the defendant was a shareholder of GR Finance, his family members were all investors in GR Finance, and he was also the director of an entity that was an investor. Clearly he had a personal stake in its financial wellbeing.
In order to attract investors, GR Finance had to issue a prospectus. The purpose of the prospectus was to provide information to enable investors to make an informed decision about whether to invest in the notes. The defendant agreed that GR Finance was legally obliged to have a prospectus in order to go out to the public to raise funds and was not in the business of raising funds without a prospectus.
The notes on offer were first ranking notes, issued under a trust deed, for a nominated term, rate of interest and a nominated frequency of interest payment. They were 'first ranking' in the sense that their payment was secured by a first ranking charge over the assets of GR Finance, which charge was held by the trustee, however the assets of GR Finance consisted primarily of cash and loans to its borrowers. The company therefore advised its potential investors that the notes should be regarded as unsecured investments. They were really only as secure as GR Finance's borrowers were reliable.

Approximately three or four weeks before the date of expiry of a note, GR Finance would communicate with the investor informing him that, if it did not hear from him prior to the date of the expiry, his note would be rolled over for a similar term and rate.
The defendant testified that there were two main employees that reported to the finance committee of GR Finance, the first being the investment services officer, Mr Adam Strachan, and the second being the loan services officer. Mr Strachan was concerned with the company's investors. He reported to the defendant, who delegated tasks to him. The loan services officer was concerned with its borrowers, including pursuing borrowers for unpaid loans, and reported to another director.
As investment services officer, Mr Strachan was responsible for advertising and promoting the notes, keeping the company website up to date, issuing notes to investors, maintaining a register of investors, communicating with all investors, and following up with either the redemption of their notes at the end of the term of the investment, or rolling over the notes into a similar investment, depending upon the investor's wishes.
Each prospectus was current for 13 months and so, each 13 months, a new prospectus had to be issued and lodged with ASIC to enable the company to continue raising funds. Approximately three to four months prior to the expiry of the current prospectus, a committee would be formed within the company, consisting of one of the directors, a legal adviser and Mr Strachan, to attend to due diligence and related matters to enable a new prospectus to be lodged. As the new prospectus took form, it would be put to the individual directors for their comment.
As explained earlier, a person or company commits an offence if it offers securities under a prospectus which contains a misleading or deceptive statement which is materially adverse from the point of view of the investor: s 728. It is a defence to a charge for breach of s 728 if the person made all reasonable enquiries and believed on reasonable grounds either that the statement was not misleading or deceptive: s 731 (described in the Act as the 'due diligence defence'). GR Finance's committee attended to that requirement of due diligence.
The defendant explained that the prospectus was sometimes sent to ASIC for its consideration prior to formal lodgement, because ASIC had a debenture committee with which GR Finance had dealt for years. The idea presumably was to iron out any difficulties in advance. Once it was considered ready, the new prospectus would be formally lodged with ASIC, which would either approve it, or revert to GR Finance with questions. The defendant agreed that, once a prospectus was formally lodged with ASIC, it would then be under a review period called an exposure period which normally lasts for seven days, subject to ASIC extending the time. He said ASIC generally approved a prospectus about seven days after lodgement.
Once the prospectus received approval from ASIC it would be printed, published on the website and distributed.
The point was to ensure that, at any given time, there was a current prospectus. In 2011, however, the year this case concerns, that was not achieved.

The plaintiff first hears of GR Finance

In June 2011, the plaintiff was retired, with money to invest, which he held in a Westpac interest bearing account. He learned about GR Finance from his friend, Stuart Watson of Woodlands Wines. The two men were discussing the low interest rates offered by banks, and Stuart Watson suggested the plaintiff look into an investment that his brother Andrew Watson had made. An email chain suggests that Stuart Watson emailed the plaintiff a copy of Prospectus No 7 as a pdf attachment on 3 June 2011 at 12.43 pm.
The plaintiff testified that he opened the attachment and flicked through it. Prospectus No 7 is a colour document but the plaintiff recalls that the document he received was in black and white. His counsel later informed the court that investigations revealed the plaintiff had in fact received a colour copy. His memory is unreliable on that point. Nothing turns on that.
The plaintiff testified that he read Prospectus No 7 on his laptop, which has a screen a little bigger than an A4-sized piece of paper. He said if the document had come through at full size, the first half-page would have filled the screen and he would have scrolled down to continue to read the document. When asked how long he had spent looking at the document, he said 'Not as much time as I should have … It wasn't long'.
The plaintiff said he did not notice the words on the cover at the bottom 'This Prospectus is issued on 12 May 2010 and expires on 11 June 2011'. He also did not notice on the first page, inside the cover, the words:
IMPORTANT NOTICE
This Prospectus is dated 12 May 2010. This Prospectus was lodged with the Australian Securities and Investments Commission (ASIC) on 12 May 2010. ASIC takes no responsibility for the contents of this Prospectus which expires on 11 June 2011. No GR First Ranking Note will be issued on the basis of this Prospectus later than thirteen (13) months after the date of this Prospectus.
He testified that he did not become aware that Prospectus No 7 had expired on 11 June 2011 until sometime in 2013, which is when he first consulted his lawyers.

Evidence about the telephone call of 3 June 2011

As previously noted, an email chain suggests that Stuart Watson emailed the plaintiff a copy of Prospectus No 7 as a pdf attachment on 3 June 2011 at 12.43 pm. That same day, at 2.23 pm, the plaintiff emailed Stuart's brother Andrew, the subject heading being 'GR Finance'. He asked:
When you have a free moment, any chance of discussing this company with you? Specifically, how you found out about them, the risks and returns.
He testified that he then spoke to Andrew Watson that same day and asked him how long he had been investing with GR Finance, what interest rate he had been receiving, whether or not he regarded the company as reliable and what the people were like to deal with.
An email from Andrew Watson to the plaintiff suggests that Mr Watson also passed a message on to the defendant, who subsequently telephoned the plaintiff. That accords with the defendant's memory. The plaintiff later sent an email to Andrew Watson (on 16 June 2011) thanking him for letting the defendant know that he might be interested in investing in GR Finance and informing Mr Watson that the defendant 'did ring me quite soon after I spoke to you'. Telephone records indicate that the first conversation between the plaintiff and defendant occurred on 3 June 2011 and lasted 15 minutes 10 seconds.
The telephone records are before the court, and I infer from the face of the records and the manner in which they were dealt with by defence counsel that they are the defendant's telephone call records being an account received from Optus. That being so it is possible to infer that the defendant telephoned the plaintiff. Although the plaintiff's evidence was a little unclear, it appears that he also spoke to Andrew Watson again after speaking to the defendant. Given that Andrew Watson passed the message on to the defendant initiating the first contact between the plaintiff and defendant, logic suggests the plaintiff spoke to Mr Watson about the company at the outset, and the plaintiff also testified that he spoke to Mr Watson after speaking to the defendant.
I find that, on 3 June 2011, the plaintiff received the prospectus, then spoke to Andrew Watson about GR Finance, then spoke to the defendant for the first time.
The plaintiff testified that his first conversation with the defendant was of a very general nature and he was the one asking the questions. He said he asked the defendant how he had come to know the Watsons, and the defendant informed him that he had met the Watsons in the early 2000s at their winery where they had discussed the possibility of one of the defendant's acquaintances distributing their wines for them.
The plaintiff testified that he also asked the defendant a little about GR Finance. He said the defendant explained to him that GR Finance generated its income by obtaining money from investors and then lending that money out for property development secured by mortgages, and that the interest rate they charged their borrowers was higher than the interest rate they were then able to pass on to their investors. He recalls they discussed the interest rate that was available on an investment, which the defendant nominated as being 10.5% 'for friends and family'.
The plaintiff testified that he specifically recalls the defendant asking him if he had seen the prospectus, to which he replied 'Yes'. The defendant then asked 'Which prospectus do you have?' to which he replied 'Number 7'. He said the defendant responded 'Good, all good'. The plaintiff said he specifically recalls those words, because the defendant used that exact phrase during a later conversation when the plaintiff asked him how the investment was going and the defendant had responded 'Good, all good'.
Turning now to the defendant's recollection of the telephone call of 3 June 2011, he described it as an introductory call. He said after some general banter and discussion about their mutual contact the Watson family and their winery in Margaret River, the conversation then turned to GR Finance:
And we discussed – I can't remember word for word but we discussed the – the company, my role in the company, the fact that I was a shareholder in the company and what GR Finance did … To my recollection, that ended – I asked him if he had a prospectus and he said he had – he'd had, not from the company but from someone else, an email copy. And I recall saying to him 'well, I'll – I'll get the company to send you a – an' – well, 'I'll get the company to send you a prospectus to ensure that you have the – the correct prospectus' because there was no guarantee that he had – he might have number 5 for all I know, but he – but we sent him the - we said we were going to send the number 7 prospectus.
The defendant testified that the plaintiff was then sent a copy of Prospectus No 7, either by the defendant or Mr Strachan, the investment services officer. He said that occurred that same day and knows it was sent by email because he recalled the plaintiff flagged to him the delay in getting postage from the eastern seaboard to Margaret River where the plaintiff was, and so he recalled getting the plaintiff's email address from him and then using that address. He said he recalled email was the plaintiff's preferred way of receiving information.
In cross-examination the defendant confirmed that he understood from the plaintiff that he already had a copy of the prospectus. He agreed that it was important for a potential investor to be looking at the current prospectus and said that was something that GR Finance was diligent about and so, if a potential investor had obtained a prospectus second‑hand, it would provide a document to the potential investor to make sure they had the correct document. He said that is why he mentioned to the plaintiff that he would get him a copy of the current prospectus as at 3 June 2011.
He said he did not recall using the expression 'Good. All good' but said he did recall asking the plaintiff if he had a copy of the prospectus. He said he recalled the plaintiff telling him he had an electronic copy but it had come from someone else. It matters not whether the defendant used the words 'Good. All good', or not. It is apparent that he ascertained that the plaintiff had the right prospectus, being Prospectus No 7. That is plausible, given that the plaintiff might have had an old one, and the evidence of both witnesses is broadly consistent on that point.
There is no email from GR Finance sending Prospectus No 7 to the plaintiff. It may be not all emails are before the court, as mentioned earlier. It is plausible that the defendant sent Prospectus No 7, or at least instructed Mr Strachan to. Not a lot turns on the point, however, and it is not necessary for me to make a finding about whether or not the defendant sent the plaintiff Prospectus No 7, as it is uncontroversial that the plaintiff did receive Prospectus No 7 from his friend at least.
The defendant testified that he also informed the plaintiff during this first telephone call that the application form for the notes was at the back of the prospectus. I will return to this evidence later. It is contested, the plaintiff testifying that this occurred during the second conversation.
As to the amount the plaintiff was planning to invest, the defendant said he did not recall talking about an amount in their first conversation. He did, however, recall Andrew Watson telling him that the plaintiff had sold a business which had been quite successful and that the plaintiff had significant assets behind him. The defendant said he got the impression that the plaintiff had a significant amount of money to invest and, while he did not know how much that money was, he understood it was more than the average investor who might invest a few thousand dollars.
He could not, on the strength of that information alone, have formed a view that the plaintiff was a 'sophisticated investor', which on the defendant's understanding was a person who was investing $500,000 or had assets of over $2 million, although he may have suspected he might be.
It is accepted that, at no stage during the conversation, did the defendant inform the plaintiff that Prospectus No 7 was due to expire in eight days. It simply was not discussed.
The plaintiff testified that, at the conclusion of that conversation, he decided to conduct further inquiries in whatever ways he could in order to decide whether this was a sound investment.
He did that by speaking to Andrew Watson again, asking him if he knew the defendant, what he thought of him, how much Mr Watson had invested with GR Finance and if he had had any issues with his investment. The focus of that conversation appears to have been more on the defendant personally. Clearly the plaintiff placed a great deal of stock in Mr Watson's personal experience with the investment and his view of the defendant.
The plaintiff also 'Googled' GR Finance to see if there was any negative publicity about the company. He read an article in a financial magazine which referred to GR Finance as one of the financial companies that gave a good return on investments, and had nothing negative to say about it.
On his case, he took such steps to inform himself about GR Finance, yet did not, as part of those enquiries, spend sufficient time reading Prospectus No 7 to notice its expiry date.

Prospectus No 7 expires

Prospectus No 7 expired on 11 June 2011.
Prospectus No 8 had not yet been lodged with ASIC for approval. The due diligence committee was still working on progressing the new prospectus. It was not lodged until 18 July 2011.
When the defendant spoke to the plaintiff for the second time on 16 June 2011, therefore, GR Finance was not in a position to accept any application for notes pursuant to the new prospectus.
Nor could it accept any application for notes which had been made under the old prospectus, because its new prospectus was not lodged with ASIC and the period of seven days post-lodgement (which could be extended by ASIC) had not elapsed. If any such applications were sent in, its only option was to refund the application money.
Ultimately, for reasons which will be detailed a little later, the time period between prospectuses turned out to be even longer. Prospectus No 8 did not satisfy ASIC in certain respects and so GR Finance lodged Replacement Prospectus No 8 with ASIC on 9 August 2011, so that the seven-day period did not elapse until 16 August 2011. The period during which GR Finance could not accept any application for notes was therefore close to two months.
The defendant was certainly aware of the significance of the expiry of a prospectus. He was an accountant, a director of a company which made its money through offering securities via a prospectus, and he was aware of the need for a due diligence committee and, in 2011, was kept appraised of its progress.
In addition, he testified that, at some time prior to 2001, a new company secretary had joined GR Finance and helped formulate a number of written procedures for the company, including a written procedure for what occurred if funds came in from an investor when there was not a current prospectus in place. He said GR Finance received legal advice on that issue from Messrs Wilmoth, Field Warne, a Melbourne-based law firm.
The written procedure was not put before the court. The defendant said:
The procedure was that the investments services officer made contact with the investor to let them know that we'd received the funds. The funds are set in trust. And a note was issued acknowledging the – the date and the actual – the timing of the investment. And then the investor was then provided with – once the new prospectus was lodged and live, the investors were then provided with the – the new prospectus.
The defendant said the investments services officer, Mr Strachan, was responsible for implementing that procedure.
That summary of the procedure raises questions. The defendant was cross-examined about it.
The defendant said that GR Finance did receive applications for notes in 2011 during the period when there was no current prospectus (the plaintiff being one such applicant). He said that he is aware that that procedure was followed after Prospectus No 7 expired
because I recall speaking with the investment services officer, Adam, when the Replacement Prospectus number 8 was live, and we had the printed copies of those prospectuses in the – in the office, and I actually saw the pile of the prospectuses and the fact that they were going out to investors.
In cross-examination, the following exchange took place:
So what was the procedure? - The procedure was if there were funds received in that period, that they went into the trust account, and then there was documentation sent to the investor to acknowledge the receipt of the funds and – and the Note. And then once the new prospectus was issued and printed, the new prospectus then went out to the investor.
When you say the moneys went into trust, I take it you mean that the moneys went into trust until the new prospectus became available? - I think so. I don't have the procedure in front of me.
But you would agree with me that's the only sensible procedure for dealing with money that's received after a prospectus has expired and there's a gap, wouldn't you? - I think so.
Yes. So let – so we can be reasonably certain that the procedure that was enunciated, provided that the money received in a gap period would be put into trust and remain in trust during the gap period, correct? - That's my recollection.
Of course, counsel's suggestion that the 'only sensible procedure' available required putting the money in trust overlooks the option of refunding the money immediately, which I have already found was in fact required pursuant to s 725 if there was no new prospectus lodged with ASIC. Not a lot turns on that, however, as the point counsel really wished to confirm with the witness was that the money would not be taken by the company and accepted into its coffers. And if the money did remain in trust, then it would be unavailable to an administrator or liquidator.
If it remained in trust, however, that appears quite inconsistent with the notion of also issuing notes while ever it remained in trust, and also inconsistent with calculating the interest to be paid to the investor from the date of receipt of the funds into trust. If the money were in trust, it could not have been loaned out to borrowers, nor commanded the high rate of interest associated with investing in the notes.

It gives the court broad-ranging powers once it is established that the plaintiff has suffered loss or damage. Section 1325 has similar counterparts in the other statutes prohibiting misleading or deceptive conduct, and authorities dealing with those other statutes are applicable to s 1325.
Its purpose is to enable the court to do justice between the parties: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, 298. Its great width and flexibility enables the court to adequately compensate a claimant who has suffered loss and damage without having to quantify it. For example, the court may in effect restore the parties to their original positions thereby avoiding overcompensation: Morellini v Adams [2011] WASCA 84 [38] (McLure P). It is not to be interpreted narrowly such that a party can only be ordered to refund money if he was the original recipient of it: Morellini v Adams [39] (McLure P).
There is, however, a fundamental difficulty which was not the subject of submissions before me.
In s 1325 'the Court' (as opposed to 'the court') is defined to mean the Supreme Court, the Federal Court or the Family Court: s 58AA(1). Section 1041I presents no such difficulty, enabling the plaintiff to 'recover the amount of the loss or damage by action against that other person' without reference to any specific court. There is no question that the case for damages is within the jurisdiction of this court. Section 58AA(2) confirms that by providing that, 'except where there is a clear expression of a contrary intention (for example, by use of the expression 'the Court') proceedings in relation to a matter under this Act may … be brought in any court'.
Section 1325, however, does not confer any jurisdiction on this court to make any of the orders provided for in that section. This action is a creature of statute. The District Court is also a creature of statute, finding its jurisdiction within the provisions of the District Court of Western Australia Act 1969 (District Court Act). Within the limits of its jurisdiction it has all the powers of the Supreme Court, but does not have that inherent jurisdiction which pertains to courts of unlimited jurisdiction: R v Forbes; Ex parte Bevan [1972] HCA 34; (1972) 127 CLR 1, 7. It has implied jurisdiction upon the principle that a grant of power carries with it everything necessary for its exercise, but implied powers are derived from a different source to inherent powers and are limited in their extent: Grassby v The Queen [1989] HCA 45; (1989) 168 CLR 1, 16 (Dawson J).
The only arguable source of the power is s 55 of the District Court Act, which provides:
55.Court has powers of Supreme Court
The Court or a District Court judge has, as regards any action or matter within its or his jurisdiction for the time being, power —
(a)to grant, and shall grant, in the action or matter such relief, redress or remedy, or combination of remedies, either absolute or conditional; and
(b)to make any order that could be made in regard to any action or matter, and shall in each such action or matter give such and the like effect to every ground of defence or counterclaim equitable or legal,
in a full and ample manner as might and ought to be done in the like case by the Supreme Court or a judge thereof.
That section has been interpreted as giving ancillary or auxiliary power only, to be exercised in the determination of claims otherwise within the jurisdiction of the court for the purpose of making more complete and more effective the jurisdiction which the court already enjoys. It may be exercised in aid of principal relief sought in a matter within the jurisdiction of the court. It does not, however, increase the jurisdiction of this court to grant equitable relief where that relief is the principal aid sought: Murcia & Associates (a Firm) v Grey [2001] WASCA 240; (2001) 25 WAR 209, 214 (Steytler J); Commercial Developments Pty Ltd (t/as Don Rogers Motors Pty Ltd) v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1991) 5 WAR 208, 217 (Malcom CJ). The plaintiff's claim for compensation, coupled with a transfer of the notes to a nominee of the defendant, is being sought as principal relief. Section 55 does not provide this court with additional jurisdiction to grant such relief.
In any event, the Commonwealth statute which is the source of the power to grant such relief has expressly confined that power to the Supreme Court, Family Court and Federal Court. I regard the use of the expression 'the Court' as amounting to 'a clear expression of a contrary intention' to the powers contained within s 1325 being exercised by an inferior court. Where the statute enacted at State level is inconsistent with a Commonwealth statue, it must bow to the Commonwealth Act: s 109 Commonwealth of Australia Constitution Act. (Nothing contained in pt 1.1A of the Act appears to relate to this issue).
For those reasons, I decline to make any orders pursuant to s 1325. In any event, it is plain enough that the notes have only nominal value anyway, illustrated by the interim dividend declared in October 2012 by the liquidator of 2.66 cents in the dollar for secured investors.
The plaintiff's remedy before this court must lie in an award for damages pursuant to s 1041I.
Returning then to the plaintiff's claim for damages, general principles relating to other similar legislation are applicable. Damages for misleading or deceptive conduct are closely analogous to a common law action for damages for deceit: Morellini v Adams [40] (McLure P).
The ordinary measure of damages in deceit is the difference between the price paid for a thing and the real value of the thing acquired as at the date of its acquisition, and not subsequently, often referred to as 'the rule in Potts v Miller': Potts v Miller (1940) 64 CLR 282, 297 - 298 (Dixon J), such that 'the defendant shall receive credit for the fair or real value of the shares estimated as at the time of the allotment or purchase'. It is the true or real or fair value which is to be determined, not market value: HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [35]. The claimant is not bound to sell the thing (subject to mitigation of his loss) and there may not be a market for it.
Subsequent events may, however, be looked at insofar as they may cast light on the true value of the thing at acquisition: Potts v Miller (298); Kizbeau Pty Ltd v WG & B Pty Ltd (291); HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 [40], [43]. A distinction is drawn between subsequent events affecting value that arise from the nature or use of the thing itself and subsequent events affecting value that arise from sources supervening upon, or extraneous to, the breach: Morellini v Adams [44] (McLure P); Potts v Miller (298).
According to the rationale in Potts v Miller, if, after the date of purchase, the thing loses value due to accidental or extrinsic causes, it is not enough to say that, but for the misrepresentation, he would never have bought the thing and therefore would not have lost it. If a man is induced by misrepresentation to buy an article, and while it is still in his possession it becomes destroyed or damaged, he can only recover the difference between the value as represented and the real value at the time he bought: Potts v Miller (298). If the cause of the loss is independent, extrinsic, supervening or accidental, then the additional loss is not consequence of the misrepresentation: HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [39]. But if the cause of the loss of value is inherent in the thing itself, then that cause should be taken into account in arriving at the real value of the thing at the time of the acquisition: Potts v Miller (298).
The 'rule' however is not universal or inflexible or rigid: HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [35]. In that case, the High Court in assessing damages, deducted the true value of a small shopping arcade as at the date of purchase from the purchase price, and is assessing the true value the court took into account the subsequent events, including the decline in the business, which the court regarded as arising from the nature of the item itself. The rental levels and value of the plaza were 'doomed from the start' and 'pregnant with disaster'. The court compared the loss of the business to a horse dying of a latent disease, as distinct from dying of a disease contracted after purchase.
The court also contemplated an 'alternative approach' which was not resorted to in that case but which was regarded as not lacking in merit, whether it is employed as a means of assessing damages for misleading conduct or as a means of checking the soundness of results achieved by other possible paths. The alternative approach was that the plaintiff was entitled to recover his purchase price for the shopping centre less whatever was left in his hands: HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [63].
The court approved the statement of the majority of the House of Lords in Smith New Court Securities Ltd v Scrimegour Vickers (Asset Management) Ltd [1997] AC 254 to the effect that the fundamental rule is that the plaintiff shall be compensated, that the rule which turns on an assessment of value is only a means – a second order rule – of giving effect to the overriding compensatory rule and that, 'if that method is inapposite, then the court is entitled simply to assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it': Smith New Court Securities Ltd v Scrimegour Vickers (Asset Management) Ltd (284); HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [63]. The High Court majority also cited with apparent approval the statement of the House of Lords that the general rule, of comparing price paid with true value as at the date of acquisition, may well produce a fair result in the case of a readily marketable asset, but will not normally apply where either the misrepresentation has continued to operate after acquisition so as to induce the purchaser to retain the asset, or where the purchaser is locked in to the business he has acquired: Smith New Court Securities Ltd v Scrimegour Vickers (Asset Management) Ltd (266 – 7); HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd [66].
This alternative approach finds further support in Gould v Vaggelas at (221-222) (Gibbs CJ):
This rule is, with all respect, not quite as inflexible as Potts v Miller might suggest. There may be cases in which the purchaser continues to trade, either because he has no real alternative or because he has not become aware of the nature of the fraud, and in those circumstances incurs losses which are not represented by the difference between the price and value of the business.
Further, in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653, Ipp JA concluded:
In my opinion, particularly bearing in mind the scope and purpose of s 1005, the rule in Potts v Miller will not ordinarily apply in cases where a plaintiff becomes 'locked in' to property acquired as a result of contravening conduct. In circumstances where it is not practically possible or it unreasonable for plaintiffs to dispose of assets acquired on the strength of contravening conduct on the part of others, that conduct may be regarded as causing the entire loss even if, after the acquisition of the assets in question, other causes contribute to the loss [177].

Findings as to damages

The defendant's argument in relation to damages advocates the application of the 'rule' in Potts v Miller, emphasising the principle that if, after the date of purchase, a thing loses value due to accidental or extrinsic causes, it is not enough to say that, but for the misrepresentation, he would never have bought the thing and therefore would not have lost it. The defendant says that that is, in effect, this case. He argues that the loss of value of the notes was caused by the demise of GR Finance and was therefore independent of, and not a consequence of, the misrepresentation. He submits that the cause of the loss of value was not inherent in the notes themselves, which retained the same qualities after the expiry of Prospectus No 7 as they had while Prospectus No 7 was current; the notes lost value because the company became insolvent, and not because of some intrinsic defect which was misrepresented to the plaintiff.
The defendant argues that it is no part of the plaintiff's case that the notes ever ceased to be as they were represented in Prospectus No 7, or that the true value of the notes at the date of acquisition was less than the plaintiff paid for them. Accordingly, on the application of the rule in Potts v Miller, the defendant submits that the plaintiff's case must fail.
The defendant also argues against any departure from the rule in Potts v Miller on the basis that the plaintiff was 'locked in' to his investment, on the basis that he could have applied for early redemption of his notes, and failed to do so. I have earlier rejected that submission. He was locked in.
The plaintiff's position is that damages should not be assessed according to the rule in Potts v Miller. He argues that this is a 'no transaction case', in which he was locked into an investment he would not have otherwise made.
I accept the plaintiff's submission that this is a case where the ordinary measure of damages described in Potts v Miller should not be applied.
Because of the defendant's misleading or deceptive conduct, the plaintiff was given to believe that he could apply to invest in the notes pursuant to Prospectus No 7, and he did apply to invest in the notes pursuant to Prospectus No 7. For the defendant to have not engaged in misleading or deceptive conduct he would have had to inform the plaintiff that, Prospectus No 7 having expired, and there being no current prospectus, it was not possible for GR Finance to accept any application from him to invest in the notes. Had he told the plaintiff the truth, the plaintiff would not have applied for notes that could not lawfully be issued to him. He would not have entered into the transaction at all. And that situation must have remained so for a period of two whole months. I am satisfied the plaintiff would have entirely lost interest in investing in GR Finance had he been told the truth by the defendant.
The breach by GR Finance of s 725 in issuing the plaintiff with notes was not an accidental or supervening event. The whole purpose behind the defendant speaking to the plaintiff was that he was a likely investor of a substantial sum of money at a time when GR Finance needed money. Notwithstanding that other potential investors were turned away during this period or told to wait, the plaintiff was not turned away. The defendant instructed Mr Strachan to follow up for the purpose of chasing up the money. The fact that GR Finance then accepted the plaintiff's application and issued him with notes was directly referable to the defendant's involvement with this investment.
Once he had invested in the notes, and parted with his $500,000, the plaintiff was locked into that transaction, for five reasons. Firstly, Prospectus No 7 told him he was locked into that transaction. He had no right to redeem his notes, except in a case of 'extreme and unforeseen hardship or death'.
Second, he did not become aware that he had been misled until sometime in 2013, when there was no prospect of redeeming his notes.
Third, there is no convincing evidence that GR Finance would have been in any position to redeem his notes early, had he known to ask. Certainly the fact that a director of the company managed to get his money out before the company went under is not persuasive. By May 2011, before the plaintiff even invested, GR Finance was known to be unable to meet its commitment to acquire the first mortgage over the property in Torquay. The plaintiff was not a small investor. No new money was coming in to the company via a prospectus in June, July or at least the first half of August. It still had to pay its investors their interest payments.
Fourth, GR Finance did not even offer Replacement Prospectus No 8 to the plaintiff accompanied by an invitation to request his money back within a month. While I have rejected the evidence, such as it was, that he was sent the new prospectus, there is no evidence that the new prospectus was accompanied by a letter informing the plaintiff that he should consider the contents of that prospectus pursuant to which he had invested, and request a refund within the month. Despite cross‑examination of the plaintiff suggesting that the investment was in fact pursuant to Replacement Prospectus No 8, GR Finance paid no regard to its obligations pursuant to s 725 if that was so.
Any claim that the plaintiff should have applied to redeem his notes is illusory when GR Finance ignored its statutory obligations to refund the plaintiff his money immediately, and even its obligations to offer him a refund if he had, in theory, invested pursuant to an 'updated' prospectus.
Fifth, there is no basis upon which to suggest that the plaintiff could have transferred his notes to another potential investor.
Assessing the loss suffered on the basis of the measure of damages described in Potts v Miller would be an impossible task on the evidence before me. The trial did not encompass a detailed inquiry into the financial position of GR Finance. Indeed the defendant objected, unsuccessfully, to the relevance of any such evidence. At the time the plaintiff invested, there were factors already at play which may have very much reduced the value of the notes acquired. GR Finance was already unable to meet its commitments pursuant to the agreement to acquire the first mortgage in relation to the Clemwood loan. The evidence suggests that litigation was a real prospect even before the plaintiff spoke to the defendant. That situation was 'pregnant with disaster'.
Very little has been put before the court by way of explanation of why the new prospectus was so delayed. That process began before the plaintiff spoke to the defendant. The evidence implies it was partly due to the draft prospectus being inadequate in terms of disclosure but the full extent of the reasons for the delay is not clear.
The increase in defaulting loans between Prospectus No 7 and Replacement Prospectus No 8 is notable, with 74% being in default before the plaintiff spoke to the defendant. There is room in the evidence to strongly suspect that GR Finance was akin to a horse dying of a latent disease at the time the plaintiff invested.
All of those factors may have impacted on the true value of the notes at the time the plaintiff acquired them. The subsequent events of 22 September 2011, when GR Finance was served with legal proceedings in relation to the Torquay property, and 4 October 2011, when GR Finance withdrew Replacement Prospectus No 8, and the subsequent entry into administration eight days later, were simply the rather inevitable playing out of events which occurred, or at least commenced, months earlier.
But I am satisfied it is not in any event appropriate to attempt such an exercise. Any assessment of damages pursuant to the rule in Potts v Miller would fail to achieve just compensation for the plaintiff, which is the overriding rule that the court should follow.
The true loss here is the full loss of the investment, less any interest payments received and the small dividend declared in the administration. The defendant has not sought to demonstrate that, but for entering into this transaction, the plaintiff would have entered into another transaction and incurred some loss. There is no basis upon which to reduce his damages on that basis: Westpac Banking Corporation v Jamieson [2015] QCA 50; (2015) 104 ACSR 657 [153], [164]. I have accepted his evidence that his money would likely have stayed in the bank in an interest bearing account.

The plaintiff is plainly entitled to interest during the period from the date of his investment until the date of judgment, but I will need to hear further from the parties as to the rate to be applied.
I assess damages as representing the loss of the total investment of $500,000, together with the interest the plaintiff would likely have earned on that money between 29 June 2011 and the date of this judgment, less $13,125 in interest payments received and $18,855.77 in dividends received.

No reduction of damages on account of the plaintiff's own conduct

The defendant calls into play the further provisions of s 1041I of the Act which provide that, where the plaintiff has suffered loss or damage 'as a result partly of the claimant's failure to take reasonable care' and the defendant 'did not intend to cause the loss or damage' and 'did not fraudulently cause the loss or damage', then
the damages that the claimant may recover in relation to the loss or damage are to be reduced to the extent to which the court thinks just and equitable having regard to the claimant's share in the responsibility for the loss or damage.
This pleading received scant attention in submissions. The only basis on which it could be said that the plaintiff failed to take reasonable care is his own claim that he did not notice the expiry date on Prospectus No 7, nor the notice informing him that no notes would be issued on the basis of the prospectus later than 13 months after the date of the prospectus. I have rejected his evidence to that effect, but did not find that fatal to his claim. The limited impact that information had upon the plaintiff was 'trumped' by the defendant's misleading or deceptive conduct.
Once that had occurred, the information in the prospectus would only have had further impact upon him such as to override the defendant's conduct if the plaintiff had sought legal advice as to a company's obligations in relation to offering financial products subject to a prospectus, or had sought to familiarise himself with those provisions of the Act and had noticed the restrictions on offering a product after expiry of the prospectus, and the obligations of a company pursuant to s 725.
I do not consider the plaintiff's claim should be reduced on account of his failure to do so. The defendant was an executive director and secretary, and a member of the finance committee, of a company which made its income by offering the notes to the investing public and then loaning their money to others with interest. GR Finance and its directors were subject to the obligations contained within the Act designed to ensure that potential investors were fully informed before they invested in any financial product. I do not consider it just or equitable to reduce the plaintiff's claim on the basis that he should have fully informed himself as to the defendant's and GR Finance's obligations pursuant to the Act, so that when he was given by the defendant to believe that he could still apply to invest in the notes pursuant to Prospectus No 7, he should have countered with the knowledge that it was not so.
Given the highly protective regime contained within the Act, and given the legal obligations upon GR Finance and the officers of the company, it is a bold submission for the defendant to say 'you should not have believed me when I misled you': Sutton v AJ Thompson Pty Ltd (in liq) (239).
It is not necessary for me to make any finding about whether or not the defendant acted fraudulently. The plaintiff has not, in answer to this issue, pleaded that he did.

Proportionate liability

In written submissions, the defendant asserts, without detail, that any loss 'must have been contributed to' by GR Finance. There is no pleading to that effect. The plaintiff objects to it being raised on that basis.
The implications of this issue are that, where two or more persons whose acts or omissions cause the damage or loss in breach of s 1041H, independently of each other or jointly, they are known as 'concurrent wrongdoers': s 1041L. The liability of a defendant who is a concurrent wrongdoer is limited to an amount reflecting the proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss and the court may not award judgment for more than that amount: s 1041N. The concurrent wrongdoer's liability is not excluded, however, where he intended to cause the loss or damage, or fraudulently caused the loss or damage.
I accept the plaintiff's submission that, not having pleaded this issue, the defendant cannot raise it now. Although the plaintiff's case does itself refer to the breach of s 725 by GR Finance, pleading that, to the extent to which that was conduct of GR Finance, it was conduct directly engaged in by the defendant, the lack of any pleading, or detailed submission, has hardly given the plaintiff, or the court, adequate notice to enable it to explore this issue, and of course GR Finance is not before the court.
In any event, the defendant's submission in this regard appears to be based on a contention that he 'had nothing to do with the issue of the product after the time it was handed over to Adam Strachan and that's quite clearly a function of GR Finance'. For reasons expressed earlier, I reject that submission. On the findings I have made against the defendant, he was knowingly concerned in the issue of the notes to the plaintiff. I have also rejected the defendant's submission to the effect that he only acted in his capacity as a director of GR Finance. That is no answer to the claim. He was responsible for the loss suffered.
The matter not being pleaded or the subject of any meaningful submission to the court, I make no reduction to the damages on account of the existence of a concurrent wrongdoer.