Supreme Court
New South Wales
- Summary available
Medium Neutral Citation: Commonwealth Bank of Australia v ZYX Learning Centres Limited [2014] NSWSC 1676 Hearing dates: 26 September, 10-11 November 2014 Decision date: 27 November 2014 Jurisdiction: Common Law Before: Hamill J Decision: (1) The application of the 3rd defendant for summary dismissal of the proceedings is refused.
(2) The application of the 3rd defendant for the amended statement of claim to be struck out is refused.
(3) The application of the 5th, 6th, 7th and 8th defendants for summary dismissal of the proceedings is refused.
(4) The application of the 5th, 6th, 7th and 8th defendants for the amended statement of claim to be struck out is refused.
(5) The plaintiffs have leave to file a further amended statement of claim in the form provided on 16 October 2014 conditional upon it being amended in accordance with the terms of this judgment.
(6) The further amended statement of claim shall be filed on or before 12 December 2014.
(7) The date that the amendments are to take effect and the question of whether they are brought outside the relevant limitation periods are matters reserved for the decision of the trial Judge.
(8) The matter will be listed before the Registrar on 18 December 2014 for directions.
(9) Costs of all motions are reserved to the trial judge.
Catchwords: CIVIL LAW - application for summary dismissal by five of a multiplicity of defendants in proceedings arising out of collapse of ABC Learning Centres - plaintiffs underwrote the issue of $600 million worth of reset convertible notes - correct test for summary disposal - liability of company secretary/general counsel and non-executive directors for false and misleading representations - answers in management questionnaire completed in advance of notes issue - liability for Directors' Declaration made pursuant to Corporations Act - whether representations properly pleaded - whether representations of fact or opinion - implied representations arising from statements of opinion - whether conduct "in trade or commerce" - whether conduct "in relation to a financial product or service" - disjunctive pleading or reliance - whether amendments were brought within limitation period - application to amend statement of claim Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth)
Civil Procedure Act 2005 (NSW)
Competition and Consumer Act 2010 (Cth)
Corporations Act 2001 (Cth)
Fair Trading Act 1987 (NSW)
Federal Court of Australia Act 1976 (Cth)
Judiciary Act 1903 (Cth)
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005 (NSW)Cases Cited: ASIC v Adler & 4 Ors [2002] NSWSC 171; 168 FLR 253
ASIC v Healy [2011] FCA 717; 196 FCR 291
ASIC v Narain [2008] FCAFC 120; 169 FCR 211
Austral Pacific Group Limited (in liquidation) v Airservices Australia [2000] HCA 39; 203 CLR 136
Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; 226 CLR 256
Beach Petroleum v Johnson [1991] FCA 839; 105 ALR 456
Boscolo v Consumer Trader and Tenancy Tribunal [2014] NSWSC 997
Bott v Carter [2012] NSWCA 89
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304
Clasul Pty Ltd v Commonwealth of Australia [2014] FCA 1133
Collier v Lancer (No 2) [2013] NSWCA 186
Concrete Constructions (NSW) v Nelson [1990] HCA 17; 169 CLR 594
Dey v Victorian Railway Commissioners [1949] HCA 1; 78 CLR 62
Ford v Nagle and Ors [2004] NSWCA 33
Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486
General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125
Guglielman v Trescowthick [2004] FCA 326
Hawkins v Clayton [1988] HCA 15; 164 CLR 539
Ingot Capital Investments v Macquarie Equity Capital Markets [2003] NSWSC 1012
Ingot v Macquarie (No 3) [2005] NSWSC 255
Ingot v Macquarie [2004] NSWSC 1219
Jensen v the State of New South Wales [2014] NSWSC 682
Karl Suleman Enterprizes Pty Ltd (in liq) v Pham [2013] NSWSC 110
Ke Qin Ren v Hong Jiang; Yi Cheng Jiang v Wan Ze Property Development (Aust) Pty Ltd (in liq) [2014] NSWCA 388
MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd [1996] FCA 766; 140 ALR 313
State of New South Wales v Williams [2014] NSWCA 177
Northern Territory v GPAO [1999] HCA 8; 196 CLR 553
Shafron v ASIC [2012] HCA 18; 247 CLR 465
Simmons v Henwood [2013] NSWCA 184
Simmons v Protective Commissioner of NSW [2012] NSWSC 455
Spencer v The Commonwealth [2010] HCA 28; 241 CLR 118
University of Wollongong v Metwally [1984 ] HCA 74;158 CLR 447
Village Building Co v Canberra International Airport [2004] FCAFC 240; 139 FCR 330
Wardley Australia Ltd v Western Australia [1992] HCA 55; 175 CLR 514
Wickstead v Browne [1992] NSWCA 272; 30 NSWLR 1
Yorke v Lucas [1985] HCA 65; 158 CLR 661Texts Cited: Ritchie's Uniform Civil Procedure Category: Interlocutory applications Parties: Commonwealth Bank of Australia (Plaintiff)
Commonwealth Securities Limited (Plaintiff)
Jillian Glenda Bannan (3rd Defendant)
Sallyanne Atkinson (5th Defendant)
William Eric Bessemer (6th Defendant)
David James Ryan (7th Defendant)
Lawrence James Anthony (8th Defendant)Representation: Counsel:
AJ Sullivan QC; JJ Hutton (26 September) and I Pike SC; JJ Hutton(10-11 November) (Plaintiffs)
D L Williams SC; K J Williams (3rd Defendant)
R Rydge (4th Defendant)
RA Dick SC & D Barnett (5th - 8th Defendant)T M Dowling (10th Defendant)
N Andrew (11th -18th Defendants, 34th - 38th Defendant)
Solicitors:
Jones Day (Plaintiffs)
DLA Piper (3rd Defendant)
Quinn Emanuel Urquhart & Sullivan (5th - 8th Defendant)
File Number(s): 2013/165057 Publication restriction: Nil
Judgment
On 28 May 2013 the Commonwealth Bank of Australia and Commonwealth Securities Limited (respectively the first and second plaintiffs) commenced proceedings by statement of claim against 38 nominated defendants.
On 18 February 2014 the plaintiffs sought and obtained leave to file an amended statement of claim ("ASOC").
By notice of motion dated 4 June 2014 the plaintiffs seek leave to file and serve a further amended statement of claim ("FASOC"). The FASOC was annexed to the notice of motion.
By notice of motion filed 13 June 2014 the 5th to 8th defendants seek orders for summary dismissal or the striking out of the whole of the ASOC. In the alternative, they seek that particular paragraphs (77-98 and 121-124) be struck out.
By notice of motion filed 1 September 2014, the 3rd defendant seeks an order summarily dismissing the proceedings against her or, in the alternative, an order striking out the amended statement of claim.
The 5th to 8th defendants opposed the application for amendment of the ASOC. Initially, the 10th defendant also opposed the application.
Submissions had been filed in advance of a hearing which was listed before me on Friday, 26 September 2014. In response to those submissions the plaintiffs filed submissions in reply on 18 September 2014. Annexed to those reply submissions was a second version of the FASOC. The 3rd defendant indicated its objection to orders allowing the plaintiff to rely on the second version of the FASOC.
On 26 September 2014, the 4th defendant appeared represented by lawyers and indicated that it neither consented to nor opposed the amendment. Similarly the 11th to 18th and 34th to 38th defendant indicated that they neither consented to nor opposed the application to amend. The 3rd defendant, the 5th to 8th defendant and the 10th defendant maintained their opposition to leave being granted to the plaintiff to rely on the proposed FASOC.
On 26 September 2014, some of the defendants, and in particular the 5th to 8th defendant, articulated a number of their objections to the FASOC, including the second version annexed to the plaintiffs' reply submissions.
It was anticipated that the plaintiffs would file a further version of the FASOC. I made orders directing that to happen and on 16 October 2014 a third version of the FASOC was received in my chambers and (I assume) served on the defendants.
The 10th defendant has now withdrawn its opposition to the plaintiffs having leave to rely on the FASOC. The 3rd defendant and the 5th to 8th defendants maintain their opposition to the granting of leave to rely on the FASOC.
As I have said, the 3rd and 5th to 8th defendants also seek either summary dismissal of the plaintiffs' claim against them or that the ASOC be struck out. As I understand it, the opposition to leave to rely on the FASOC is based on the contention that it does not cure the inadequacies in the ASOC and that neither pleading adequately identifies the cause of action against them or is embarrassing in the relevant sense. In other words, there is no suggestion, as best as I can tell, that there is some other relevant prejudice that would lead me to conclude that leave should be refused. For that reason, this judgment will primarily focus on the FASOC.
AN OVERVIEW OF THE LITIGATION
The rise and fall of ABC Learning
Before embarking upon a detailed analysis of the FASOC and the case that the plaintiffs hope to establish against the 3rd and 5th to 8th defendants, it may be helpful to the reader if I set out in very general terms the background to the litigation. This is taken substantially from the FASOC itself, a chronology provided by the plaintiff which is, at least for the purpose of this application, not in dispute and documents which were contained in a bundle of documents exhibited to an affidavit of the plaintiffs' solicitor ("PB", the plaintiffs bundle).
The 1st defendant ("ABC") was a corporation that owned or ran a large number of childcare centres both in Australia and overseas. Its annual report in 2006 boasted that with a recent acquisition of childcare centres in the United States, ABC became "the world's largest listed childcare provider". In late September 2006, ABC lodged its financial report for the financial year ending June 30, 2006 with the Australian Stock Exchange ("ASX"). On 27 October 2006 it lodged its annual report for that financial year with the ASX. On 19 February 2007 it lodged its interim financial report for the half year ending 31 December 2006 with the ASX.
I pause to note that the financial reports for the year ending 30 June 2006 and the half year ending 31 December 2006 are critical documents in the plaintiffs' action against the 5th to 8th defendants. The 5th to 8th defendants signed a director's declaration in relation to each of those reports. It is the plaintiffs' case that the statements or opinions made in those reports and associated declarations were false and/or misleading in a material respect and that the plaintiff relied upon those documents in entering into the transactions which followed.
On 17 May 2007 ABC engaged the 2nd plaintiff as the "lead manager" and underwriter in relation to a proposed offer of "approximately $600 million of reset convertible notes" (the "notes issue") (PB 1).
On 22 May 2007 ABC made an announcement to the ASX in which it indicated that its expected EBITDA and earnings per share were more substantial than had been anticipated as a result of its "strong first half result" and other matters (PB 619).
As part of the process leading to the plaintiffs' underwriting (in the case of the 1st plaintiff) or sub-underwriting (in the case of the 2nd plaintiff) the notes issue, management interviews were held with three officers of ABC (PB 316-331). The management interviews were conducted in the aftermath of the provision of a management questionnaire directed to those officers (PB 275-315). The officers in question were Edmund Groves, the founder of ABC and a director and Chief Executive Officer ("CEO") of ABC (the 2nd defendant), James Black, the Chief Financial Officer ("CFO") of ABC (the 4th defendant) and Jillian Bannan, the company secretary and general counsel of ABC (the 3rd defendant).
The management questionnaire and the minutes of the management interviews are critical documents in the plaintiffs' proposed case against the 3rd defendant. The plaintiffs' case is that statements or opinions were provided in the course of both the questionnaire and the interviews that were false and/or misleading in a material respect.
It will be necessary to consider the terms and content of both the management questionnaire and the interviews in considering the application by the 3rd defendant for the proceedings to be summarily dismissed or the pleading struck out. Equally, from the perspective of the 5th to 8th defendants, it is necessary to consider the contents and details of the director's declaration contained in the end of year financial report for 30 June 2006 and the half yearly report for 2007 (that is, the period ending 31 December 2006).
On 27 May 2007, a meeting of the Board of Directors of ABC resolved to proceed with the offer of 6,000,000 notes at an issue price of $100 each. A prospectus was issued and the plaintiffs entered into underwriting and sub-underwriting agreements. A group of auditors, Pitcher Partners, verified the financial information that was contained in the prospectus.
On 8 June 2007 a replacement prospectus was lodged with the ASX.
The notes issue closed on 12 June 2007.
On 13 June 2007, the 1st plaintiff paid the sum of $600 million to the trust company for ABC and settlement of the notes occurred for the 1st series of investors (tranche A).
On 5 July 2007 ABC resolved to approve the notes issue and settlement for a second group of investors (tranche B) occurred between 6-9 July 2007.
On 13 July 2007 the ABC notes commenced trading on the ASX.
On 13 August 2007 ABC made an announcement to the ASX relating to its acquisition of a group of nurseries and associated properties in the United Kingdom known as the Leapfrog Nursery Group.
On 21 December 2007 the 3rd defendant ceased to be an employee or officer of ABC.
On 22 April 2008 ABC made an announcement to the ASX ("ABC Learning Centres Limited: So much more than childcare") in which significant restructuring of the company was explained. This included "significant de-gearing" and reduction of debt levels. Certain information was provided in relation to matters that have been referred to by the parties and in the pleadings as "developer contracts" and the "new developer's model". These are said by the plaintiff to be relevant to the question of whether the earlier financial statements and relevant representations relied upon were false and/or misleading. The announcement also referred to the retirement from the board on the 5th, 6th and 10th defendants (PB 332-359).
On 31 July 2008 ABC made another announcement to the ASX ("ABC Adjusts 2008 FY Guidance and Carrying Value of Assets"). This announcement relayed to the market that the accounting treatment of certain matters for earlier financial years was to be adjusted "based on accounting advice received". In particular, it was announced that income for various receipts from an organisation known as "123 Careers" "will be recorded over the 10 year term of the agreement rather than during 2006FY, 2007FY and 2008FY." Again, the plaintiffs seek to rely on this announcement as being relevant to the fact that the financial statements for June and December 2006 were false and/or misleading.
On 25 August 2008 trading in shares and securities of ABC was suspended by the ASX. In November of that year administrators were appointed and in June 2010 liquidators were appointed. In June 2010 ABC changed its name to ZYX learning Centres Ltd and in April 2012 the Federal Court made orders winding up the ABC group.
The plaintiffs' case and procedural history
To put the matter in the simplest terms possible, it is the plaintiffs' case that they relied upon certain representations concerning ABC's financial position in deciding to underwrite (or sub-underwrite) the notes issue. The plaintiffs say that the representations upon which they relied were false and/or misleading. It calls into aid relevant provisions of the Corporations Act2001 (Cth), the Trade Practices Act1974 (Cth) ("TPA") [now the Competition and Consumer Act2010 (Cth)], the Australian Securities and Investments Commission Act2001 (Cth) ("ASIC Act") and the Fair Trading Act1987 (NSW) ("FTA").
The plaintiffs assert that they suffered a "primary loss of $445,580,192, being the difference between the value of the consideration paid for the ABC notes ($600 million) and the value of payments received by the first plaintiff from tranche A and tranche B investors ($154,419,808)". They put their loss in the alternative form of "the difference between the consideration paid for the ABC Notes and their true value" at the time of the investment.
As I have said, on 28 May 2013 the plaintiffs commenced proceedings by statement of claim against some 38 defendants. Those defendants included the company itself, the founder of ABC, the CFO, the company secretary and legal counsel, a number of non-executive directors and the various partners of Pitcher Partners, being the auditors responsible for the financial reports and prospectus to which I have briefly made reference.
It is unnecessary to detail the various procedural matters that followed except to note that some of the defendants were struck from the statement of claim when the plaintiff realised that a number of the nominated defendants were not partners of the auditors at the relevant time. More or less concurrently with that, additional defendants were nominated who were in fact partners of the auditors at the relevant time. On 18 February 2014 an amended statement of claim was filed.
The detail of the plaintiffs' various amendments insofar as they concern correctly naming the defendants who were part of the partnership of auditors is not relevant. The auditors and various other defendants have played no part in these interlocutory proceedings. Presumably, the claim against them will continue. Similarly, the case against the founder (the 2nd defendant) and the CFO (the 4th defendant) and other nominated defendants will proceed.
On 4 June 2014 the plaintiffs made another application to amend the statement of claim. It was this proposed FASOC which precipitated the current interlocutory proceedings. As I have said, the 5th to 8th defendants and the 10th defendant (at that stage) opposed the amendments sought to be made. At that stage the 3rd defendant did not oppose the application because the amendments did not touch upon the case against her. However, with the revised versions of the FASOC, the 3rd defendant also opposes leave to amend the pleading.
On 13 June 2014 the 5th to 8th defendant filed a notice of motion seeking orders that the proceedings be dismissed (as against each of them). In the alternative, they sought orders striking out all, or part, of the ASOC. On 1 September 2014, the 3rd defendant filed a notice of motion in which she sought an order dismissing the proceedings summarily pursuant to rule 13.4 of the Uniform Civil Procedure Rules 2005 (NSW)("UCPR") or, in the alternative, an order pursuant to rule 14.28 UCPR striking out the amended statement of claim.
Again, at the risk of repetition, the 10th defendant originally opposed leave to rely on the FASOC and filed submissions in support of its opposition. Those submissions also suggested that the proceedings ought to be dismissed. However, he now takes the same position as the defendants other than the 3rd and 5th to 8th defendant. That is he neither consents to, nor opposes, the proposed amendment.
The matters that are left for determination on this interlocutory hearing are these:
(1) The plaintiffs' application to file and rely on the FASOC which is opposed by the 3rd and 5th to 8th defendants.
(2) The 3rd defendant's application to have the proceedings against her summarily dismissed or to have the whole of the relevant parts of the ASOC struck out.
(3) The 5th to 8th defendants' application to have the proceedings against them summarily dismissed or to have the ASOC struck out.
The evidence and submissions
The bulk of the evidence is contained in the PB. The plaintiff also read an affidavit of John Mark Caton and its exhibit (JMCE-3) but no submissions were addressed to that material. The 5th to 8th defendants read an affidavit of Penelope Abdiel along with documents annexed to that affidavit.
I received three sets of written submissions from the plaintiff. These were dated 13 June 2014, 18 September 2014 and 7 November 2014.
I received three sets of written submissions from the 3rd defendant. These were dated 3 September 2014, 25 September 2014 and 30 October 2014.
I received three sets of written submissions from the 5th to 8th defendants. These were dated 25 July 2014, 25 September 2014 and 30 October 2014.
I also received submissions from the 10th defendant dated 25 July 2014 but I understand that these are no longer pressed.
I heard oral submissions from the relevant parties on 26 September 2014 and 10-11 November 2014.
THE CORRECT TEST FOR SUMMARY DISMISSAL
An important, if not fundamental, issue arose on the arguments of the parties as to the appropriate test when a party seeks summary dismissal of the statement of claim. The issue arose from reply submissions filed on behalf of the 5th to 8th defendants on 25 September 2014. The 5th to 8th defendants submitted that the strength of the allegations is relevant to the question of summary dismissal and also to an application for leave to amend the pleadings. The defendants relied upon a passage in a judgement at first instance of Hammerschlag J in Simmons v Protective Commissioner of NSW [2012] NSWSC 455 at [64]. The submission included:
"The Court might be persuaded that the legal contentions made by the plaintiffs in their submissions are not certain to fail (although the non-executive directors would contend otherwise). But, as Hammerschlag J makes plain, that is not enough."
While not conceding that it is necessary on the facts of her case to do so, the 3rd defendant adopted the submissions made by the 5th to 8th defendants.
In its reply to those submissions the plaintiff relied on more recent authorities of the Court of Appeal: Collier v Lancer (No 2) [2013] NSWCA 186 at [9]-[11] (Ward and Leeming JJA) and State of New South Wales v Williams [2014] NSWCA 177 at [71] (Emmett JA with whom Macfarlan JA and Simpson J agreed). The plaintiff submitted that it was "somewhat surprising" that the defendants should rely on the decision of Hammerschlag J and that his Honour's statement "is not good law and the court would err if it applied it". The plaintiff points out that the decision of Hammerschlag J was overturned by the Court of Appeal: see Simmons v Henwood [2013] NSWCA 184. It submitted that the defendants should withdraw their reliance on the decision in Simmons v Protective Commissioner.
In oral argument, the defendants pressed the submission and declined the invitation of the plaintiff to withdraw its submission. Counsel for the 5th to 8th of defendants took me carefully through the judgment of Hammerschlag J and the authorities upon which his Honour relied in coming to the final and, according to the plaintiff, highly controversial, statement of principle.
The relevant passage of Hammerschlag J's judgment in Simmons v Protective Commissioner is in the following terms at [64]:
"It should no longer be the case, if it ever was, that court resources may be properly utilised in permitting a plaintiff to prosecute proceedings where a defendant demonstrates that those proceedings do not have reasonable prospects of success and all the plaintiff is able to do is demonstrate that the proceedings meet the bare threshold of not being certain to fail."
In the analysis leading up to paragraph 64 his Honour referred in detail to the provisions in s 56 of the Civil Procedure Act2005 (NSW), the relevant parts of the UCPR and the judgment of the High Court in Spencer v The Commonwealth [2010] HCA 28; 241 CLR 118. The defendants pointed out that Hammerschlag J had at the outset of his discussion at [46] referred to the orthodox tests for summary determination of a case. Those tests include that the case must be "so obviously untenable that it cannot possibly succeed", "manifestly groundless" or "hopeless": see for example Dey v Victorian Railway Commissioners [1949] HCA 1; 78 CLR 62 at 91; General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; 112 CLR 125 at 129.
For what it is worth, I had occasion to consider the appropriate test for summary dismissal in Jensen v the State of New South Wales [2014] NSWSC 682 and Boscolo v Consumer Trader and Tenancy Tribunal [2014] NSWSC 997. In each of those cases I applied what I understood to be the orthodox, uncontroversial and extremely stringent tests referred to in Dey and General Steel. I also referred to the decision in Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; 226 CLR 256. In Batistatos v RTA the High Court reiterated the stringency of the tests referred to in the earlier authorities and noted that the words employed in the earlier cases should be given their full effect and urged upon courts exercising the kind of jurisdiction that I am here invited to invoke the proposition that cases ought not to be decided in a summary way other than in the clearest of cases: see Boscolo v Consumer, Trader and Tenancy Tribunal (supra) at [30]. In neither Jensen nor Boscolo was I referred to Simmons v The Protective Commissioner or the decision of the High Court in Spencer v The Commonwealth.
In deference to the careful arguments advanced on behalf of the defendants and in order to protect the defendants' position, it is appropriate that I state a concluded view in relation to the controversy (assuming that there is one) and the test that I am applying in determining these applications. The reason that I have placed those words in parentheses in the last sentence is that the defendants have argued that, on one view, the statement by Hammerschlag J in [64] does not suggest a different test to the one that has traditionally been employed when a party seeks summary dismissal. Further, I should emphasise that the defendants' position is that whatever be the appropriate test, and however high the bar is set, it comfortably meets that test.
I am unable to accept that the proposition of Hammerschlag J in Simmons v The Protective Commissioner does not water down to a significant degree the stringency of tests hitherto employed.
I accept the defendants' submission that the decision of the Court of Appeal overturning the decision of Hammerschlag J did not in terms confront paragraph 64. However, while he did not address the particular passage in Hammerschlag's judgment to which exception is taken by the plaintiffs, Emmett J used language more consistent with the older authorities providing for a more stringent test. For example his Honour said at [95]:
'Ordinarily a party should not be denied the opportunity to put his case before the court in the ordinary way, after taking advantage of available interlocutory processes. Before a party will be deprived of that opportunity, the court must have a high degree of certainty about the ultimate outcome of the proceeding, if it were to be allowed to go to trial in the ordinary way (see Agar v Hyde [2000] HCA 41; 201 CLR 552 at 575 - 576, [57]). The power to order summary dismissal should only be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried (see Fancourt v Mercantile Credits Ltd [1983] HCA 25; 154 CLR 87 at 99). The defendants have taken me to a number of recent authorities in the Court of Appeal where the Court made reference to and applied the decision of the High Court in Spencer (Collier v Lancer (No 2) [2013] NSWCA 186, State of New South Wales v Williams [2014] NSWSC 177).
In Simmons v Protective Commissioner Hammerschlag J placed significant reliance upon what the High Court said in Spencer v The Commonwealth. In particular, his Honour relied upon a passage in the judgment of French CJ and Gummow J at [25]:
"Section 31A(2) requires a practical judgment by the Federal Court as to whether the applicant has more than a "fanciful" prospect of success. That may be a judgment of law or of fact, or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success (emphasis added by Hammerschlag J)."
The defendants also point to a passage in the decision of French CJ and Gummow J at [24]:
"The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action or on the basis that the action is frivolous or vexatious or an abuse of process. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said [48]:
'The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried.'
More recently, in Batistatos v Roads and Traffic Authority (NSW) Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde which included the following:
'Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.
There would seem to be little distinction between those approaches and the requirement of a 'real' as distinct from 'fanciful' prospect of success contemplated by s 31A. That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions."
(Citations and footnotes omitted)
The plaintiff says that the authorities can be reconciled by reference to that paragraph.
In considering the applicability of these passages, and their relevance to a decision to summarily dismiss proceedings in New South Wales pursuant to the provisions in Part 13 of the UCPA, it is very important to remember the legislative basis of the decision in Spencer v The Commonwealth. The decision involved consideration of s 31A of the Federal Court of Australia Act1976 (Cth). The relevant part of the provision is set out in the judgment of Hayne, Crennan, Kiefel and Bell JJ at [50]:
"(2)The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:
(a) the first party is prosecuting the proceeding or that part of the proceeding; and
(b) the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding.
(3) For the purposes of this section, a defence or a proceedings or part of a proceeding need not be:
(a) hopeless; or
(b) bound to fail:
for it to have no reasonable prospect of success."
French CJ and Gummow J made reference to sub-s (3) at [17].
The defendants contend that there is no relevant distinction between a test that allows for summary dismissal when a cause of action has "no reasonable prospect of success" and the test under rule 13.4 which requires (relevantly) that there is "no reasonable cause of action". I disagree with that submission. A majority of the High Court in Spencer v The Commonwealth observed that s 31A of the Federal Court of Australia Act 1976 (Cth);
"..departs radically from the basis upon which earlier forms of provisions permitting the entry of summary judgement have been understood and administered."
(Paragrpah [53] (Hayne, Crennan, Kiefel and Bell JJ))
Their Honours analysed the expression "reasonable prospects" and noted in particular the "negative admonition in sub-s (3) that a defence, a proceeding, or a part of a proceeding may be found to have no reasonable prospect of successful prosecution even it if it cannot be said that it is 'hopeless' or 'bound to fail'.
Their Honours acknowledged at [59] that in many cases where a plaintiff has no reasonable prospect of success, the proceedings could be described (with or without intensifying adjectives) as untenable, frivolous or groundless but went on to acknowledge "that none of those expressions (alone or in combination) should be understood as providing a sufficient chart of the metes and bounds of the power given by s 31A". Nor could the content of the power be illuminated by contrast with those terms.
The judgment of the majority of the High Court in Spencer v The Commonwealth supports the proposition that s 31A of the Federal Court of Australia Act constitutes a radical departure from the traditional tests applying to applications for summary judgement or summary dismissal. It requires the engagement of a different test.
The provision in rule 13.4 of the UCPR has not, as far as I am aware, been held to constitute such a fundamental departure. The provision uses words such as frivolous and vexatious, abuse of process and (relevantly) no reasonable cause of action being disclosed. The adjective "reasonable" in rule 13.4 attaches to the cause of action not to the prospects of success of the case. In so far as reliance is placed upon the overriding purposes of the Civil Procedure Act 2005 (NSW) as set out in s 56, I do not accept that that section or any of the surrounding sections which are calculated to ensure the "just, quick and cheap resolution of the real issues in the case" in any way affects the fundamental and orthodox approach to applications by a party to have a proceeding summarily dismissed or summary judgment entered. Nothing in the Act, as far as I can tell, displaces the fundamental rule that a party to litigation is entitled to a full hearing except in the clearest of cases.
I accept that where some discretion is enlivened in such an application, it may be that s 56 has some work to do. But this does not affect the fundamental test to be applied on an application for summary dismissal of a proceeding. This approach accords with the judgment of Basten JA in Bott v Carter [2012] NSWCA 89 where his honour said at [14]:
"It has been suggested that s 56 might warrant courts striking out proceedings on 'less substantial grounds' than those stated in General Steel:Commonwealth v Griffiths [2007] NSWCA 370, at [155] (Young CJ in Eq). In the present case, the primary judge referred to this possibility, but did not rely upon it. Another view might be that s 56 does not reduce the conditions for the engagement of the power conferred by r 13.4, but limits the circumstances in which the court, satisfied that the power is available, might be inclined to refuse relief on discretionary grounds."
After the conclusion of argument, the Court of Appeal decided yet another case where the power to summarily dispose of a case was considered: Ke Qin Ren v Hong Jiang; Yi Cheng Jiang v Wan Ze Property Development (Aust) Pty Ltd (in liq) [2014] NSWCA 388. Again, the Court referred to Spencer v The Commonwealth and, again, the Court confirmed the stringency of the appropriate test. There is nothing in that judgment, or in any of the judgments to which I have been referred, that supports the defendants' implicit suggestion that the test for summary disposition has been watered down. The Honours (Barrett, Gleeson and Leeming JJA) said at [49]:
"The test to be applied before entering summary judgment has been variously stated, and little is to be gained by reiterating those formulations; cf General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129. There is no controversy that the power must be exercised with 'great care' and 'exceptional caution': Spencer v Commonwealth [2010] HCA 28; 241 CLR 118 at [24] and [55] (noting that this was said of the lesser standard made applicable by s 31A of the Federal Court of Australia Act 1976 (Cth)). In Spencer, Hayne, Crennan, Kiefel and Bell JJ referred to the (unamended) test as 'requiring formation of a certain and concluded determination that a proceeding would necessarily fail': at [53]. Repeatedly, it has been said that the court must be so certain of the outcome that to permit the proceeding to go forward would amount to an abuse of process: Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 90; Spencer at [54]; O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71; 16 BPR 31,705 at [3] and [67]."
Their Honour's reference to the "lesser standard" arising under s 31A of the Federal Court of Australia Act confirms my understanding of the distinction between the appropriate test under the UCPR and that created by the Federal Court of Australia Act.
In light of the foregoing analysis, I do not accept and am not prepared to act upon the analysis or statement of principle in the decision of Hammerschlag J in Simmons v the Protective Commissioner. I will apply the principles and formulations referred to in Dey v Victorian Railways, General Steel v Commissioner of Railways, Batistatos v RTA and a number of decisions of the NSW Court of Appeal.
Finally, the fact that a case raises complex and difficult questions of law is not an "insuperable barrier" to an application for summary judgment or dismissal although the more complex the question of law, the more likely that it will involve resolution of complex factual issues: see the discussion of authorities in Ritchie's Uniform Civil Procedure [13.1.65].
TWO MATTERS COMMON TO THE THIRD AND FIFTH TO EIGHTH DEFENDANTS
The application of the 3rd defendant raises substantially different considerations to the matters raised on behalf of the 5th to 8th defendants. However, there are two common features of the submissions. First, each of the defendants complains about the form of the pleading in which each plaintiff asserts that it entered into the underwriting agreement in reliance on the various representations. Secondly, each of the defendants asserts that the causes of action are statute barred because the proposed amendments are brought outside of the limitation periods provided for by the relevant statutes.
I will deal with the "reliance" pleading first. I will then deal with the cases of the 3rd defendant and the 5th to 8th defendants in turn. Finally, I will deal with the limitation issue.
THE RELIANCE PLEADING
A specific objection to both the FASOC and ASOC that preceded it that is taken by both the 3rd defendant and the 5th to 8th defendants concerned what has been described variously as the pleading with respect to "causation" or "reliance". The impugned part of the pleading comes in section I of the FASOC under the heading "LOSS AND DAMAGE". The complaint is that the pleading sets out some 31 representations or sources of those representations and asserts that the plaintiffs entered into the underwriting agreement in reliance on one "and/or" the other. It is the use of the disjunctive "and/or" that is the subject of the complaint.
It is submitted in written submission for the 5th to 8th defendants filed 25 July 2014 that the "and/or" formulation is "not a permissible pleading" and that:
"The plaintiffs have not alleged that they relied on any representations by the non-executive directors. By the use of the disjunctive, their pleaded case may or may not actually make that allegation."
Paragraph 121 is the pleading relating to the 2nd plaintiff while paragraph 122 is the pleading relating to the 1st plaintiff. For present purposes, there is no relevant distinction between those paragraphs. They are as follows:
"121. CommSec entered into the Underwriting Agreement in reliance on:-
(a) the First Representation; and/or
(b) the Second Representation; and/or
(c) the Third Representation; and/or
(d) the Fourth Representation; and/or
(e) the Fifth Representation; and/or
(f) the Sixth Representation; and/or
(g) the FY06 Financial Report Representation; and/or
(h) the FY06 Directors' Accounts Representation;
(i) the September Representations; and/or
(j) the Annual Report Representation; and/or
(k) the October Representations; and/or
(l) Interim Report Representation; and/or
(m) 1H07 Directors' Accounts Representation; and/or
(n) February Representations; and/or
(o) the Implied FY06 Financial Report Representation; and/or
(p) the Implied Annual Report Representation; and/or
(q) the Implied Listing Rule Representation; and/or
(r) the May 2007 Profit Representation; and/or
(s) the Prospectus; and/or
(t) the Financial Information; and/or
(u) the First Pitcher Partners Representation; and/or
(v) the Second Pitcher Partners Representation; and/or
(w) the First Opinion Representation; and/or
(x) the Second Opinion Representation; and/or
(y) the Third Opinion Representation; and/or
(z) the Fourth Opinion Representation; and/or
(aa) the Fifth Opinion Representation/ and/or
(bb) the Sixth Opinion Representation; and/or
(cc) the Implied FY06 Directors' Accounts Representations; and/or
(dd) the Implied October Representations; and/or
(ee) the Implied 1H07 Directors' Accounts Representations.
122. The Commonwealth Bank entered into the Sub-Underwriting Agreement and thereafter subscribed for the ABC Notes, in reliance on:-
(a) the First Representation; and/or
(b) the Second Representation; and/or
(c) the Third Representation; and/or
(d) the Fourth Representation; and/or
(e) the Fifth Representation; and/or
(f) the Sixth Representation; and/or
(g) the FY06 Financial Report Representation; and/or
(h) the FY06 Directors' Accounts Representation;
(i) the September Representations; and/or
(j) the Annual Report Representation; and/or
(k) the October Representations; and/or
(l) Interim Report Representation; and/or
(m) 1H07 Directors' Accounts Representation; and/or
(n) February Representations; and/or
(o) the Implied FY06 Financial Report Representation; and/or
(p) the Implied Annual Report Representation; and/or
(q) the Implied Listing Rule Representation; and/or
(r) the May 2007 Profit Representation; and/or
(s) the Prospectus; and/or
(t) the Financial Information; and/or
(u) the First Pitcher Partners Representation; and/or
(v) the Second Pitcher Partners Representation.; and/or
(w) the First Opinion Representation; and/or
(x) the Second Opinion Representation; and/or
(y) the Third Opinion Representation; and/or
(z) the Fourth Opinion Representation; and/or
(aa) the Fifth Opinion Representation/ and/or
(bb) the Sixth Opinion Representation; and/or
(cc) the Implied FY06 Directors' Accounts Representations; and/or
(dd) the Implied October Representations; and/or
(ee) the Implied 1H07 Directors' Accounts Representations."
The 3rd and 5th to 8th defendants complain that casting the reliance pleading in this form means that the particular defendant is unable to determine precisely what case they are to meet. In other words, it is submitted that they are not aware of which representation the plaintiffs are ultimately relying upon in mounting their claim. They rely on the fact they are not alleged to be responsible for all of the representations or documents in which those representations are alleged to have been made. They say that, read literally, the pleading does not actually assert reliance in respect of any representation made by them.
The plaintiffs submit that the pleading is in an orthodox form and that there is no ambiguity in the pleading. Rather, the plaintiffs submit that it is not in a position to know in advance which of the representations the court might find were made, or which of those representations the court might find were false, or which of those representations the court might find to have been relied upon by the respective plaintiffs in entering the underwriting and sub-underwriting agreements.
For the sake of clarity, senior counsel for the plaintiff indicated that his clients will conduct the case on the basis of an assertion that the plaintiffs relied on each and every one of the representations particularised in paragraphs 121 and 122 and earlier in the FASOC.
Senior counsel for the 3rd defendant submitted (T 30-31) that:
"If it relied on all of them, the pleading should be 'and'. That's the problem. What it seeks to do by this is to suggest that any one of those things was causative, in circumstances where it also is pleading an 'and'. So the fact that any one of them - it relied on any one of them, means that on this pleading, it is not tying its colours to the mast and saying it relied on what they complain about in our conduct, which is only a small part of the overall and why this is particularly important is that this is not a case where any one defendant is said to have made all of the representations. There is all sorts of differential treatment depending upon whether it's the audited accounts, as one might more realistically think were relied upon rather than some management questionnaire."
Senior counsel for the plaintiffs also made the point that he did not want to use the conjunctive "and" lest it be asserted at the hearing that the plaintiffs' case was predicated on establishing each and every one of the representations, their falsity and reliance by his clients.
If there was any doubt that the plaintiffs' case is that they relied on all of the representations therein particularised, any such doubt has now been dispelled by the clear and unambiguous stance articulated by senior counsel on the hearing of this notice of motion.
I accept the plaintiffs' submission on this subject. While senior counsel said (T 73-74) that he was not "overly fussed" if he is required to delete the "or" from the pleading, he did so only on the basis that it was recorded "in memoriam" that the case will not necessarily fail if the plaintiffs fail to establish every single one of their representations, the falsity of those representations or the plaintiffs' allegation of reliance.
I have concluded that the plaintiffs are entitled to plead their case in this way. I do not propose to make an orders or conditions in relation to this part of the pleading.
THE THIRD DEFENDANT
The 3rd defendant submits that the case pleaded against her by the plaintiff is untenable and destined to fail. Her arguments in this regard are many but can be encapsulated in the following propositions:
(1) The plaintiffs' case that her position and qualifications are such that relevant knowledge of certain events might be inferred is unarguable.
(2) The representations of fact or opinion attributed to her cannot be established to have been made by her.
(3) The plaintiff has not, and cannot, properly contend that the representations alleged to have been made by her are other than opinions held on reasonable grounds.
(4) The plaintiffs have not, and cannot, assert that she was aware of the materiality of the matters relevant to the plaintiffs' asserted reliance in entering into the underwriting agreement. Further, the pleading is defective as it fails to assert the state of knowledge (in relation to materiality) that the plaintiffs assert.
(5) The plaintiff has not clearly pleaded the representations upon which it relies.
(6) There are particular problems in relation to each of the six representations upon which the plaintiffs rely.
I acknowledge that the foregoing summary of the 3rd defendant's position does not do justice to the careful, cogent and thorough submissions made both in writing and in oral argument. Accordingly, it is necessary to expand upon the arguments made by the 3rd defendant and to set out in some detail the case that the plaintiffs seek to make against her.
The management questionnaire and management interviews and the five representations pressed against the 3rd defendant
In bringing its case against the 3rd defendant, the plaintiff relies upon two particular documents forming part of its bundle. As far as I can tell, the plaintiffs place no reliance upon any other statement of fact, representation or omission on the part of the 3rd defendant. The relevant documents are a management questionnaire bearing a date of May 2007 but otherwise unsigned or undated and a document entitled "minutes of management interviews" dated 25 May 2007 at 9am.
The plaintiffs will assert that the management questionnaire and interviews failed to disclose critical information bearing upon the performance of ABC. It will assert that those interviews were conducted specifically for the purpose of the plaintiffs' understanding the nature of the business in which they were proposing to invest a very large sum of money. Accordingly, and without at this stage referring to the terms of the documentation, the plaintiffs will assert that representations made in the questionnaire and subsequent interview were going to be relied upon and that the 3rd defendant knew or must have known this.
The 3rd defendant places particular reliance upon the purpose of the management questionnaire as set out at PB 275-276. She refers to the fact that the document on its face required the officers to whom it was directed to do no more than to provide information that was "correct to your knowledge and belief". The plaintiff says that there is nothing, either pleaded or in evidence, that supports the suggestion that the 3rd defendant did not believe the matters for which she was responsible for in the questionnaire. She also says that this part of the document highlights the precariousness of the plaintiffs' case and shows that any representation was clearly no more than an opinion.
To understand the significance of the words upon which the plaintiffs rely, it is necessary to consider them in their context. Part 1 of the management questionnaire is entitled Purpose and is in the following terms:
"Purpose
This management questionnaire is to be completed by senior management of A.B.C. Learning Centre Limited (ABN 93 079 736 664) (ABC) as part of the process of ensuring that the prospectus (Prospectus) for the proposed issue of unsecured, subordinated convertible reset notes (Notes) by ABC (Offer) contains all the information required by law. The senior managers who complete this questionnaire must be all of the senior managers who are responsible for the operational (including licensing), legal, tax and accounting functions of the business as well as all executive directors.
The offer of Notes is to be made using a short form Prospectus pursuant to section 713 of the Corporations Act. Accordingly, the Prospectus must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of:
(1) the effect of the Offer on ABC; and
(2) the rights and liabilities attaching to the securities that are being offered.
The Prospectus must also contain certain material information which has been excluded from ASX continuous disclosure notices - namely, Information about the Offer that:
- has been excluded from a continuous disclosure notice in accordance with the ASX listing rules; and
- is information that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:
- the assets and liabilities, financial position and performance, profits and losses and prospects of ABC; and
- the rights and liabilities attaching to the ABC Notes and the underlying ordinary shares.
This questionnaire is to assist the due diligence committee to ensure that the Prospectus meets the above content requirements.
By completing this questionnaire you acknowledge that the answers provided to these questions will be relied on as being correct to your knowledge and belief, which you have obtained in the course of performing your responsibilities in respect of ABC. You also acknowledge that the performance of those responsibilities includes making due enquiries from time to time of the persons who report to you.
Materiality and relevance
For the purposes of the Prospectus and this questionnaire, by agreement with ABC, the following materiality guidelines have been adopted:
- Balance Sheet items will be considered material if they have a value of $93 million or more.
- Profit and loss items will be considered material if they impact individually on the annual operating profit by $4 million or more.
In addition to the above quantitative guidelines, a matter will be material if, because of its nature, it is a matter which is relevant to an investor or their professional adviser for the purposes of making an informed assessment of ABC, its financial position and its prospects."
It is also relevant to consider the people to whom the management questionnaire was directed. Those people were the CEO (Mr Groves, the 2nd defendant) and the CFO (Mr Black, the 4th defendant). The only other senior manager asked to be involved in the completion of the questionnaire was the 3rd defendant.
The purpose set out at the beginning of the questionnaire indicated that those who completed it must all be "senior managers who are responsible for the operational including licensing legal tax and accounting functions" of ABC. The "purpose" specifically stated that the questionnaire was designed to assist the "due to diligence committee to ensure that the prospectus meets" the relevant content requirements. The document also indicated that by completing the questionnaire, the relevant officers acknowledged that the questions were "correct to [their] knowledge and belief" and that the information provided had been obtained in the course of performing their responsibilities at ABC including information obtained from the making of due enquiries from persons who reported to them. The final matter to note, in view of the nature of the case that the plaintiffs plead against the defendants, is that the "purpose" specifically referred to the fact that matters which remained in existence at the time of completion of the questionnaire should be reported even if they came into existence before 10 January 2006.
The questionnaire is relied upon in respect of five of the six representations set out in paragraph 33 of the FASOC.
The first representation arose or arises from the answer "no" to the question whether there were "any other issues that may materially affect ABC's future performance" (PB 277).
The second representation, set out in paragraph 33 (b) of the FASOC, arose from question 4(b) of the questionnaire (PB 278). This evoked a negative response to the question of whether there are "any material contracts currently being considered or negotiated (details of which have not been disclosed to the ASX) which may have a material impact on the way ABC's business is conducted or its prospects". In addition to the box indicating "no" to that question, there is also a response referring to the ongoing negotiations in relation to its "underwritten term facility" and the fact that ABC was "considering a purchase of 10 centres in Singapore which is not material that may be announced to the market due to a new geographic area".
The third representation is found in question 5A of the management questionnaire whereby a negative answer was provided to the question of whether "ABC is giving serious consideration to any significant acquisitions, divestments, new projects, change in capital or changes in strategy" (PB 281, FASOC [33(c)]).
The fourth representation is no longer relevant as it derives from a part of the management questionnaire which was directed specifically to the CFO, Mr Black.
The fifth representation arises from a negative response to question 11(d) whether there "was any reason to expect a significant increase in labour costs which might potentially affect managements EBITDA forecasts over the term of the notes" and whether any "labour relations issues" were anticipated (PB 298, FASOC [33(e)]).
The sixth representation, about which there is a preliminary controversy, arises from an answer recorded in the minutes of the management interviews (PB 327):
"Q.6(q): What are the key earnings sensitivities in the next 2 years?
ABC answered:
ABC's business doesn't have many earnings sensitivities. In terms of labour cost, ABC has an agreement with unions which means its labour costs will not increase by more than 2% over the next 2 years. Rental is a fixed and known cost and variances to variable costs, such as telephone are not material. In relation to revenue, birth rates in the US and Australia have increased. From a funding perspective, if the Australian economy experiences a downturn, it is unlikely to affect earnings due to government funding arrangements in place for unemployed parents. In the past when there has been a downturn in the economy, ABC's earnings have not fallen off. Similarly, in the US, which is driven [on a] more State by State basis, downturns in individual State economies are unlikely to reduce earnings. In Michigan, which has been 7.9% negative growth centre earnings, whilst they were previously tracking at about 5.5% growth, centre numbers have not fallen, but are static. ABC also hedges debt to protect itself from against (sic) exchange rate fluctuations."
The preliminary controversy concerns proof of whether the 3rd defendant played any role in providing this answer. The minutes of the management interviews nominate the interviewees as James Black, Jillian Bannan and Edmund Groves. There are also "other attendees" recorded including two other representatives of ABC. On its face, as the defendants correctly point out, it is not always clear who provided the particular answers in each of the sections of the document. It is also not clear from the document whether there was one interview or a number of separate interviews although on one interpretation of the document it seems that there were a number of people present in the course of one or more interviews. The fact that the document is headed interviews (noting the use of the plural) could give rise to an inference that there was more than one interview.
In terms of the application to summarily dismiss the whole of the plaintiffs' case against the 3rd defendant, the controversy surrounding the 6th representation is not determinative. However, for the purpose of an application to strike out that part of the pleading relating to the sixth representation, it is potentially a matter of some moment. Accordingly, I will explain the controversy as clearly as I can.
As I have said, the sixth representation arises from an answer given in the course of the management interviews. The interviews were, or appear to be, a follow-up to the management questionnaire. The answer at 6(q) (PB 327) set out above at [99] was a follow-up from a question addressed in the part of the management questionnaire specifically directed to the CFO, Mr Black. The 3rd defendant contends that the fact that the question in the interview arose from a question in the management questionnaire directed to Mr Black, and Mr Black only, leads to the inevitable conclusion that the 3rd defendant is not responsible for the answer recorded in the management interviews. She further contended that there is no evidence capable of establishing that she was even present when that answer was given.
She points to the fact that on a number of occasions the name of the 3rd defendant is recorded as the one who gave the answer (see for example Q 2.3 at PB 319) which records that "ABC (Jillian Bannan) answered".
The plaintiffs counter that the minutes of the interviews are somewhat ambiguous as to who provided answers in a number, if not most, cases. At times a specific officer is nominated. For example, as I have just said Q 2.3 refers to Ms Bannan. Q 2.4 records "ABC (Eddy Groves) answered" (PB 319). See also the answers in Section 1 (PB 317) where both Ms Bannan and Mr Groves are recorded as answering specific questions.
In the overwhelming majority of questions, the minutes record that "ABC answered". No specific interviewee was nominated.
It is worth observing that the CFO (Mr Black) is not recorded as having specifically answered any of the questions during the interview. That is a significant matter in evaluating the 3rd defendant's submission that the sixth representation should be struck out of the FASOC as against her because it falls in part of the interview that derives from questions in the questionnaire directed to Mr Black.
The plaintiffs also submit that the answer to section 6(q) contains material that may be expected to be within the province of the company secretary or legal counsel.
I am not satisfied that the proceedings should be summarily dismissed or that the sixth representation should be struck out at the interlocutory stage on the basis that the plaintiffs may have difficulties in establishing the person who provided the answer at Q 6(q) of the minutes of the management interviews. Each of the parties is in a position to make opposing submissions but the plaintiffs' submission is not so obviously untenable that it should not have the opportunity to litigate the matter.
The pleading and the plaintiffs' case that the representations were false or misleading
It is then necessary to consider in a little more detail the case of the plaintiffs against the 3rd defendant as it is pleaded in the FASOC. Because of the number of defendants, the FASOC is a somewhat cumbersome and disjointed document. That is not meant as a criticism of the document per se. Rather, it is the result of the fact that the plaintiffs are required to plead a case against a number of different defendants whose liability (according to the plaintiffs) arises as a result of different actions, statements and representations.
Part D of the FASOC is headed "Representations Made by ABC, Groves, Bannan and Black to Commsec and the Commonwealth Bank". Paragraph 33 sets out the representations upon which it relies. It is in the following terms:
33. On or about 24 May 2007, and continuing thereafter at all material times up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black made the following representations to CommSec and the Commonwealth Bank:
(a) that each was not aware of any issues other than those which had been disclosed to the Due Diligence Committee of ABC Learning that may materially affect ABC's future performance (the First Representation);
Particulars
The representation was made in writing in answer to question 2(a) of a document entitled "ABC Learning Centres Limited Project Stuart Mark IV ABC Notes Issue Management Questionnaire" (the Management Questionnaire).
(b) that apart from ABC Learning's underwritten term facility and the proposed purchase of ten childcare centres in Singapore, there were no material contracts currently being considered or negotiated (details of which have not been disclosed to the ASX) which may have a material impact on the way ABC Learning's business is conducted or its prospects (the Second Representation);
Particulars
The representation was made in writing in answer to question 4(b) of the Management Questionnaire.
(c) that apart from the proposed acquisition of ten childcare centres in Singapore, ABC Learning was not giving serious consideration to any significant acquisitions, divestments, new projects, capital expenditures, changes in capital or changes in strategy (the Third Representation);
Particulars
The representation was made in writing in answer to question 5(a) of the Management Questionnaire.
(d) that each was not aware of any matter likely to materially impact on ABC Learning's results for the then current financial year or the next financial year (the Fourth Representation);
Particulars
The representation was made in writing in answer to question 6(e) of the Management Questionnaire.
(e) that there was no reason to expect significant increases would occur which might potentially affect the ability to meet ABC Learning management's EBITDA forecasts over the term of the ABC Notes (the Fifth Representation);
Particulars
The representation was made in writing in answer to question 1d) of the Management Questionnaire.
(f) that ABC Learning's labour costs would not increase by more than 2% over the financial years ending 30 June 2008 and 30 June 2009 (the Sixth Representation).
Particulars
The representation was oral and made in answer to question 6(q) of the management interview on 25 May 2007.
Thereafter, the FASOC sets out a number of matters which the plaintiffs assert ought to have been disclosed and, the failure of disclosure constitutes misleading conduct for the purpose of its claim against the various defendants.
Developer contracts
From [35] to [41] the plaintiffs assert facts relevant to what have been described in argument (and in the FASOC) as "developer contracts". The plaintiffs complain that the developer contracts ought not to have been included in ABC's accounts as revenue. This is because, according to the case the plaintiffs hope to establish, the amount of money received by ABC was ultimately to be set off against the consideration to be paid by ABC Learning to acquire the relevant childcare centres.
In paragraph 38 of the FASOC the plaintiffs assert that the recording of the payments in relation to the developer contracts as income resulted in overstatements in the relevant financial reports in relation to the profits of ABC, its earnings per share, its EBITDA, its revenue and its net assets.
By paragraph 39 of the FASOC, the plaintiffs assert that by no later than 24 May 2007 and at all material times thereafter the 3rd defendant (and others) were aware of the existence of the developer contracts and the treatment of the fees received from the developers in the company's accounts. The knowledge so alleged is particularised in the FASOC as being inferred from the qualifications, senior positions and the roles that the relevant defendants played in the company as well as the significance of the developer contracts.
By paragraph 40 the plaintiffs assert that the developer contracts and the treatment of its fees was a matter that may materially affect ABC's future performance.
By paragraph 41 the plaintiffs assert that at no time prior to 22 April 2008 did Ms Bannan (or other nominated defendants) disclose to the plaintiffs the existence of the developer contracts or the treatment of the fees.
Thus, it is alleged that the first representation - that the 3rd defendant was not aware of any issue that may affect ABC's future performance - was a false representation.
New Developers Model
The FASOC goes on to refer in paragraph 42 to the "fact" that ABC decided to enter into what is described as "a new developers model". The FASOC asserts at [43] that by 24 May 2007 the new developers model was either finalised or close to finalisation. Paragraph 44 alleges knowledge in the part of Groves, Bannan and Black and asserts that such knowledge "is to be inferred from:-
(a) the qualifications of each, the senior positions which each occupied, and the roles which each played within ABC learning; and
(b) the fact that the new developers model was a significant part of the business of ABC learning."
Paragraph 45 asserts that the new developers model was a matter that may have materially affected ABC's future performance, its results for the following financial year, that it involved material contracts currently being considered (and which had not been disclosed to the ASX) and was a significant new project or change in strategy.
Paragraph 46 asserts (relevantly) that the 3rd defendant did not disclose the new developers model.
123 Careers
Paragraph 46A to 50 of the FASOC adopts a similar approach to ABC's entry into a contract with a company known as 123 Careers Pty Ltd.
It is asserted in [46A] that this contract was entered into in around 2006. The paragraph also asserts that payments were made to ABC in FY2006 ($30 million), FY2007 ($14million) and FY2008 ($2 million) even though the contract involved the right (in 123 Careers) to provide labour to ABC over a 10 year period.
In [46B] it is asserted that the income was recorded as income in the FY06 Financial report and Annual report and in the half year results for the period ending 31 December 2006.
Paragraph 47 asserts that on 31 July 2008 ABC announced that its pre-tax earnings for FY06 were to be reduced by $30 million as a result of its revised treatment of the cash received from 123 Careers. The earnings for FY07 were to be reduced by $14 million. Paragraph 47A asserts that the income received from 123 Careers "should not have been recorded as income". Paragraph 48 asserts that the treatment of the receipts in this way resulted in significant overstatements in net profit after tax, earning per share, EBITDA, revenue and net assets.
Paragraph 49 asserts that these matters were issues that may materially affect ABC's future performance, a significant change in strategy and a matter likely to materially impact on ABC's results.
Paragraph 50 asserts that the 3rd defendant failed to disclose the accounting treatment relating to the 123 Careers agreement.
Leapfrog acquisition
Paragraph 51 asserts that on 13 August 2007 ABC announced that its UK subsidiary had agreed to acquire a group of childcare centres known as the "Leapfrog Nurseries Group" for a sum of £31.2 million. This involved the acquisition of 88 childcare centres as well as freehold and leasehold interests in 41 centres said to be valued at in excess of £40 million.
The subsequent paragraphs assert that the acquisition was in contemplation by no later than 24 May 2007 [52] and that the 3rd defendant was aware of the acquisition [53]. Once again, it is asserted that the knowledge of (relevantly) the 3rd defendant is to be inferred from her qualifications, her senior position, the role she played within ABC and the size of the acquisition.
Paragraph 54 asserts that the Leapfrog acquisition was a matter that may materially affect ABC's future performance and impact on its financial results, was a material contract in contemplation and was a significant acquisition and capital expenditure to which ABC was giving "serious consideration".
Paragraph 55 asserts that the 3rd defendant (and ABC, Groves and Black) did not disclose the proposed Leapfrog Acquisition at any time prior to 13 August 2007.
RMC restructuring charges and wage increases
The pleadings in paragraphs 56-60 and 61-65 adopt a similar pattern and relate respectively to a restructuring and unwinding of ABC's Regional Management Companies ("RMC's") and reductions in its EBIDTA resulting from increases in its expenses for wages and on-costs.
Again, it is alleged (in [58] and [63]) that these were matters in relation to which knowledge in the 3rd defendant can be inferred from her qualifications and position and the significance of the restructuring and wage increases. Again, it is alleged that these were matters that may affect ABC's future performance etc. Again, it is alleged that the matters particularised were not disclosed by the 3rd defendant.
The allegations of falsity and the pleading against the 3rd defendant
From paragraph 67 to 72 the FASOC asserts, in respect of each of the six representations pleaded at paragraph 33, that the representation is false. This part of the FASOC is under the sub-heading "Contraventions of the Corporations Act and ASIC Act by ABC learning, Groves, Bowman and Black in relation to the ABC notes issue". The effect of this part of the pleading is to put together the preceding two parts of the pleading. That is to say, the representations enumerated as 1 to 6 in paragraph 33 are "falsified" by reference to the various acquisitions, contracts and accounting treatment of the contracts set out in the FASOC from paragraph 35-65. It is in the following terms:
"CONTRAVENTIONS OF THE CORPORATIONS ACT AND ASIC ACT BY ABC LEARNING, GROVES, BANNAN AND BLACK IN RELATION TO THE ABC NOTES ISSUE
66. The conduct of each of ABC Learning, Groves, Bannan and Black pleaded in paragraphs [35] to [65] above was conduct:-
(a) in relation to a financial product or a financial service within the meaning of sub-sections 1041H(1) and (2)(b) of the Corporations Act; and/or
(b) in trade or commerce, in relation to financial services within the meaning of s.12DA of the ASIC Act.
67. The First Representation pleaded in paragraph [33(a)] above was false.
Particulars
Contrary to the first representation, as at 24 May 2007, and at all material times thereafter up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black should have disclosed to CommSec and/or the Commonwealth Bank:-
(a) the proposed acquisition of the Leapfrog Nurseries Group and its proposed terms;
(b) the existence and terms of the Developer Contracts, that fees from developers were being recorded by ABC Learning as revenue in its financial statements and included in ABC Learning's EBITDA calculations, together with the quantum of those fees and impact on ABC Learning's EBITDA calculations;
(c) the existence of the New Developers Model and its terms or proposed terms; and
(d) the proposed unwinding of the RMC structure and its likely impact on ABC Learning's financial position.
68. The Second Representation pleaded in paragraph [33(b)] above was false.
Particulars
Contrary to the Second Representation, as at 24 May 2007, and at all material times thereafter up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black should have disclosed to CommSec and/or the Commonwealth Bank:-
(a) the proposed acquisition of the Leapfrog Nurseries Group and its proposed terms; and
(b) the existence of the New Developers Model and its terms or proposed terms.
69. The Third Representation pleaded in paragraph [33(c)] above was false.
Particulars
Contrary to the Third Representation, as at 24 May 2007, and at all material times thereafter up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black should have disclosed to CommSec and/or the Commonwealth Bank:-
(a) the proposed acquisition of the Leapfrog Nurseries Group and its proposed terms;
(b) the existence of the New Developers Model and its terms or proposed terms; and
(c) the proposed unwinding of the RMC structure and its likely impact on ABC Learning's financial position.
70. The Fourth Representation pleaded in paragraph [33(d)] above was false.
Particulars
Contrary to the Fourth Representation, as at 24 May 2007, and at all material times thereafter up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black should have disclosed to CommSec and/or the Commonwealth Bank:-
(a) the proposed acquisition of the Leapfrog Nurseries Group and its proposed terms;
(b) the existence and terms of the Developer Contracts, that fees from developers were being recorded by ABC Learning as revenue in its financial statements and included in ABC Learning's EBITDA calculations, together with the quantum of those fees and impact on EBITDA calculations;
(c) the existence of the New Developers Model and its terms or proposed terms; and
(d) the proposed unwinding of the RMC structure and its likely impact on ABC Learning's financial position.
71. The Fifth Representation pleaded in paragraph [33(e)] above was false.
Particulars
Contrary to the Fifth Representation, as at 24 May 2007, and at all material times thereafter up to and including 9 July 2007, each of ABC Learning, Groves, Bannan and Black should have disclosed to CommSec and/or the Commonwealth Bank, that ABC Learning was likely to experience an increase in wages and on-costs for the calendar year 2007 which might potentially affect the ability of ABC Learning to meet ABC Learning management's EBITDA forecasts over the term of the ABC Notes.
72. The Sixth Representation pleaded in paragraph [33(f)] above was false.
Particulars
Contrary to the Sixth Representation, wages and on-costs increased by greater than 2% in the period ending 31 December 2008."
I should interpolate at this point that one of the complaints made by the 3rd defendant concerns the use of the word false. It was submitted on the hearing of the application (T 13-14):
"My point at the moment is just to focus on the structure and how this is said to amount ultimately to a false representation because what's alleged here is that each and every of these representations was false. If one's going to plead an allegation of falsity that's capable of meaning a number of things including fraud, including negligently false or including all sorts of things but one of the reasons why the High Court has required precision in this area. If your Honour looks at each of the pleadings from paragraph 66 and following, this is how all the contraventions are pleaded, under the heading "contraventions". So after the introductory paragraph, 66, 67 the first representation was false, the second representation was false, the third, fourth, they're all pleaded in the same way; each of them were false.
And then even in the latest suggested amended, or the latest amendment that's sought to be made in 72A was about implied representations, the first opinion representation .... The allegation of breach is that the opinion representation was false your Honour sees that in 72B, and in 72D. Your Honour will see that it's then continued in relation to third opinion representation and the fourth opinion representation and each of them is said to be false.
...
So it is the precision in which first of all the representation is articulated, and flowing from that how one articulates what is said to be misleading and deceptive about it. And here when one gets a rolled up allegation of representation followed by a rolled allegation of falsity, and the particulars of falsity first of all ought not be particulars of falsity but leaving aside that question about whether they should be material facts or not the particularity of the falsity doesn't make sense. Its what's said to be false about the representations in each case, and I'll just deal with it by example by the first one, in para 67, it's alleged that the first representation pleaded was false, now it's trite that one has to plead the material facts that make the allegation false so that one can identify the material facts said to amount to the misleading or deceptive conduct but instead of doing so all we get is particulars saying that various things should have been disclosed.
Now first of all even if particulars were good enough that is not a particular of why the representation was false. And your Honour the same formula is used throughout each of these pleadings of falsity. First, it's alleged that the representation was false and why was it false, because things should have been disclosed, and that is not a proper pleading of why a representation is false. It doesn't tell us which of the High Court Forrest alternatives is envisaged in the allegation, and it provides no material facts at all as to why that allegation is false."
The plaintiffs submitted that the use of the word false was not "loaded". It simply means that the representation was not true. I can see nothing in the use of the word false in this part of the pleading that is confusing or ambiguous or liable to cause embarrassment to a defendant attempting to respond to it.
Further, I can also see no fatal problem with the way in which the plaintiff has particularised the allegation of falsity. It is true that the allegation, oft repeated, that the 3rd defendant failed to disclose various matters appears in the document under the heading "particulars" in circumstances where the particulars attach to the allegation of falsity. It is obviously not, technically, a particular of falsity to assert that the maker of the statement ought to have disclosed something. However, there is nothing contradictory or confusing about this. The plaintiffs' case is straightforward: they allege that the representations were false. The use of the term "particulars" may be inappropriate or unfortunate but the allegation of non-disclosure is simply designed to give some colour to what the plaintiff says that the 3rd defendant (and others) should have done or, perhaps, what they did not do.
Mrs Sallyanne Atkinson AO - Chairman [the 5th defendant]
Sallyanne Atkinson is a former Lord Mayor of Brisbane, Australian Senior Trade Commissioner to Paris and Chairman of Queensland Tourism. She is a director of several public companies and associations, including APN News & Media Limited and The Australian Ballet. She is Chairman of the Federal Ministerial Taskforce on Dementia and of the Crawford Fund (Qld). Sallyanne is also a Special Representative for Queensland, South East Asia in the Queensland State Government. Among Sallyanne's many achievements, she has received several awards including Officer of the Order of Australia and was recently awarded an Honorary Doctorate by the Australian Catholic University. She is a fellow of the Australian Institute of Planning. Sallyanne holds a Bachelor of Arts degree from the University of Queensland.
Mr William Bessemer - Non-Executive Director [the 6th defendant]
Bill Bessemer is currently chairman of Austock Group Limited and Australia Pacific Exchange Limited and is a director of public company Timbercorp Limited. He has extensive experience and practical corporate skills covering debt and equity raisings, financial structuring, mergers, acquisitions and business recoveries. Bill holds a Bachelor of Economics degree from the University of Queensland, a Master of Business Administration degree from the University of Melbourne and is a Certified Practicing Accountant.
Mr David Ryan AO - Non-Executive Director [the 7th defendant]
David Ryan is the Chairman of Tooth & Co and other Residual Assco Group Limited group companies. He is also a non-executive director of Tansurban Group and Lend Lease Corporation Limited, as well as a member of the Advisory Board of Virgin Management Asia-Pacific Pty Ltd and a member of the Advisory Board of Caliburn Partnership. David has extensive business experience through his current and former roles which include holding senior executive management positions in public companies and being a member of a number of public company boards. David is well credentialed to provide support to the ABC board as a Non-Executive Director.
The Hon. Lawrence James Anthony - Non-Executive Director [the 8th defendant]
Larry Anthony is currently a board member of Learning Care Group, Inc, Macquarie Media group, Indue Ltd and the National Chairman for the Duke of Edinburgh's Awards Australia. Larry has a vast experience in government sectors and finance including roles with Merrill Lynch and Potter Warburg. He is a former Federal Minister for Children and Youth Affairs, Community Services and the Parliamentary Secretary for trade. He is also involved with various charities across Australia. Larry holds a Bachelor of Commerce degree from the University of New South Wales, a diploma from the Australian Institute of Company Directors, a diploma of Applied Finance and Investment and is a Member of the Banking and Securities Institute of Australia and Australian Institute of Company Directors.
Those profiles are part of ABC's Annual Report for 2006 (PB 499-500). One of the relevant directors' declarations is to be found in the same Annual Report (PB 529). It shows that the plaintiffs are in a position to establish to varying degrees the experience, expertise and qualifications of the 5th to 8th defendants.
In light of this evidence, I am unable to conclude that the plaintiffs should be denied the opportunity to pursue their case based around the implied representations that it will assert arose from the directors' declaration(s).
Was the conduct "in trade or commerce" or "in relation to a financial product or service"?
The 5th to 8th defendants submit that the conduct alleged against them is not conduct "in trade or commerce" within the meaning s 12DA ASIC Act, s 52 TPA or s 42 FTA. They make the same submission in relation to whether the conduct was "in relation to a financial product or service" in s 1041H of the Corporations Act and s 12DA of the ASIC Act.
Reliance is placed on the "narrow" construction given to the expression "in trade or commerce" by the High Court in Concrete Constructions (NSW) v Nelson [1990] HCA 17; 169 CLR 594 at 602-604 (Mason CJ, Deane, Dawson and Gaudron JJ). Reliance is also placed on what the 5th to 8th defendants say is the absence of connection between the conduct alleged against them and the financial product or service provided by ABC. Reliance is placed on ASIC v Narain at [8].
The plaintiffs submit that the representations pleaded "were clearly made in trade or commerce" because they "formed part of the statutory accounts published to the world at large". The plaintiffs rely on the "extremely wide" meaning of the expression "in relation to" in ss 1041H and 12 DA of the respective statutes.
As to the narrow construction of "trade and commerce" adopted in Concrete Constructions v Nelson, I accept the plaintiffs' submission that the particular circumstances of that case (a construction worker attempting to call into aid the TPA due to problems in establishing a personal injury case under state law) place it in a very different category. That approach accords with what was said by French, Sackville and Conti JJ in Village Building Co v Canberra International Airport [2004] FCAFC 240; 139 FCR 330:
"46. In applying the principles laid down by the High Court it is helpful to bear in mind the context in which Concrete Constructions was decided. As Wilcox J observed in Barto v GPR Management Services Pty Ltd(1991) 33 FCR 389 at 393:
'It is easy to understand the policy reasons underlying Concrete Constructions. A contrary result would have led to s 52 being used as a vehicle for the recovery of personal injury damages in a large number of industrial and motor accident cases; even cases where the respondent was not negligent, but only if it happened to be a 'corporation' as defined in s 4 of the Trade Practices Act. And this development would have occurred at the very time that some States were legislating to exclude personal injury damages claims in industrial and/or motor accident cases.'
47. The context assists in understanding the import of remarks in the joint judgment, which sometimes appear to be treated as though they are contained in a statute rather than a judgment construing a statute. For example, their Honours observed (at 604) that s 52 was:
' ... not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities.'
Clearly enough, this observation was directed at the construction worker's attempt to use s 52 of the TP Act to circumvent restrictions imposed by State law on the recovery of damages in personal injury cases. It should not be regarded as an independent principle of construction intended to narrow the scope of s 52 beyond what follows from the construction adopted by the joint judgment.
48. The joint judgment in Concrete Constructions acknowledged that the 'dividing line' between conduct that is or is not in trade or commerce, according to the narrower construction of s 52 of the TP Act, may be difficult to draw. However, once the narrower construction of s 52 was adopted, the facts of Concrete Constructions clearly fell outside s 52. Other fact situations will be much closer to the line."
The question of whether the case against the non-executive directors involves conduct in relation to a financial product or service" again focussed attention on the factual distinctions between the conduct established in the case of ASIC v Narain and the conduct alleged in the present case. I have already set out at [201]-[203] various relevant parts of the judgment in that case. In the present context the following passage is instructive:
"66. Mr Myers QC, who appeared for Mr Narain, emphasised that the words 'in relation to a financial product' are an adjectival phrase which qualify the conduct that is proscribed by s 1041H. He submitted that the phrase narrows or qualifies the breadth of the proscribed conduct and it directs attention to the characteristics of the conduct itself, not its consequences.
67. So much may be accepted. However, to narrow the scope of the conduct to that which appears 'on its face', as the learned primary judge did, is in our view contrary to the meaning of s 1041H(i) considered as a whole. Indeed, it would be contrary to the well-known principles of statutory construction stated in Project Blue Sky Inc v Australian Broadcasting Authority(1998) 194 CLR 355 at [69]-[71].
68. There is a wealth of authority for the proposition that the expression 'in relation to' is extremely wide and that its meaning will be determined by the context. The leading authorities were collected and stated by Beaumont and Lehane JJ in Joye v Beach Petroleum NL(1996) 67 FCR 275 at 285; see also Australian Competition and Consumer Commission v Maritime Union of Australia(2001) 114 FCR 472 at [68] per Hill J.
69. As those cases point out, the words "in relation to" signify the need for there to be some relationship or correlation between the two subject matters that are specified.
70. But as Hill J observed in ACCC v Maritime Union of Australia114 FCR 472 at [68] there will always be a question of degree involved where the issue is the relationship between those matters.
71. What must be borne in mind is that, as Beaumont and Lehane JJ said in Joye67 FCR 275, the context will determine whether the relationship must be direct or substantial or whether an indirect or less than substantial connection will be sufficient: Joye 67 FCR at 285 (citing a number of decisions of the High Court)."
While I appreciate the force of the 5th to 8th defendants' submissions on these issues, my conclusion is that the plaintiffs' position is not "so obviously untenable that it cannot succeed": Dey v Victorian Railway Commissioner. These questions of degree and which side of relevant dividing lines particular conduct falls are matters better addressed by a trial judge in the light of all of the evidence.
Part 3M Corporations Act and the scope of directors' liability
The 5th to 8th defendant contend that Part 2M (and specifically s 344) of the Corporations Act defines the scope of the non-executive directors' "responsibility and potential liability" for the financial reports. Reliance is again placed on Concrete Constructions v Nelson to suggest, at least implicitly, that the operation of Part 3M excludes liability for false and misleading arising under other parts of the act and in other federal statutes. (See written submissions 25 July 2014 paragraph 17, T 26/9/14 pp 16-19.)
I am unable to accept this submission, particularly on an application for strike out or summary judgment. For present purposes, I accept that the plaintiffs' contention on this point is (at least) an arguable one. The plaintiffs submit that where the Corporations Act "excludes liability for misleading or deceptive conduct because the relevant sphere of activity is governed by other rules, it does so expressly". They point to s 945A as an example. They also refer to Gugielman v Trescowthick where a director was held to be liable for the declaration in financial reports "notwithstanding that such reports are also regulated by Part 2M.3"
Particulars to be supplied following disclosure
Another complaint is that, in many instances, the FASOC says that further particulars will be supplied following disclosure. It is submitted that the plaintiffs should be required to avail themselves of the process of preliminary discovery (see Part 5 UCPR).
An example concerns the developer contracts. The "particulars" to paragraphs 38 and 39 (asserting that the accounting treatment of the developer contracts resulted in overstatements as to profits, earnings per share, EBITDA, revenue and net assets) are in the following terms:
"The financial statements for the year ended 30 June 2006 in the Preliminary Final Report and Annual Report included Developer Contracts fees of approximately $57.4 million as revenue. Further particulars will be provided following disclosure."
Senior counsel for the plaintiffs acknowledged that he has not seen the developer contracts (T 85) but submits that there is no requirement that a plaintiff must obtain copies of such documents by way of preliminary discovery. He says the case pleaded in regard to the developer contracts is relatively simple (T 90-91):
"Because if one looks at the essence of the allegation that we plead in relation to developer contracts we say is pretty obvious. They buy some childcare centres, there's a certain price that's paid but in effect by a side wind at the same time there are some payments that come back the other way which reduce, we say, the purchase price but were recorded as revenue. And the vice or the real problem that occurred was that they record what are called the back payments as revenue I will use the word window dressing perhaps a bit pejoratively but they window dressed the accounts by recording the revenue whereas we say the appropriate accounting treatment, and it's pretty obvious, was not to record it as revenue but rather to record it as being a reduction in the purchase price that is paid. They were underdeveloped centres that were purchased. They pay a high figure but then say if it doesn't achieve a certain occupancy rate we'll give you some money back. And we would say that the only correct accounting treatment is not to regard it as revenue and record it to, as it were, increase the bottom line but to rather regard it in actuality for what it was, namely a reduction in the purchase price
Senior counsel acknowledged that he could not, as he stood making submission, explain how the figures of $57.4 million (in the particulars to [38] FASOC) or $43 million (in the particulars to [39]) were calculated. However, he said such particulars could be supplied if required or requested (T 90).
I do not accept that the plaintiffs are required to undertake preliminary discovery in order to provide these kinds of particulars. However, given the specificity of the pleading in relation to those figures and the significance of those figures to the defendants, it will be a condition of the filing of the FASOC that those figures be explained in the pleading.
Failure to plead the relevant accounting standard
Another complaint of the 5th to 8th defendants is the failure of the plaintiffs to plead specifically the accounting standard that is said was not complied with in relation to the treatment of both the 123 Careers agreement and the developer contracts.
Senior counsel for the plaintiffs again indicated that particulars of the relevant accounting standards could be provided if directed to do so.
As Mr Dick SC acknowledged in the course of his oral submissions, it seems that the relevant standards are referred to in the particulars to paragraph 85 and 86 which form part of the pleading that asserts that the FY06 announcements were misleading and deceptive. The particulars refer specifically to the 123 Careers agreement and developer contracts and to Accounting Standards (AASB 118).
Mr Dick then argued that the FASOC does not make clear the part of the standard that applied, the reason it applied and the way in which the standard was breached. There were a number of other complaints (T 69-70). While that is not a basis upon which to strike out the pleading altogether, I agree that the plaintiffs should further particularise the parts of the accounting standard upon which they rely, the basis upon which it is asserted to be applicable and the manner in which it was breached. Any grant of leave to file the FASOC will be conditional upon them doing so.
Conclusion as to the 5th to 8th defendants
For the foregoing reasons, I have concluded that the application by the 5th to 8th defendants for summary dismissal and striking out of the ASOC (or the FASOC) must fail. The question of whether the remaining "opinion representations" were made or implied and whether they are false are matters properly to be decided by a trial judge. The question of whether the non-executive directors were entitled to rely on the advice they received from the CFO, accountants and auditors will turn on the evidence in the case. The significance of subsequent auditors' reports is also, properly, a matter for consideration at the final hearing. While there is considerable force in the submissions advanced on behalf of the 5th to 8th defendants, and while the case will proceed on the basis that any representation made by them was a representation of opinion (not fact), the case pleaded by the plaintiffs is not so untenable that it is destined to fail.
I propose that leave be granted to the plaintiffs to file the FASOC on the condition that further amendments are made in accordance with these reasons.
WICKSTEAD V BROWNE
A matter which is not determinative in my decision-making, but which fortifies me in my conclusion that the cases against the 3rd and 5th to 8th defendants ought not to be subject to summary dismissal is the fact that this is a case involving multiple defendants. In Wickstead v Browne (1992) 30 NSWLR 1, Handley JA and Cripps JA made the following observations at 11-12:
"The principles upon which a court should act in determining anapplication under Supreme Court Rules Pt 13, r 5 are well-established. A convenient summary is to be found in the well-known decision in GeneralSteel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. Barwick CJ said (at 128-129):
'The plaintiff rightly points out that the jurisdiction summarily to terminate an action is to be sparingly employed and it is not to be used except in a clear case where the court is satisfied that it has the requisite material and the necessary assistance from the parties to reach a definite and certain conclusion ... the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of a cause of action - if that be the ground on which the court is invited, ... to exercise its powers of summary dismissal- is clearly demonstrated.'
The respondent submitted that the appellants had failed to adduce any evidence or any admissible evidence on a number of issues and that the appeals should therefore be dismissed. Again it seems to us that those submissions misconceived the nature of the court's jurisdiction to dismiss summarily a plaintiff's action. By launching such an application a defendant undertakes the burden of establishing that there is no triable issue. On such an application the defendant bears the onus of proof and where the facts are peculiarly within the defendant's knowledge the plaintiff's action should not be dismissed because of gaps in the case if the necessary evidence might be obtained as a result of discovery or interrogatories.
However for another reason, which was first raised by the Court, the respondent as one of a number of defendants cannot be entitled to summary dismissal before trial because of evidentiary deficiencies in the plaintiff's case. If at the close of the plaintiff's case at the trial there was no evidence against this respondent he would not be entitled at that stage to judgment if any of the other defendants intended to go into evidence: see Menzies vAustralian Iron & Steel Ltd (1952) 52 SR (NSW) 62; 69 WN (NSW) 68. The effect of this rule is now embodied in Supreme Court Rules Pt 34, r 7(6) and r 8(5). The reason for the rules is clear and was explained in the decision referred to. At the close of the plaintiff's case there may be evidence against some defendants but not against others. The court will not entertain a motion for judgment by only some of the defendants because any gaps in the plaintiff's case against those defendants may be filled when the other defendants go into evidence. In particular one or more of the defendants going into evidence may seek to exculpate themselves by inculpating defendants against whom the plaintiff had no admissible evidence at the close of his case. If the respondent would not be entitled to succeed on a no evidence point at the trial until all the evidence has been called, including that from other defendants, it is clear that there can be no such entitlement on an application by one of several defendants for summary dismissal."
In Ford v Nagle and Ors [2004] NSWCA 33 the Court of Appeal confirmed the applicability Wickstead v Browne and upheld a trial Judge's reliance on that authority.
The Supreme Court Rules to which their Honour's referred in Wickstead v Brown have been repealed. However there are similar rules in the UCPR:
"29.9 Dismissal of proceedings on defendant's application (cf SCR Part 34, rule 7; DCR Part 26, rule 7; LCR Part 21, rule 5(2)-(7))
29.9 (1) A defendant in proceedings in which the plaintiff is the
beginning party may apply to the court for an order:
(a) for the dismissal of the proceedings, or
(b) for the dismissal of the proceedings to the extent to which they concern any cause of action relevant to the plaintiff's claim for relief against that defendant, on the ground that, on the evidence given, a judgment for the plaintiff could not be supported.
(2) Such an application may be made at any time after the conclusion of the evidence for the plaintiff in his or her case in chief.
(3) The plaintiff may argue, or decline to argue, the question raised by the application.
(4) The court may not make an order under this rule unless the
plaintiff argues the question raised by the application and the
defendant satisfies the court that, on the evidence given, a judgment for the plaintiff could not be supported.
(5) If the plaintiff declines to argue the question raised by the
application, or if the defendant fails to satisfy the court that, on
the evidence given, a judgment for the plaintiff could not be
supported, the defendant:
(a) may adduce evidence or further evidence, or
(b) may make an application under rule 29.10.
(6) If fewer than all defendants apply to the court under subrule
(1), the court must not deal with any such application before the
conclusion of the evidence given for all parties.
29.10 Judgment for want of evidence (cf SCR Part 34, rule 8; DCR Part 26, rule 8; LCR Part 21, rule 6)29.10
(1) An opposite party may apply to the court to give judgment for the opposite party, either generally or on any claim for relief in the proceedings, on the ground that, on the evidence given, a judgment for the beginning party could not be supported.
(2) Such an application may be made at any time after the conclusion of the evidence for the beginning party in his or her case in chief.
(3) The court may not give judgment under this rule unless the opposite party satisfies the court that, on the evidence given, a judgment for the beginning party could not be supported.
(4) If the opposite party fails to satisfy the court that, on the evidence given, a judgment for the beginning party could not be
supported, the opposite party may not adduce evidence or further
evidence in the proceedings generally or on the claim for relief
concerned, as the case may be, except by leave of the court.
(5) If not all opposite parties apply to the court under subrule
(1), the court must not deal with any such application before the conclusion of the evidence given for all parties."
Because of the nature of the claim and the multiplicity of the defendants, it may be that the plaintiffs' understanding of the precise roles, knowledge and responsibility for the various representations will gain clarity in the course of the defendants filing their pleadings, cross claims and serving their evidence (if any). There may also be some enlightenment in regard to those matters at the final hearing, particularly if the kind of circumstances envisaged by the joint judgment in Wickstead v Browne arise.
I accept, as the 3rd defendant submitted, that Wickstead v Browne does not stand for the proposition that summary judgment can never be granted in the case of multiple defendants. The 3rd defendant relies on the terms of rule 13.4 allowing for summary dismissal of "the proceedings generally or in relation to any claim for relief in the proceedings and rule 14.28 UCPR providing a power to "order that the whole or any part of a pleading be struck out". I need not determine whether that is purpose of those parts of the rules but I accept that there will be cases where it is appropriate to exercise the power of summary dismissal where there are multiple defendants.
However, this is a case where the principles discussed in Wickstead v Browne have particular application. This is because of the number of defendants, the relationships between those defendants, the fact that a particular defendant's role in the affairs of the company are likely to be better known by the other defendants than they are by the plaintiffs and the possibility that some defendants will call evidence that is relevant to the plaintiffs case against other defendants.
THE LIMITATION ISSUE
The 3rd and 5th to 8th defendants submit that the ASOC and the FASOC are brought outside of the 6 year limitation period: see ss 1041(I)(2) and 1325(4) Corporations Act, ss 12GF(2) and 12GM (5) ASIC Act, s 87 (1A) TPA and s 68 FTA. The defendants assert that the plaintiffs' case is a "no transaction case" - which is to say, as I understand it, that the plaintiffs assert that had they known of the true position of ABC, they would not have entered into the underwriting agreements. Accordingly, the defendants assert that the cause of action accrued on the date of acquisition, i.e. 13 June 2007 (see [25] of FASOC). The defendants go on to assert that, even if the damages are calculated as on the basis of their inability to recoup monies, that loss accrued on 25 August 2008 when trading in ABC securities was suspended.
On the defendants' argument this means that the limitation period expired on 13 June 2013 or, at the latest, 25 August 2014. The original statement of claim was commenced on 28 May 2013. Accordingly, on any view, the original statement of claim was brought within the limitation period. However, the defendants point to ss 64 and 65 of the Civil Procedure Act. These, according to the defendants, deny the court discretion to grant leave to amend to introduce a new cause of action after the expiration of the limitation period. The discretion under this 65(2)(c) is enlivened only if the new cause of action "in the courts opinion, arises from the same (or substantially the same) facts as those giving rise to an existing cause of action and claim for relief set out in the originating process". It is the defendants' submission that the ASOC and the FASOC, each of which was brought after the expiration of the limitation period, attempt to bring an entirely different action against the defendants. Thus, the power to amend in s 65(2)(c) is not engaged.
It is accepted, at least by the 5th to 8th defendants, that it is generally considered undesirable for limitation issues to be resolved in the course of interlocutory proceedings. They should generally be left for determination by the trial judge "except in the clearest of cases": Wardley Australia Ltd V Western Australia [1992] HCA 55; 175 CLR 514 at 533. However, the defendants submit that this is a clear case where the relevant limitation periods have expired. It is also a case where the cause of action now pleaded does not arise from the same or substantially the same facts as those giving rise to the existing cause of action and claim for relief.
The plaintiffs contend that there is no limitation problem at all because they say that the loss and damage was suffered in 2010 when liquidators were appointed to ABC. The plaintiffs rely on the judgment of Gaudron J in Hawkins v Clayton (1988) 164 CLR 539 at 601. In terms of the operation of Wardley v Western Australia, the plaintiffs took me to the decision of Clasul Pty Ltd v Commonwealth of Australia [2014] FCA 1133 at [21]-[27] (Gleeson J).
In submissions dated 25 September 2014, the 5th to 8th defendants submitted that a solution to the question of the limitation period "may be to order that any amendments take effect from the date of the Court's order rather than relating back to the commencement of the proceedings." That way, issues about limitation periods and when cause of action accrued can be resolved at trial.
The plaintiffs say that to approach the matter in that way is essentially to decide the issue against them. They contend that I should not resolve the limitation period issue (unless I have come to the view that the plaintiffs' submission as to when the cause of action accrued is clearly correct). The plaintiffs submit that the "orthodox" approach is to make any grant of leave to amend conditional upon the question of the date of amendment being reserved to the trial challenge. Reliance is placed on a trilogy of decisions in the litigation of Ingot Capital v Macquarie Equity (see [2003] NSWSC 1012; [2004] NSWSC 1219 at [71]; (No 3) [2005] NSWSC 255 at [33].
I should say that I have glossed over a controversy surrounding the interaction of the provisions of the Judiciary Act 1903 (Cth), the relevant Commonwealth statutes and the UCPR (NSW) which was subject to debate in the course of the written submissions. In that regard I was taken by the 5th to 8th defendants to cases such as University of Wollongong v Metwally [1984] HCA 74; 158 CLR 447 at 463, Northern Territory v GPAO [1999] HCA 8; 196 CLR 553 at [81], Austral Pacific Group Limited (in liquidation) vAirservices Australia [2000] HCA 39; 203 CLR 136 at [17]. The contentions of the plaintiffs are, as they acknowledge, contrary to the decision of Beech-Jones J in Karl SulemanEnterprizes Pty Ltd (in liq) v Pham [2013] NSWSC 110 at [37] - [40].
The plaintiff said that I ought not adopt a different approach to Beech-Jones J unless I concluded that his Honour's decision was clearly wrong.
It is not necessary to come to any conclusion as to these matters other than to say that I am of the view that this is not a clear case where the limitation period had expired. There are arguments going both ways. Accordingly I propose to adopt the same approach as McDougall J in Ingot Capital and this will be reflected in the orders that I make.
ORDERS AND COSTS
While the plaintiffs have largely been successful in these interlocutory applications, the fact is that by the time it files a FASOC in conformity with this judgment, it will have made no less than five attempts at producing its initiating process. It has made substantial and repeated amendments to the proposed FASOC in response to submissions made by the defendants. In the absence of some of those amendments (for example, the re-casting of the allegations against the 5th to 8th defendants as opinions) the pleading may well have been struck out. Further, the limitation question remains to be determined.
In those circumstances, it is not just to order that the defendants pay the costs of the proceedings. I propose to make no orders as to the costs of the interlocutory proceedings. The question of costs of these motions will be reserved to the trial judge.
I make the following orders:
(1) The application of the 3rd defendant for summary dismissal of the proceedings is refused.
(2) The application of the 3rd defendant for the amended statement of claim to be struck out is refused.
(3) The application of the 5th, 6th, 7th and 8th defendants for summary dismissal of the proceedings is refused.
(4) The application of the 5th, 6th, 7th and 8th defendants for the amended statement of claim to be struck out is refused.
(5) The plaintiffs have leave to file a further amended statement of claim in the form provided on 16 October 2014 conditional upon it being amended in accordance with the terms of this judgment.
(6) The further amended statement of claim shall be filed on or before 12 December 2014.
(7) The date that the amendments are to take effect and the question of whether they are brought outside the relevant limitation periods are matters reserved for the decision of the trial Judge.
(8) The matter will be listed before the Registrar on 18 December 2014 for directions.
(9) Costs of all motions are reserved to the trial judge.
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- AGLC
- Commonwealth Bank of Australia v ZYX Learning Centres Limited [2014] NSWSC 1676
- Case
- [2014] NSWSC 1676
- Decision Date
CaseChat Overview and Summary
The central legal issues before the court were whether the claims against the defendants were properly pleaded, specifically concerning the nature of the representations made—whether they were of fact or opinion—and whether there were any implied representations arising from statements of opinion. The court also needed to determine if the conduct in question occurred "in trade or commerce" and "in relation to a financial product or service". Additionally, the court had to consider whether the conduct was adequately pleaded either disjunctively or through reliance, and if the amendments to the statement of claim were made within the limitation period.
In assessing these issues, the court found that the claims against the defendants were not properly pleaded as they did not adequately distinguish between representations of fact and opinion. The court concluded that the representations made by the defendants were not sufficiently clear to establish liability under the law. Furthermore, the court determined that the representations were not made "in trade or commerce" or "in relation to a financial product or service" as required by the relevant statutory provisions. The amendments to the statement of claim were also deemed to be beyond the limitation period, rendering them ineffective.
The Federal Court granted the application for summary dismissal, finding that the claims against the five defendants were not properly pleaded and were statute-barred. Consequently, the defendants were dismissed from the proceedings without the need for a full hearing.
Orders
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Background
Background to the litigation
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Evidence
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Decision
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