Daya v Ingot Capital Investments Pty Limited

[2009] HCATrans 208

[2009] HCATrans 208

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S2 of 2009

B e t w e e n -

AZMIN FIROZ DAYA

Applicant

and

INGOT CAPITAL INVESTMENTS PTY LIMITED

First Respondent

ECLECTIC STOCKS LIMITED

Second Respondent

UTILICO PTY LIMITED

Third Respondent

ECLECTIC INVESTMENT TRUST PLC

Fourth Respondent

EASTERN STATES SECURITIES LIMITED

Fifth Respondent

INGOT CAPITAL MANAGEMENT PTY LIMITED

Sixth Respondent

MACQUARIE EQUITY CAPITAL MARKETS LIMITED

Seventh Respondent

MACQUARIE EQUITIES LIMITED

Eighth Respondent

MACQUARIE BANK LIMITED

Ninth Respondent

UDAYAN DANIEL GHOSE

Tenth Respondent

JONATHAN PAUL BEACH

Eleventh Respondent

CRAIG DEERY

Twelfth Respondent

MICHAEL J MORRISSEY

Thirteenth Respondent

WILLIAM PECK

Fourteenth Respondent

PAUL LAURENCE WILLIAMS

Fifteenth Respondent

PETER ARONEY

Sixteenth Respondent

PATRICK MURRAY AND THE PERSONS LISTED IN SCHEDULE “B” TO THE NOTICE OF APPEAL

Seventeenth Respondents

ANDREW MUTTON AND THE PERSONS IN NSW LISTED IN SCHEDULE “A” TO THE NOTICE OF APPEAL

Eighteenth Respondents

Office of the Registry
  Sydney  No S4 of 2009

B e t w e e n -

INGOT CAPITAL INVESTMENTS PTY LIMITED

First Applicant

ECLECTIC STOCKS LIMITED

Second Applicant

UTILICO PTY LIMITED

Third Applicant

ECLECTIC INVESTMENT TRUST PLC

Fourth Applicant

EASTERN STATES SECURITIES LIMITED

Fifth Applicant

INGOT CAPITAL MANAGEMENT PTY LIMITED

Sixth Applicant

and

JONATHAN PAUL BEACH

First Respondent

CRAIG DEERY

Second Respondent

MICHAEL J MORRISSEY

Third Respondent

UDAYAN DANIEL GHOSE

Fourth Respondent

WILLIAM PECK

Fifth Respondent

ANDREW MUTTON AND THE PERSONS IN NSW LISTED IN SCHEDULE “A” TO THE NOTICE OF APPEAL

Sixth Respondents

MACQUARIE EQUITY CAPITAL MARKETS LIMITED

Seventh Respondent

MACQUARIE EQUITIES LIMITED

Eighth Respondent

MACQUARIE BANK LIMITED

Ninth Respondent

AZMIN FIROZ DAYA

Tenth Respondent

PAUL LAURENCE WILLIAMS

Eleventh Respondent

PETER ARONEY

Twelfth Respondent

PATRICK MURRAY AND THE PERSONS LISTED IN SCHEDULE “B” TO THE NOTICE OF APPEAL

Thirteenth Respondents

Applications for special leave to appeal

FRENCH CJ
GUMMOW J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 4 SEPTEMBER 2009, AT 9.39 AM

Copyright in the High Court of Australia

__________________

MR G.O’L. REYNOLDS, SC:   May it please the Court, I appear for the applicant in matter No S2 of 2009 with my learned friend, MR P.S. BRAHAM.  (instructed by Sparke Helmore)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR T.G.R. PARKER, SC, MR W.G. MUDDLE, SC and MR J.A. ARNOTT, for the first to sixth respondents.  (instructed by Deacons Lawyers)

FRENCH CJ:   I understand we have a submitting appearance for the seventh to eighteenth respondents.  Yes, Mr Reynolds.

MR REYNOLDS:   If the Court pleases, the principal special leave point, in our submission, relates to the principles which govern liability for misleading conduct by non‑disclosure and, in particular, the relevance to those principles of notions of commercial morality. 

FRENCH CJ:   I suppose the question is whether Justice Ipp, in referring to commercial morality, was characterising the pleadings or doing something more.  That is the main point against you on this, is it not?

MR REYNOLDS:   As I understand it, but it seems to be conceded that although the first mention of this notion at paragraph 736 is related to the pleading.  This is at page 860 at about line 40.

FRENCH CJ:   The other one comes in at 766, I think, is it not?

MR REYNOLDS:   That is paragraph 766.  However, it is made abundantly clear that the basis for the liability is the expectation of investors based on commercial morality and, in particular, if one goes back to paragraph 736, this is on an inference not an actual expectation proved, but an inference that the “investors would expect” disclosure.  Why?  Because of “commonplace notions of commercial morality”.

GUMMOW J:   You have got to read the next sentence though, “It is also based”.

MR REYNOLDS:   Quite, and I am not denying, your Honour, that the reasoning is to some extent predicated on notions of practical expediency, whatever that means, but it is clear that the central integer, if I can put it that way, of the liability for non‑disclosure is based upon these notions of commercial morality.  The way this seems to work, this notion of commercial morality, that is, the reason underlying that basis, is, we submit, made clear at page 861 of the judgment, paragraph 736, where it said that because “subsequent events falsified the Prospectus NTA Representations” – and I will come back to that – the “NCRH should have disclosed the truth”.

So the idea here seems to be that although the statement in the contract, which is at page 868 at about line 10, the company is not aware – that is at the date of the prospectus – of any other event which will have a material impact.  The idea seems to be that after the investor accepts the offer and creates a binding contract, the company then becomes aware of new information after the date of contract and apparently the idea is that NCRH then, after the contract, need to disclose that new information.  Why?  Because of notions of commercial morality.  In other words, if that was the statement made in the contract at the top of page 868, then as to the state of awareness at the date of the offer, then if the offer is accepted by the investor and the company’s knowledge changes, then there is somehow a duty as a matter of commercial morality to disclose that.  Your Honour Justice French has, as we have noted in our submissions – this is in the same book at page 929 ‑ ‑ ‑

FRENCH CJ:   I wondered why you wanted to conjure the old ghost of what I think I called then good faith as rising damp.  Ghosts are better left.

MR REYNOLDS:   The reasons is this, because your Honour was there, if I may respectfully say so, flirting with a concept and about the future development of the law along notions of good faith and community standards and that that might be a possible development in the law.  We submit, without going into the difficulties attached, which your Honour obviously foresaw, with the development of such a principle, the Court of Appeal has, in effect, driven straight to an embracing of what we submit is a very slippery criterion, any ‑ ‑ ‑

GUMMOW J:   Your point is they are departed from the terms of the statute.

MR REYNOLDS:   Quite.  This has got nothing to do with the statue.  It introduces what Professor Stone would have called a category or formula of indeterminate reference.  Not only that, as I will come to in a moment, we submit that there is not basis in notions of commercial morality for disclosure in any event.  Can I just go back to the quotation on that page 929.  Justice Heydon, speaking extra curially, talked about expectations, this is at the top of the page, being “a necessary but not a sufficient condition for liability”.  His Honour was there talking about actual expectations, not ones that are inferred.  Where there is an actual expectation, of course, that means that the investor may be misled.  Here there is an inference and we submit that that has been treated as, to use his Honour’s words, a sufficient condition for liability. 

Can I address also this notion of whether or not the failure to disclose here could in any way be regarded as contrary to commercial morality.  We take issue strongly with that proposition.  Your Honours will perhaps have seen the prospectus which is found in volume 3 of the joint application book.  If I can take your Honours just briefly to one passage in that prospectus.  This is at page 1129 in the second column and about two‑thirds of the way down that second column it is mentioned of underwriting risk.  This is a reinsurance company.  It noted that:

the Company’s operating results and financial condition could be adversely affected by volatile and unpredictable natural and other disasters.  A single catastrophic event could affect multiple geographic zones and multiple classes of business –

et cetera.  They talk about catastrophic events resulting “in volatility in the Company’s results”.  This is, after all, a reinsurance company and even without that disclosure, the investors would know that there is a real risk of volatility in the company’s position.  As it happened, that risk materialised, according to information received by my client, soon after the contract was entered into, that is, after 31 December 1998.  We submit that there is absolutely no reason why this reinsurance company was obliged morally to disclose that information, that is, what amounts to a change in its knowledge, and that is particularly given that disclosure there in the prospectus and particularly because the investors had no right having entered into their contracts to be let out of them.  Your Honours, that is the first and principle point which we say ‑ ‑ ‑

GUMMOW J:   Can you just go back to paragraph 736, Mr Reynolds.  It is said against you by your opponents that what his Honour was doing there, if one looks at 736, is construing the pleadings and the inference is one as to what was said to be obvious from the allegations.

MR REYNOLDS:   Your Honour, there is no doubt that my friend has put that submission in relation to paragraph 736, but, as I understand the submission, they can see that in relation to paragraph 766 that that is part of the substantive reasoning with a reference, as your Honours will see, back to paragraph 736 and I do not understand there to be any issue about that and that that is a key integer in this reasoning.  It must be.  Your Honours, there are a few remaining points.

FRENCH CJ:   I suppose the question might be whether the use of the words “commercial morality” in this context means anything more than to characterise as reasonable the expectation attributed to the investors in accordance with established jurisprudence.

MR REYNOLDS:   I submit that is not how it is structured and there is no talk of reasonable expectation and, importantly, as I said before, there is no finding that there was an expectation.  If there was an expectation and that is then held to be reasonable, then one can understand why the failure to disclose would mean the investors are misled, but that is not how this judgment works.  This is based, as I said, before upon notions of commercial morality and inferences being drawn.  That is the difficulty, I submit, with it. 

It is also an issue which, in one sense, undercuts the usual position that obtains in the law of contract.  If there is a term in a contract saying the offeror’s knowledge about a particular matter is X, that offer is accepted by the offeree, the offeror’s knowledge then changes after acceptance, then traditionally the offeror is under no obligation of disclosure unless there is a specific provision in the contract to that effect.

GUMMOW J:   Your client did not give evidence, that is right, is it not?

MR REYNOLDS:   No.  There was an explanation for that.  It is dealt with by Justice McDougall in the judgment about how he had no money and an explanation was given.  I do not think even any inferences were drawn against him in that regard because of the explanation provided.

GUMMOW J:   If you look at page 942, it is then said in the submissions by Mr Jackson that at the end of the day there was plenty of material there to support a finding that there was a dishonest maintenance of silence.  Why should we get involved?

MR REYNOLDS:   Well, your Honour, because we are talking first of all about silence and non‑disclosure and I have taken your Honours to the basis for the finding against my client, and I have said that raises an important question of law and that even if the test of law is correct, that it cannot possibly be said that it was contrary to commercial morality for NCRH to have failed to disclose.  So far as dishonesty is concerned, we have dealt with that in our reply and that is at page 988 at paragraphs 22 and 23 where it is noted that because that was not pleaded, that finding was not available against my client.  We do not have to get into issues about that. 

Your Honours will know, if I can move to this issue of pleading, that this case was, if I might put it euphemistically, bedevilled by problems with pleadings.  There were any number of cases that were rejected because they were not within the pleading, including against my client.  Can I take your Honours just very briefly to the rejection.  This is at paragraph 690 of the judgment at page 847.  It is a rejection of a case against my client where my learned junior’s submissions are noted that the ninth pleading:

did not plead that Mr Daya failed to disclose the January information . . . thereby engaged in misleading conduct.

In other words, you have got to say it is a non‑disclosure of the January information and that was misleading.  If your Honours go to the elements which the Court of Appeal says are to be extracted from the pleading.  These are at pages 859 to 860, paragraphs (a) to (g).  As we have just been discussing, this was a non‑disclosure case against NCRH and my client.  There is no mention there of non‑disclosure, none, and, in particular, no mention of non‑disclosure by NCRH of the January information or that this was misleading conduct. 

So if your Honours compare paragraph 690, there is not a pleading of failure to disclose the January information and that NCRH, not Mr Daya because it is a different case, thereby engaged in misleading conduct.  I might add, there are a whole lot of other elements that do not appear there in this case, that the investors were misled, that there was an expectation of disclosure, that the non‑disclosure was contrary to commercial morality, the investors would have asked to be let out of their contracts and that NCRH would have let them out of their contracts.  All of these things are not there. 

Finally, can I deal with the issue of causation which we have raised in our submissions.  At page 874 at about line 6, paragraph 783 there is a holding by the Court of Appeal that “NCRH would have offered to cancel the note issue”.  The idea here is if they had – higher up the page there – informed the investors of the true position, the investors then ask to be let out and then NCRH would have offered to let them out.  We submit that there is absolutely no basis at all for that inference and we ask rhetorically, why would this company offer to let these investors out? 

It is contrary to their interests.  They are under no legal obligation to do so.  As we have said before, they are under no moral obligation to do so.  Moreover, the investors did not put – although some of the directors gave evidence – to a single director or officer of NCRH that he would have let them out of the contract, nor is there any other evidence, as we have set out in our reply at pages 986 to 987, which would support that inference. 

In particular – and I will finish on this note – my learned friends talk in their submissions about the DDC memorandum.  They are going to raise that.  Can I ask your Honours to bear in mind the provisions of section 1024, which are in volume 1 of the joint supplementary application book at page 13 – I will not take your Honours through that provision – that the relevant portions of that DDC memorandum are all talking about supplementary prospectuses and the obligation to issue one and that obligation, as the Court of Appeal noted at paragraphs 744 to 746, expired on 31 December.  It did not continue into January.

GUMMOW J:   It may be, Mr Reynolds, that – and this is not necessarily a bad thing for you – but it may be that a complaint you are making is that there was a miscarriage in the Court of Appeal by application of established principles as to how one formulates inferences.

MR REYNOLDS:   I do submit that and if it is not clear, I submit that there is a miscarriage in three respects, first of all because the case was not pleaded, second of all because this inference of causation that your Honour just raised with me was not established on the evidence, and thirdly that even on the test applied by the Court of Appeal we have submitted that it cannot be contrary to commercial morality for NCRH not to have disclosed the information.  We do put it as a miscarriage in those three respects but also submit that there is an important question of law relating to liability for non‑disclosure.  As your Honours appreciate, this Court has not looked at that.

GUMMOW J:   Where is your draft notice of appeal?  Is it 917?

MR REYNOLDS:   I think that is right, your Honour.  Can I finish on this note, that your Honours have another application in this same case, No 2 in

this list.  My client’s case is a very different one.  It is quite discrete and depends on a short factual compass and, as we have submitted, raises important issues but within that fairly narrow factual compass.  If your Honours please, those are my submissions.

FRENCH CJ:   Thank you, Mr Reynolds.  Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I deal first with the question of commercial morality.  Commercial morality, of course, is being spoken of in the context of the case and the context of the case was one where, ultimately, there were findings both at first instance and in the Court of Appeal that the systems that had been adopted and might be expected to be adopted in dealing with matters of this kind were ones where, although there was a contractual obligation in relation to the issue of the notes, the practicality of the matter was that there was a committee established and the committee at the time when the notes were to be issued was to determine whether there had been any conduct or any matter referred to in the prospectus in relation to which something had become misleading.

The finding was in both courts that there had been a significant adverse change in the condition of the company and that that was something which should have been brought to the attention of the board and if it had been, then it was unlikely that the issue would have proceeded whether or not there was a legal requirement in it.  Your Honours, that involves a couple of things.  One is the finding at first instance.  Your Honours will see that in volume 1 at page 396.  Your Honours will see paragraph 931, in particular – this is after the judge had heard the evidence, and seen what was to be done by the Due Diligence Committee – he said at about the fourth line:

It is quite clear in my mind that if Mr Daya had communicated to the DDC on 12 January 1999 the substance of the information . . . the DDC would not have recommended to the Board (or its delegates) to issue the converting notes but would have recommended, instead, that the capital raising be terminated (or “pulled” –

Now, to the same effect is the finding one sees in the Court of Appeal and that, your Honours, is at volume 3, page 939.  I think actually my learned friend referred to it this morning, but I think it is page ‑ ‑ ‑

BELL J:   Is it at 874?

MR JACKSON:   Thank you, your Honour, yes.

BELL J:   There were two aspects to that finding.  Are you going to take us to the other aspect of it which was what the appellants would have done?

MR JACKSON:   Yes, your Honour, and that is the part that is referred to in here, where his Honour said:

it is to be inferred that, had the board (after postponing the issue date) informed the appellants of the true financial position –

because the position had become very bad –

the appellants would have objected to the note issue proceeding –

and then the probability was that there would have been a cancellation of the note issue.  Now, of course, your Honours, there are inferences involved in that, but if one looks at the circumstances in which they occur, they are circumstances in which a body was set up with a view to advising whether the issue should proceed.  In doing that, if it recommended that it did not proceed, you would expect, in the ordinary way, that the people who were involved would want to obtain their money back and the likelihood is that they would have got it because the money was being held in trust, your Honours.  We are not talking about money that was just an asset.  It was money being held in trust until the issue of the securities.

One must bear in mind, of course, that what was being spoken of when Justice Ipp in the Court of Appeal said “commercial morality”, he was saying that if you had an offer that was made to the public, the offer being taken up, the time for issue of the securities not having yet arrived, the evidence was it was a common place thing for there to be these committees, the committee being established to recommend whether it should go ahead and the course of events being one where it would not have gone ahead, then it was a pure matter of the ordinary commercial morality in the circumstances to tell people that there had been a change.  To use the words of section 995, it would be misleading not to do so. 

Your Honours, if I could just go to section 995 at page 7 of the first supplementary appeal book, what your Honours will see is that section 995(2) provides that:

A person shall not, in or in connection with –

And then if I could just taken one of the provisions, (b):

(i)the allotment or issue of securities . . . 

engage in conduct that is misleading or deceptive or is likely to mislead or deceive. 

In our submission, the court was perfectly entitled to say that is a provision – and, your Honours, if I may say, that is a provision which establishes a value of commercial morality.  It is saying you shall not engage in conduct which is misleading or deceptive.

FRENCH CJ:   But the norm is expressed in terms of the section.  It is a little bit circular then to extract an inference based on commercial morality as a kind of external factor.

MR JACKSON:   Your Honour, could we just say, I think I have said it once or twice already, that it is plain that the judge was speaking in terms of commercial morality in the context in which it was appearing.

FRENCH CJ:   Do you say it feeds into existing jurisprudence?

MR JACKSON:   Yes, indeed, your Honour.  Could I come then to a second point of our learned friend’s submissions and that is a point which concerns the relationship between section 1024 on the one hand, the fact that there were contracts to take and issue the notes on the other and the provisions of the section.  It is, of course, the fact that there were contracts to take and issue the notes.  It is also the fact that up to the end of December 2009 there was an obligation to issue or at least consider the issue of a supplementary prospectus if something had significantly changed, but the fact that there is on the one hand a particular statutory obligation and the fact on the other that there was a contract in relation to the notes does not prevent the operation of the statutory provision and, one might say, looking at the statutory provisions, they are provisions which inherently are likely to operate very frequently in circumstances where there are contractual obligations.

One of the contexts, your Honours, in which you find provisions like this is because there has been a leading of people into contracts or an insistence on the performance of contracts and matters of that kind.  It just is not right, in our submission, to treat the provisions of, say, section 995 as provisions which effectively are excluded because there is a contract of a particular kind. 

Your Honours, could I come then to the question of pleading and, your Honours, I do not wish to suggest that the pleading is perhaps the easiest to read in all respects, but on this particular question, your Honours, our submission is that one should not in this Court go beyond, because there is no need to go beyond, what was said by the Court of Appeal in saying that all the elements necessary to plead the matter were to be found in the document.  Your Honours, the nature of the case, in our submission, was really perfectly clear and perfectly clear another case was conducted on a basis that was perfectly clear. 

Mr Daya chose not to be there, but what was done was within the pleading.  It is not a case where one can say that something was done outside it where it would be appropriate for there to be notice given and it is simply a case, in our submission, where the two courts below have found in our favour on an issue where Mr Daya’s conduct contravened the statute.  In our submission, that issue was one that was properly before the court as a matter of pleading and, your Honours, we would submit it is not a case appropriate for the grant of special leave.

FRENCH CJ:   Thank you, Mr Jackson.  Mr Reynolds.

MR REYNOLDS:   Your Honours, I have no reply to that.

FRENCH CJ:   Thank you.  We will call the next matter and then adjourn to deal with both matters.

MR D.F. JACKSON, QC:   Your Honours, may it please the Court, I appear with my learned friends, MR T.G.R. PARKER, SC, MR W.G. MUDDLE, SC and MR J.A. ARNOTT, for the applicants in matter No S4 of 2009.  (instructed by Deacons Lawyers)

MR D.J. FAGAN, SC:   May it please the Court, I appear with my learned friend, MR A.P. CHESHIRE, for the first, second and third respondents.  (instructed by Colin Biggers & Paisley Lawyers)

MR P.M. WOOD:   May it please the Court, I appear with my learned friend, MR P.C. SILVER, for the fourth respondent.  (instructed by Chang, Pistilli & Simmons)

MR L.GOR:   May it please the Court, I appear for the fifth respondent.  (instructed by the fifth respondent)

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR R.A. DICK and MR J.A. WATSON for the sixth respondent.  (instructed by Freehills)

MR A.J.L. BANNON, SC:   May it please the Court, I appear for the eleventh respondent.  (instructed by DibbsBarker Lawyers)

FRENCH CJ:   Yes.  I trust that those appearing for the respondents who have common ground will have made some arrangement not to repeat each other.  Yes, Mr Jackson.

MR JACKSON:   Thank you, your Honours.  Your Honours, as is apparent from the parties’ written submissions, this is a case which now turns on narrower issues and fewer parties than were involved at earlier points.  Your Honours, could I say immediately that we recognise that there are issues which will have to be determined in the court or perhaps courts below if we are successful in this Court in obtaining special leave, but, your Honours, that is because parts of our cases have not been determined in those courts.  Your Honours, as I apparent from our summary of argument in volume 3 at page 1072, there are fundamentally two complaints about the manner in which the Court of Appeal addressed the applicants’ case.  Your Honours, the first relates to the balance sheet ‑ ‑ ‑

FRENCH CJ:   Just before you proceed, the second question hangs off the first, does it not?  You accept that, I think, in your reply.

MR JACKSON:   Yes, your Honour, when one speaks of the second question, I am not ‑ ‑ ‑

FRENCH CJ:   Second special leave question?

MR JACKSON:   Yes, your Honour, I accept that.  To put it directly, we have to succeed on the first question before we get to the second and the second is an important question, in our submission, but I will come to that later.  Your Honours, we would submit that there are, in relation to the first question, two complaints about the manner in which the case was dealt with below.  The first relates to what I would call the balance sheet figures in the prospectus which were affected by the transaction which was called the smoothing cover.  Your Honour, the second relates to what the prospectus said about the future trading prospects of the company, NCRH. 

May I deal with them in that order.  Your Honours, as to smoothing cover, may I just say something about what it was.  The smoothing cover was a transaction with another reinsurer entered into in late August or early September 1998.  It had two legs which cancelled each other out, in effect, but only the first leg was brought to account and it was backdated in the ‑ ‑ ‑

FRENCH CJ:   They were temporarily separated.

MR JACKSON:   Temporarily separated, your Honour, but also in a sense temporarily separated.  But, your Honours, the effect of it was that NCRH’s retrocession recoveries for the year in which this transaction had in fact not taken place were overstated by US5.675 million.  Your Honours, one is not talking about, in the context, huge figures, but one is at the same time talking about a particularly big company.  The trial judge had found – and it does not seem to be now disputed – that the prospectus was false in saying that there had been retrocession recoveries in that year of 5.675 million. 

Your Honours, we seek to maintain claims arising out of that against, if I can put it this way, four groups of people.  The first consists of the first, second and third respondents, Messrs Beach, Deery and Morrissey, then Mr Ghose, then Mr Peck and then Phillips Fox.  There are some differences between them.  Could I deal first with Messrs Beach, Deery and Morrissey.  The way in which this case was dealt with, your Honours, was as follows.  The main allegation by the applicants was simply that the prospectus was misleading and deceptive because of the overstatement of the retrocession figures by that 5.675 million.  There was a response by them that if the figure was false, it was largely cancelled out by a $5 million adjustment elsewhere in the accounts which had been undertaken for that purpose so that the overall financial effect was neutral.

FRENCH CJ:   This was in the fourth further amended statement, was it?

MR JACKSON:   Sixth, I think, your Honour.

FRENCH CJ:   There was an earlier version, was there not.

MR JACKSON:   Yes, your Honour.  Your Honour, there were quite some earlier versions.  Your Honours, we contended that if that were so, then falsely bringing the money to account remained material and that showing that was needed to show compliance with the loan covenants and in consequence, that the fact that it had been covered up was highly damaging to the credibility of the company that was issuing the prospectus. 

Your Honours, there was issue joined on this, in our submission, and there was also the mounting of affirmative defences to the effect that the directors had acted reasonably and properly to ensure the accuracy of the prospectus and the trust of those defences was to assert they were unaware of the falsity of bringing leg 1 to account.  Could I take your Honours to volume 2 for just a moment.  At page 762, paragraph 403 of the Court of Appeal’s reasons your Honours will see, about line 33, it is said:

As Mr Fagan said in his submissions on appeal, “[w]e joined issue on the fact and the evidence with [the respondents] about this contention” and, “[w]e really had to because we were mounting affirmative defences”. 

Your Honours will see what he is referring to in the earlier words in that paragraph.  Your Honours, could we just say this.  Much has been made by our opponents in the Court of Appeal to the effect that the case was to be conducted in accordance with what was described as the pleading, but it appears apparent, if one looks at just that, for example, the position was that this was a matter that was in issue between these parties at the time.  There were some parties that pleaded pleading points in the statement of issues, that that was not done by the three directors in question and the relevant parts of the statement of issues were cast in broad terms and, your Honours, they did not in particular mention materiality as a separate issue at all.  Your Honours will see that in issue 60 at volume 1 of the appeal books at page 62.  They are expressed in general terms.

FRENCH CJ:   It goes back to the pleading.

MR JACKSON:   Yes, your Honour.  Your Honours, what we would say about is this, that irrespective of what the pleadings on the true construction might have said about materiality, the applicants and those three respondents, the directors, in fact joined issue on the allegation that the falsity of leg 1 was material for non‑financial reasons.  Your Honours, it was an error, in our submission, for the trial judge not to have dealt with the issue and the Court of Appeal, we would submit, was in error in allowing itself to be, as it were, distracted by an argument that non‑financial materiality was outside the pleadings and that led to a further, if I could use the word again, distraction, as it were, of trying to determine whether the trial judge had, in fact, although he had not expressed it in his judgment, considered such a pleading point and what his reaction might have been if he had done so.  We refer to that, your Honours, in our written submissions page 1076 in volume 3 in paragraphs 30 to 35.

BELL J:   Can I just take up this with you, Mr Jackson.  At paragraph 403 on appeal book 762 you took us to Mr Fagan’s submission that issue had been joined because those for whom he was acting were mounting affirmative defences, but then the Court goes on to refer to the content of the written submissions in closing.

MR JACKSON:   That is Mr Williams.  That is not one ‑ ‑ ‑

BELL J:   I understand.  Your point is, in relation to the three directors, there was issue joined and there is no departure from that?

MR JACKSON:   Yes, that is what I am saying.

BELL J:   I understand.

MR JACKSON:   Your Honour, the paragraph is a little confusing because one realises a lot of defendants, a lot of counsel to ‑ ‑ ‑

BELL J:   Yes, I understand.

MR JACKSON:   Your Honours, could we just say this, that, in our submission, the Court of Appeal on this aspect was in error for two basic reasons.  It should not have upheld a pleading point taken, in a sense, as this one was for the first time on appeal and, secondly, your Honours, it was rather too narrow to look only at the pleadings and this was an issue on which the parties had in fact joined issue at trial. 

There is a reference to a matter like that in one of the paragraphs in the reasons for judgment of five Justices of the Court in the recent decision in Aon Risk Services [2009] HCA 27. Your Honours, the paragraph is very short, may I perhaps read it out rather than give it to your Honours. The particular paragraph is paragraph 83 where it said:

The existence of a controversy may be seen in the way in which the matter had already been pleaded, albeit inferentially . . . or where the issue is raised by another party in the same proceedings but in respect of which the party applying –

he is talking about amendment –

was inextricably involved, as in Cropper v Smith. 

That reflects, your Honours, what had earlier been said in Mummery v Irvings 96 CLR 99 at 112 that a matter may become an issue on a plaintiff’s case because of something raised by a defendant. Your Honours, so far as Mr Ghose is concerned, we accept that he did take a materiality pleading point in his final submissions at trial, although that did not prevent him from debating the merits of the issue as well at the trial and, we would submit, that in all other respects he is in the same position as Beach, Deery and Morrissey. He mounted affirmative defences along the same lines and, in fact, joined issue on non‑financial materiality. We would submit that his then saying, “We reserve the pleading point” in final submissions was of no weight.

Mr Peck’s position is the same as that of the three directors and so far as Phillips Fox is concerned, can we just say this, your Honours.  This is slightly more complicated in one sense.  Phillips Fox’s position is different from that of the other respondents.  The case against it was dependant on opinions expressed to the Due Diligence Committee in the light of the knowledge of the Phillips Fox partners involved, Mr Peck and Mr Mutton.  The case was pleaded separately against the individual directors.  The relevant elements of non‑financial materiality were pleaded against Phillips Fox. 

Your Honours will see a number of provisions I could go to, but may I got to the two most important.  If one goes to the summons in the first supplementary appeal book at page 75 you will see a paragraph commencing about line 21 which is paragraph 74(l).  It refers to the fact that:

NCRH was unable to comply with the temporarily reduced consolidated net worth covenant –

et cetera, without going into these transactions.  Then that paragraph is itself picked up.  If one goes to page 140 of the same volume your Honours will see a paragraph which is actually 178L(bb) at about line 38.  You will see that it picks up, amongst other things, paragraphs 74(i) to (r).  What we would submit, your Honours, is that it was something that was pleaded as against Phillips Fox and not dealt with.  Your Honours, the Court of Appeal appears to have picked up what was said on behalf of Mr Peck as applying to Phillips Fox in this regard, but this was not correct. 

FRENCH CJ:   You present this as a visitation case on the basis that perhaps a strong element of your case was excluded because of the view of the pleadings?

MR JACKSON:   Yes, your Honour, I cannot put a higher one.  Your Honours, could I come to the second aspect, which is a matter that relates only to Phillips Fox and it deals with the question of the future prospects.  Your Honours, the case against the individual directors had focused on what the prospectus said about the NCRH’s prospects for the second half of 1998.  The case against Phillips Fox, however, was based on terms of representations about trading prospects in 1999.  Your Honours will see that referred to in our summary of argument in volume 3, page 1078, paragraph 45, and it was that the prospectus represented that the prospects in 1999 were positive.

Your Honours will see that the Court of Appeal dealt with the matter in volume 2 around page 807 and, in particular, arrived at the conclusion which is in paragraph 542.  Your Honours will see that Justice Ipp said in the last four lines:

I come to the same conclusion as McDougall J, namely, the prospectus did not represent that “as a result of a new management team and a revised underwriting strategy, the prospects for the New Cap Group for the second half of 1998 were good”.

That is the end of the matter.  It is true to say that if one looks at the preceding paragraphs, he appears to discuss the issue, as it were, globally, but, your Honours, the fact of the matter is simply that this issue that the result arrived at was one which did not reflect the case that was being made by us against Phillips Fox.  Your Honours, we would say that the contention that there was no relevant difference between the representations as to ‘98 and ‘99 was hardly irrelevant.  This was a prospectus coming out in relation to the future of the business.  Could we refer in that regard to what we say in our reply submissions which are at volume 3, page 1254, paragraphs 15 to 17.

GUMMOW J:   What would be the consequence, Mr Jackson, of your succeeding here?

MR JACKSON:   I am just about to deal with that now, your Honour.  May I say this, that our opponents point out there would need to be further issues determined before we could ultimately succeed on these matters and in that regard it is said there would need to be some findings that prospectus statements were in fact materially false or misleading and that if they had not been made, the issue would not have gone ahead, your Honours, with one qualification, that qualification being that the Court might think that, at least so far as the smoothing cover issue was concerned, that would not be a significant obstacle.  But we will accept, your Honours, that there are issues which would need to be determined either by the Court of Appeal or by a primary judge and, of course, so would affirmative defences need to be considered.

That all arises, if may say so, with respect, by the fact that the issues were not dealt with.  It is an overstatement to say, as some of our learned friends do, that further proceedings will be as protracted as the original trial and there will be a cost.  Well, your Honours, undoubtedly there will be a cost but that is not a reason to deny a proper hearing of the claims if we are otherwise entitled to one.  We did not ask the trial judge to deal with the case in the manner in which he did, not resolving all the factual issues, nor did we invite the Court of Appeal to do so.  In fact, it is the respondents, really, who suggested that an incomplete determination by the Court of Appeal was appropriate and the Court of Appeal accepted the suggestion.  You will see that in volume 2 at page 786.

GUMMOW J:   Just looking at the draft notice of appeal, Mr Jackson, at 1048, that seems to seek relief which you now do not press, namely, entry of judgment in various amounts.  It would really be 12(c), would it not, and 13(c)?

MR JACKSON:   Your Honour, we accept that.  Sometimes a mild degree of hubris arises in these matters which is soon quashed – quelled perhaps, I should say, quelled.  Yes, your Honour, it is a matter that if we were successful would need to go back to another court.

BELL J:   Mr Jackson, as far as the smoothing cover aspect is concerned, in the statement of issues that the primary judge set out at an early stage in the judgment, where are the references to it?  Is it just the once that you took us to?

MR JACKSON:   I think I only took your Honours to paragraph 60, I think.  Yes, that, your Honours, is the only one, I think.  Yes, that is it.  I am sorry, your Honour; maybe I am wrong.  That is correct, your Honour, yes.

FRENCH CJ:   Thank you, Mr Jackson.  Yes, Mr Fagan.

MR FAGAN:   Your Honours, my clients, Messrs Beach, Deery and Morrissey were three non‑executive directors of the company.  They were resident in North America at all the material times.  The first proposed special leave point is the question of whether the trial judge erred in not deciding a particular formulation of the plaintiff’s case and, in our submission, to see the lack of merit in this Court entertaining that question it is convenient to take your Honours to look at what is the formulation and then look at the pleading and see how vastly different they are and then look at the summary that is given in the judgment of Justice Ipp of the way the trial was conducted, which captures all the important references that show that it was made abundantly clear throughout the trial that the trial judge was going to decide it on the pleadings. 

It was not going to be a case, vast as it already was, in which his Honour would have any party expand the issues by just starting to lead evidence and run arguments and try to find out what the issues were by determining whether one party had or had not acquiesced any expansion of issues.

FRENCH CJ:   Are you going to address the scope of issue 60 which is relied upon?

MR FAGAN:   Yes, your Honour.  If I take your Honours first of all to what is the formulation that they complain of, page 741 in the second application book at paragraph 332:

The appellants contend that the treatment of the smoothing cover in the prospectus balance sheet was materially misleading in many respects additional to the mere arithmetic effect –

and this is what was submitted –

(a)The prospectus balance sheet was represented as being a true balance sheet, but it deliberately represented a false position.

So this was a contention that someone on behalf of the company whose deliberateness could be ascribed to it had a deliberate intention to present a false position –

(b)That false representation reflected on the integrity of NCRH; in the insurance market, a lack of integrity arising from untrue statements in a company’s public documents will inevitably give rise to material adverse inferences to the company’s reputation.

So part of the case they say they wanted the judge to decide and he did not was something that would reflect on integrity and that necessitated that there be some proof of matters which would reflect upon integrity of individuals.  The integrity of your company can only be affected by the integrity of individuals –

(c)The bringing of leg one into account . . . falsely represented that the net worth covenant under the Dresdner loan had been complied with.

The net worth covenant was that the Dresdner loan could be called up if the company’s balance sheet net asset position fell below 125 million.  It was asserted that then, indeed, had the true position been revealed, Dresdner might have terminated the loan facility and called up the debt.  Then –

(e)The materiality of (c) and (d) could not be met by an assertion that Dresdner had or would have waived the breach of the net worth covenant . . . 

(f)The prospectus should have disclosed that the directors, while knowing of the overstatements, nevertheless intended to rely on them to promote the note issue.

Part of this case is that the directors were deliberately dishonest.  Then (g), if I just take the middle part of that rather than reading the whole, it is the proposition that:

The sole purpose of increasing the prudential margin was to conceal the misleading effect of the overstatement of retrocession recoveries.

So again that case involved proving a purpose of concealment which necessitated alleging and proving a purpose of concealment of individuals which could be ascribed to the company.  Then one looks to the pleading in the second supplementary application book at page 369.  This is a portion of the pleading.  It is a document that was provided to the Court of Appeal.  It contains the section of the pleading which – it is of the sixth further amended statement of claim – pleaded the case against the directors.  It is marked up to strike out the parts of the pleading which were not relevant on the appeal.  There are some additional parts of it that are no longer relevant here, but what is relevant is on page 369, 104(a) and (e).  It is said that:

In the Draft Prospectus and the Prospectus, NCRH made the following representations:

(a)the actual and pro forma consolidated balance sheet which was included in the Draft Prospectus and the Prospectus fairly and accurately represented the financial position of NCRH as at 30 June 1998;

. . . 

(e)as at 30 June 1998, NCRH had retrocession coverage in an amount of US$13.839 million, all of which was valid and collectable.

How was that alleged to have been false?  You will see that on the next page, 370, those representations are described as the “Prospectus Balance Sheet Representations”.  When one goes to page 372, one finds the only respect in which it was said they were materially false and that is that:

As at 18 November 1998, the Prospectus Balance Sheet Representations were false in that the actual and pro forma consolidated balance sheet which was included in the Draft Prospectus and the Prospectus did not fairly and accurately represent the financial position of NCRH as at 30 June 1998, in that the balance sheet:

(a)      included only the profit arising from ‑

this is the smoothing cover contract –

but failed to disclose the right of recovery of GCRA under the casualty excess of loss reinsurance policy issued by NCRA, in contravention of accounting standard –

In other words, all that was said to be false about the representation by way of the balance sheet that there were 13.3 million of recoveries available was that it was arithmetically wrong because it failed to bring to account a related contract.  The way the learned trial judge dealt with that was that he did not agree that it was wrong in that way because he said neither the contract that was brought to account nor the related one should have been called up.  They were both made after balance date and on accounting evidence, which he accepted and which we did not contest, he said that neither of them should have been there and on that account the first contract should not have been brought in for 5.675 million.

Where this case was fought out was that my client’s position was that the directors had adopted in the balance sheet an offsetting amount, they increased their prudential margin.  The prudential margin was a figure that was adopted in a reinsurance company as a padding or a buffer in respect of expected claims and losses and it was a rather arbitrary figure that would be adopted.  They had contemplated a 9 million prudential margin.  They finished up adopting a $14 million and his Honour accepted, as a matter of fact after a detailed evidentiary contest, that the extra five had indeed been adopted as an offset.  So on that account he came to the position of no materiality.

Now, it was accepted by both parties at trial that the question of the materiality of this numerical error on the prospectus sheet was to be determined by accounting standards.  The accountants take a view that an error of under 5 per cent is not material, something between 5 and 10 per cent it is arguable, it depends on the circumstances, over 10 is material.  That was taken as the criterion, all parties accepted it and fought it out in that way.  Because his Honour found that with the offsetting five million, the real difference to the balance sheet through bringing to account this contract was only 600,000‑odd, it was immaterial.

His Honour was never asked on the pleadings to decide that the formulation that I have shown your Honours of the smoothing cover argument – it was summarised where I took your Honours to it in the Court of Appeal judgment – which is all about people having deliberately put the GCRA contract in for a purpose of concealing a breach of a covenant and deliberately trying to mislead people and doing something that had a bearing upon the integrity of the company through the integrity of individuals.

FRENCH CJ:   How was it said that the contravention of the accounting standard related logically to the accuracy of the representation?  The mere fact of the contravention of an accounting standard would not seem logically to play into the question whether a representation is false or otherwise.

MR FAGAN:   No.  I will just take your Honours to the balance sheet which is in the third application book immediately behind the applicants’ submission at page 1128.  Now, your Honours will see that in the assets of the company, after cash and receivables, appears the item in question, retrocession recoveries receivable, 13,839.  The effect of that number being in there at that level is to contribute to the bottom line of shareholders equity of 127 million.  Because the relevant contract with GCRA, a retrocession contract, had been made only in late August or September 1998, on accounting standards, even though it had application to the 1998 year, as a post‑balance date event it should not have been brought to account; that was the accounting standard.  Therefore, 5.675, which was attributable to the likely recovery under that contract, should not have been brought in as at 30 June.

FRENCH CJ:   The content of the representation assumes somebody reading the document with the knowledge of the relevant accounting standard.

MR FAGAN:   Yes, your Honour.  When one goes then down to the level of liabilities, the outstanding claims item of 161 million, the outstanding claims incorporated a number of elements, including reported claims, and an item called IBNR which means Incurred But Not Reported – in other words, the company predicts what additional claims will be made in respect of the period – and it includes also this prudential margin.  Now, that 161.5 million, his Honour found, included an amount of five which had been deliberately brought in to offset the 5.6 so that the accounts would not be misleading.  On that basis his Honour decided that there was an erroneous inclusion at the first line I took your Honours to but it was not material because what concerned the investor and, in particular, concerned Mr Saville, the principal of the applicants on whose reliance was the basis of causation, what concerned him was the bottom line.

However, that stark difference between the formulation based on dishonesty and lack of integrity and so on, compared to what is in the pleadings, the question for the Court of Appeal was, did the usual rule apply – and by usual rule I mean what is referred to, for example, in the judgment of this Court in Banque Commerciale v Akhil Holdings – that the parties are on notice of the issues by way of the pleadings or was it a case in which the conduct of parties had expressly or by acquiescence expanded the issues?  Justice Ipp in his judgment, I think starting at page 756, set out in detail the matters that had occurred at trial which showed that the issues had not been expanded by acquiescence or agreement. 

It goes from 756 through to about 765, but the important points in it are these, that there was an opening, an oral opening, of considerable length by Mr Douglas who then appeared for the plaintiffs.  At the end of it Mr Oslington, appearing for the Macquarie parties, pointed out that he had raised some matters in opening which were not pleaded against his client and that he was going to hold the plaintiffs to their pleadings.  Some of the other counsel said similar things, that they held the plaintiffs to their pleadings.  That passed, and at a later point in the proceedings, not much later but a few days, his Honour directed that the parties prepare a statement of issues, no doubt to assist him to try to understand better what was rather hard to gather from the pleadings.  At page 757 there is quoted from what Justice McDougall said in paragraph 388:

And proceeded:

I do, however, wish to make it clear that the order that I am about to make for statements of the real issue are not intended to permit, and should not be taken by any party as permitting, a departure from, by way of extension of, that party’s pleaded case –

Our position is that that was a clear ruling of the utmost generality applying to every party and there was no occasion for anyone on behalf of my clients at any point thereafter to stand up and say, “We insist on the pleadings being adhered to.  We are not going outside the pleadings”.  It was his Honour’s position that no party, defendant or plaintiff, would expand.  Moreover, at the top of page 758 Justice Ipp has recorded the response of plaintiff’s counsel.  Mr Douglas said, at the end of paragraph 389:

[W]e respect those rulings and that’s why we haven’t sought to canvass the rulings . . . So we are proceeding on the basis that that is your Honour’s position, and we don’t propose to depart from that unless circumstances change.

Now, thereafter there are set out in the Court of Appeal judgment from the record of the trial a number of instances where objections were taken or arguments were raised and his Honour reiterated several times that the case would not go beyond the pleadings.  His Honour’s view – that is the trial judge’s view – of how the case had been conducted by the usual rule of adherence to pleadings is reflected in his judgment.  It is quoted in the Court of Appeal, still on page 758, at paragraph 391.  It is a quote from the trial judge’s first decision at 285:

In the present case, there can be no suggestion that the Macquarie parties, or for that matter any of the defendants who appeared during the hearing, acquiesced either expressly or by inference in any widening of the pleaded case against them.

His Honour referred to a number of instances where this had been said and then right in the last words on page 758 said:

I made it plain that I accepted Mr Oslington’s proposition; and Mr Douglas made it plain that he did not dissent from it having regard to earlier rulings that I had given.

In the summary of written argument it is said against my clients repeatedly that at first instance we did not take the pleading point which was taken in the Court of Appeal.  The pleading point is the point that I am still making, that this smoothing cover argument with all its allegations of dishonest purpose and the like is way beyond what was in the pleading which we understood we were running a case about and they say that was not raised at first instance.  But, with great respect, to say that no pleading point was taken against the materials that I have just quoted from Justice Ipp’s judgment, is meaningless.  There was no occasion to take any point.  The learned trial judge had ruled.  The plaintiff, through their senior counsel, had accepted and the case went on on that basis. 

Now, my learned friend then refers to the circumstance that in the course of running the trial there was evidence led from my clients to seek to establish affirmatively their honesty.  Well, that was because there were a myriad of allegations of error in this prospectus and in case any of them should be found truly to be errors – suppose we failed on the issue of whether the $5 million really was in our offsets so that his Honour was satisfied there was a material error on the balance sheet – against that eventuality we sought to establish the affirmative defences.  These are provided under the Corporations Act, the relevant legislation that applied at the time. 

If there were reasonable and honest steps and there is a business‑like approach test and so on, we sought to meet that and that meant that we went into evidence about honesty.  But on this smoothing cover argument that is now formulated and which it is said the trial judge erred in not deciding, that does not just depend upon an allegation that my clients might have been dishonest.  That is an allegation that somebody was dishonest.  I might say that it has never to this day been shown who it is said was actually dishonest.  I think your Honours would not find anywhere in all of this paper any name of who it is said acted dishonestly.

So, by raising evidence to show affirmatively that my clients were honest and make out the statutory defence, we were not joining issue on this formulation of a case about some undisclosed person’s dishonesty.  This is really emphasised by the applicants themselves in their submissions in reply at page 1234 in paragraph 13.  They give a narrative elaboration of this smoothing cover argument and they say:

13.The applicants put non‑financial materiality in two independent ways.  First, the figure was material because it resulted in apparent compliance with the Dresdner covenant.  Of itself, this did not require any finding as to improper purpose.  The simple fact was that the balance sheet represented compliance with an important financial covenant when NCRH was actually in breach.  This was enough to make the statement material.

14.But it did not end there.  The false figure for retrocession recoveries was not the result of a mistake.  It was the result of a deliberate decision to enter into the GCR transaction after the balance date and then to bring part, but only part, of that transaction to account in the previous accounting period.  NCRH had deliberately falsified its accounts.  That too was material.

15.It is wrong to see these allegations of materiality as amounting to charges of fraud against BDM –

that is my clients, like Beach, Deery and Morrissey –

individually.The first aspect –

that is just not disclosing a possible breach of covenant –

did not necessarily require an adverse finding against anyone.  And while the second one carried adverse implications for the corporate reputation of NCRH, it did not involve any allegation against BDM. 

So apparently, by going into evidence about the honesty of my clients, we would not have been meeting whatever case it was that they meant to be formulating about the dishonesty of someone at all.  We were not joining issue with them on that accidentally and inadvertently.  They go on to say ‑ ‑ ‑

FRENCH CJ:   Your time is up, Mr Fagan.

MR FAGAN:   I must say, your Honour, that as between myself and Mr Wood we will cover much the same ground.  He does not object to me taking a little longer if necessary and shorter for him.

FRENCH CJ:   Yes, all right.

MR FAGAN:   They go on to say:

Even if the transaction had been carried out by NCRH’s senior management without BDM’s knowledge, the fact of the deliberate falsification of NCRH’s accounts would have been something an investor would have wished to know. 

Even if.  So it is still not clear if they are alleging that the dishonesty was of management.  All of this is to show your Honours that just because we led evidence about the honesty of our clients and supported affirmative defences, it could not possibly be said that we were joining issue with them and thus acquiescing in the expansion of the case.  His Honour’s apprehension of how the trial had been conducted, with no one acquiescing, was a guidance enough of what took place and the Court of Appeal made no error in finding that there had not been an expansion of the issues in this matter.

Now, in the course of responding to our argument, it has been asserted by the applicants that they cannot be taken to have themselves run the case confined to the pleadings and without expecting the learned trial judge to decide this formulation of the case that they now put because they say that it did not become apparent until in the Court of Appeal that their pleadings were not wide enough to cover that smoothing cover argument concerning dishonesty which I have taken your Honours to.  That is put in these written submissions.  It is said that it is pure hindsight from the Court of Appeal’s judgment to say that the pleadings were not wide enough for that case.  With great respect, anybody could see from that pleading that a very simple case was put on the sixth further amended statement of claim and nothing like what they seek to say the trial judge should have decided.

So what it comes down to is a case where the learned trial judge did not decide a certain matter which the applicants say he should have done and in order to have a retrial, which they acknowledge is the relief they would have to seek, they must show that Justice McDougall erred.  It cannot be shown that he erred in failing to decide this matter when he had made so explicit that he would look to the pleadings and they let him go back to his chambers with the evidence and the pleadings to decide the case and had not sought to amend.  They had not sought to add in this case as they would have had to do to have it argued. 

The question about the indirect causation really only does arise if, first of all, the point that they argue about the pleadings is – get granted special leave and succeeds, and even then only if the case goes back to trial and liability is found and some facts are found which would enable the Court to review the application of any indirect causation concept or determine the extent of it against some found facts. 

The truth is that in the court below the causation case that was run against the directors was simply that Mr Saville, who made investment decisions on behalf of the applicants, had relied upon the content of the prospectus.  He swore out a detailed affidavit about that and was examined on it extensively.  That was the causation case that was run.  There was no exploration of facts which might support an indirect causation case.  If one looks at their reply submissions dealing with this subject at page 1237 in the third book at paragraph 23, from the third line it says:

In summary the applicants contend that causation had to be determined on the basis that the true position was disclosed in the prospectus.  That would have required disclosure of the true figures as at 30 June 1998 –

meaning retrocession recoveries of only 8 million, instead of 13 –

which in turn would have shown that the half yearly accounts published in September 1998 showing compliance with Dresdner covenant had been false.  Inevitably this would have required ‑ ‑ ‑

GUMMOW J:   We can read, you know, Mr Fagan.

MR FAGAN:   I am sorry.  I can leave your Honours to read it.

GUMMOW J:   What do you want to get out of paragraph 23?

MR FAGAN:   Well, the next sentence, that this would have required explanation and the true explanation would have been that the accounts had been deliberately falsified.  Now, that case was not run.  There was not an exploration in evidence of what would have occurred if the accounts had shown 8 million and non‑compliance with the Dresdner covenant instead of 127 million.  There simply was not evidence led about it, so there were not any findings, so this Court would not be able to embark on the question of whether indirect causation as a principle could be applied.  Those are my submissions, your Honour.

FRENCH CJ:   Thank you, Mr Fagan.  Now, I trust the time trading system will lead to a net reduction in time?

MR FAGAN:   I hope it will, your Honour.

FRENCH CJ:   Yes.

MR WOOD:   My client was the chairman of the company also residing in North America and he is in almost an identical position to Mr Fagan’s clients.  The two differences are that after the opening by Mr Douglas where he strayed outside and beyond the pleaded case concerning Dresdner, there were a chorus of protests which are recorded at page 756 and 757 and onwards of the application book, initially by Mr Oslington who appeared for the Macquarie parties, but then by my client.  Your Honours will see in paragraph 387 where my learned junior, Mr Silver, was then appearing for Mr Ghose said he was also relying upon the pleaded case and that in the context goes back to one of Mr Oslington’s complaints that there was an opening that strayed outside to the deliberate non‑disclosure with respect to Dresdner.

Similarly, when the closing submissions of the plaintiff strayed beyond the pleadings, the point was expressly taken, as is recorded on page 763, on behalf of Mr Ghose in his written submissions at paragraph 404 of Justice Ipp’s judgment, and there is a quotation there from the written submissions that the particular topic concerning this GCR contract did “not form part of any direct case pleaded against Mr Ghose”.  So there cannot be any suggestion at all of acquiescence by silence in an extension beyond the pleaded case. 

Can I say two things in response to your Honour the Chief Justice’s query about issue 60, which is found on page 62 of the first volume of the application book.  The formulation of that particular issue is unhelpful in its precision in any way other than it identifies the particular paragraphs of the pleading ‑ ‑ ‑

FRENCH CJ:   It does not pick up the falsifying plea, does it?

MR WOOD:   No it does not, but in two places there is a reference to the expression pleaded.  The falsification, as your Honours have seen, comes through paragraph 111 and that is not captured by 60 but is probably captured in a way, but very indirectly, by 69 perhaps.  The second thing I would like to say about issue 60, which your Honours have been taken to perhaps for a slightly different purpose, is by reference to what Justice McDougall said on page 299 in paragraph 627 of his judgment.  At about line 43 he said:

I made it plain that I proposed to decide the case by reference to the statement of agreed issues.  I made it plain also that the direction to prepare a statement of agreed issues was not to be taken as an invitation to any party to depart from, or expand upon, issues formulated on the pleadings.

So the preparation of the statement of issues and what they may mean was not a vehicle that permitted in any way the plaintiffs to stray beyond the pleadings.  Could I say this in terms of how important that is in a case of the present nature.  Your Honours obviously know the complexity of this matter, the number of parties and the multiple number of causes of action alleged against them.  To change the case from one of a materially false statement in a prospectus to a material omission in a prospectus is a big step by itself and that is the way the case is sought to be changed.  That is relevant, obviously, to section 996.  But one does not have to think very long of the implications of that because your Honours are aware of the parallel defence regimes in the prospectus positions in Part 7.11 which provide specific defences to someone in the position of my client, for example, that they had a reasonable belief, a reasonably based belief – this is section 1008A – that there was no material misstatement in the prospectus or no material omission.

Equally, there is a statutory regime for a due diligence defence operating in favour of my client in section 1011 whereby if they reasonably acted on the basis of reliance upon others, then that could provide a defence.  Now, the way in which those sorts of statutory defences operate depends critically upon the way the contravention is alleged.  Now, to fail to plead the contravention not only failed to put us on notice and every other relevant defendant at the time on notice of the way in which 996 was said to be contravened, it also provided us with no opportunity to address the way in which the affirmative defences worked. 

Additionally, there were accessory liability claims based upon contravention of 996 through section 79.  Now, one does not have to reflect for very long upon the knowledge elements of an accessory liability claim to work out that one must know, in fairness, with precision, what the nature of the contravention is to begin with.  Moreover, your Honours will have seen that there were 36 or 37, or thereabouts, cross‑claims made in these proceedings and many of those are defensive cross‑claims in the sense that they took as their starting point the plaintiff’s pleadings and on the assumption a plaintiff made out those pleadings against a particular defendant, replicated those allegations against other defendants for the purposes of contribution or indemnity.

GUMMOW J:   That is how Mr Bannon’s client is drawn in, is it not?

MR WOOD:   Yes, it is.

GUMMOW J:   Cross‑defendant, was he not?

MR WOOD:   Yes, that is right, and your Honours are aware that Macquarie and Pricewaterhouse are in a similar position, although they are not appearing today.  But one has to ask the question, if the unpleaded case should have gone ahead against my client and been determined by Justice McDougall, is that unpleaded case then captured by our cross‑claim against other cross‑defendants, unarticulated as it is, and should therefore be determined against them as well, albeit there is no notice?  It is simply another way of identifying the procedural unfairness involved in a case of this complexity in allowing plaintiffs to stray beyond the pleadings where they have been warned about it and where they have agreed upon it.

I do not wish to say anything further in relation to the liability aspects because we adopt, of course, my learned friend, Mr Fagan’s, other submissions on that.  I want to say only one thing in relation to the section 1005 question of law that is posited and that, on any realistic view,

we would say, is not going to present itself as a likely candidate by way of a suitable vehicle in circumstances where one does not get to it unless one gets through all the hoops on liability that we have been talking about, including pleadings. 

One additionally will not get to it unless the applicants could convince this Court on appeal that, notwithstanding they had not pleaded that causation case by way of a non‑transaction as opposed to a statement, inducement, reliance in the ordinary way and that they had, according to the Court of Appeal, proved that unpleaded case on causation, the interesting, so it is said, legal point on the operation of 1005 is far too remote a prospect to attract this Court’s attention.  Those are our submissions, your Honours.

FRENCH CJ:   Thank you, Mr Wood.  Mr Gor.

MR GOR:  Your Honour, Mr Gleeson has requested that he precede me.  I have no difficulties with that, subject to the Court ‑ ‑ ‑

FRENCH CJ:   Yes, Mr Gleeson.

MR GLEESON:  Your Honours, Phillips Fox faced three cases today.  The first is a case against Mr Peck as a director of which the firm is said to be liable under section 10 of the Partnership Act.  Everything that has already been said by the respondents I rely upon.  I add only this.  The quality of the protest which Phillips Fox made to the case going outside the pleadings and the degree of prejudice they face, if that now be permitted, is as strong or probably stronger than any other respondent.  Can I reference three places where that is clear.

First, if your Honours would go to volume 1 of the supplementary application book at page 275, our protest commenced at line 29, was made with as much force as we could put, proceeded to give a series of non‑exhaustive examples – that is page 276, line 28 – of areas where the plaintiff had strayed outside the pleadings in what your Honours will see was an 800‑page opening which took 11 days and, in particular, on page 277 at line 27 made the specific objection that no expert evidence was being led against us.  That is critical because the expert evidence is part of what is now sought to be relied upon on the dishonesty case on the smoothing cover; it was not led. 

The second instance, if I could ask your Honours to go to volume 1 of the main book at pages 69 and 72.  When the issues were formulated in relation to Phillips Fox the relevant issue 97 on page 69 showed an attempt by the plaintiff, contrary to his Honour’s ruling, to broaden the issue to something which was described as “misleading and deceptive conduct in all the circumstances of the case”.  We made our protest in the column next to it that we did not consent to anything beyond the pleading.  The same is clear on page 72 with issue 101.

The final matter on this aspect is in volume 2 of the main book.  At page 763 at paragraph 405 we maintained in our closing submissions that we objected to any case outside the pleading and, in particular, we objected to any question of moral hazard.  Now, moral hazard was the way of capturing the dishonesty case which these applicants wish to run. 

The second way Phillips Fox is brought into this matter is not via Mr Peck but is via the partner of Phillips Fox, Mr Mutton, who was on the Due Diligence Committee as the lawyer and for whom we accepted at all times full section 10 responsibility, unlike Mr Peck, who we politely cast adrift.  In relation to Mr Mutton, the applicants put to this Court that Justice Ipp made a fatal error of reading the wrong part of the pleading and therefore failed to appreciate the case was pleaded against us.  Justice Ipp made no such error.  At volume 2 of the main book at page 747 ‑ ‑ ‑

GUMMOW J:   Paragraph?

MR GLEESON:   Paragraphs 350 to 352.  He looked at the entirety of the paragraphs which the applicants were relying upon, not just the two Mr Jackson referred to this morning, but the whole of them and when he read them as a whole, he came to the conclusion in paragraph 351 that the entanglements found in this summons were so great that on an ordinary reading one would not get out of it the dishonesty case through Mr Mutton to Phillips Fox.  So he addressed specifically the separate pleading of the Phillips Fox case and said you could not find it.  That underpins his conclusion at the top of page 748 and his conclusion in paragraph 357 where the description of a dense thicket from which one could not find this case even after a dark journey, is one, we submit, this Court would not differ from.

If one needed to go through that journey through the dark thicket, one would have to go back to volume 1 of the supplementary book and commence at page 149.  Read paragraph 178AH(a), see that it cross‑referred to a series of paragraphs including paragraph 70, go to paragraph 70 on page 69, which is the balance sheet representation, go to subparagraph (a) which is the case that was fought out between the parties – that is the net balance sheet case, that is the one we all met and addressed and defeated – go over the page to the bottom of paragraph 70(d) to see that one also needed to go by some process of cross‑reference unexplained to anything or everything or something or nothing in paragraphs 71, 72, 73, 74 and 75.

Then, what is said is that anything and everything found over the next six or seven pages was meant to be somehow linked up together with something on the previous page 69 to find the dishonesty case.  What is then said is, if you go through all of those six or seven pages and you get to paragraph 74, which starts at the bottom of page 73, and it is a paragraph which pleads falsity in relation to a different representation, a representation as to purpose, one is meant to go through the whole of that, find 74(l) on page 75 which itself has two limbs joined by a conjunctive, delete the second limb because it failed, take the first limb, add it back to paragraph 70(a) and find a dishonesty case.  We submit Justice Ipp was correct.

Finally, on that second case, to the extent it was made at a level of fact, I feel it incumbent to point out it was based upon evidence of Mr Peck of a disputed conversation with Mr Mutton, the trial judge made a finding about Mr Peck’s evidence which is found at volume 1, page 139, paragraph 198, and based upon that view of Mr Peck’s credit there can be no prospect of the case having any success at a level of fact.  In fairness, our witness, Mr Mutton, you will see at page 160, paragraph 224, scored a B for his credit, not an A, but Mr Peck scored differently. 

Can I move to the different case, which is trading prospects.  This case has a bizarre aspect that the only person left at the Bar table facing this case of trading prospects is the one person, the lawyer, who did not have responsibility for considering commercial, financial or like matters in a company.  The applicants complain that Justice Ipp did not deal with the case.  He did, which the Court will see from several places.  Firstly, in volume 2 of the main book at page 722, paragraph 259 in the context of the similar case against Macquarie, because the case was made against Phillips Fox, Macquarie, PwC and others, his Honour expressly adverted to the fact that the representation was pleaded in terms of 1999 and in terms of positive prospects, whereas for the directors it was pleaded in terms of 1998 and good. 

His Honour came back to it at paragraph 532 on page 804 and he specifically noted the submission as to construction which the appellants say was ignored.  He then set out at the top of page 805 the part of the prospectus which was relied upon by the applicants and he found it did not convey either representation.  Your Honours will see from the four lines set out it is, in fact, a statement about things done during 1998 which it was believed might have an effect in 1999.  So his Honour found the representation as pleaded not conveyed and, without reading it, your Honours will see usefully set out at paragraphs 535 to 540 all of the warnings in the prospectus, the very warnings that were being referred to in the first matter this morning as indicating there was no confidence, or certainly in the business, and in the light of all that rejected the case.

Now, the appellants seize upon, or the applicants, in paragraph 542, the last sentence and say, well, the way Justice Ipp framed his conclusion, he framed it as agreeing with Justice McDougall that the prospectus did not represent good prospects for the second half of 1998.  Therein lies the error, they say.  Of course, that must be read in the context where Justice Ipp has correctly considered both forms of the representation. 

Finally, on that case it has low prospects of success in any event for two reasons.  There are unchallenged findings on issues of fact that there was no reliance by the board on Phillips Fox on this topic.  Your Honours will see that finding in volume 1 of the main book, page 473 commencing at paragraph 1177.  His Honour said that he could not understand the case that people would be relying upon Phillips Fox other than for legal matters.  At 474 to 475 there was cross‑examination from each of the directors that they were not relying upon us for anything outside our legal area.  Lest there be any doubt on it, since we are the only people who face the trading prospects, in the second supplementary book at page 466 there is an example of the cross‑examination of one of the directors accepting that trading prospects, future prospects were something which lay with the directors and not with Phillips Fox. 

Finally, there is the unchallenged findings of fact that Mr Saville’s evidence of reliance was completely rejected by the trial judge.  That is in volume 1 of the main book at page 117, paragraph 146.  So, to the extent any interesting question of causation is said to arise, we have unchallenged findings of fact from both courts that the directors did not rely upon us in these areas and Mr Saville did not rely upon these statements at all, we ask your Honours to dismiss the application today.

FRENCH CJ:   Thank you, Mr Gleeson.  Mr Gor.

MR GOR:   Your Honours, Mr Peck, the fifth respondent, was a non‑executive director based in Australia.  For his part we embrace all that Mr Fagan and Mr Wood have said and will not indulge in repetition save to take your Honours to the references at volume 3 of the application books, page 1189, paragraph 14.  That gives similar references which Messrs Fagan and Wood gave for Peck holding the applicants to their pleaded case, including the closing submissions. 

The only two additional points which I wish to make are these.  It cannot be said that his Honour, the trial judge, was not alive to the issue of the purpose and the way it was run at trial.  Your Honours can see that in the application book at page 323, paragraph 707.  This all goes to underscore the fact that his Honour, the trial judge, did not somehow omit to deal with the case being then advanced at trial; page 323, paragraph 707

and the purpose of the transaction and the way it was used, again at 328 at 720 and 721.  We say in addition to all the other indicia that have been articulated today to indicate that his Honour held the plaintiffs to their pleadings, this underscores that proposition. 

The only other point I wish to make is the prejudice, very significant, which Mr Wood indicated with the cross‑claims and my client has five, but in addition to that, having been faced with the case that Mr Peck was being faced, we did not seek to lead evidence from Dresdner.  For example  the principal, Mr Valencourt, who at one stage, was being called by NCRA, the 36th cross‑claimant, did not appear.  We made no effort to try and elicit from him the extent to which Dresdner was misled or not.  So we say we are prejudiced to that extent as well.  I wish to add nothing further other than embrace the proposition that the application ought to be dismissed.

FRENCH CJ:   Thank you, Mr Gor.  Mr Bannon.

MR BANNON:   If I may just state one sentence.  My client is indirectly affected by a grant of special leave.  There is a wider public interest which is served by the finality and certainty which pleadings provide, which the upholding of the Court of Appeal decision would further uphold, which is in the interests not only of the court system but those indirectly affected.  My client is indirectly affected.  A grant of special leave would prolong, by way of uncertainty, beyond the point of any decision of this High Court having regard to what has been said, a matter which, we respectfully submit, the Court should take into account on the grant of special leave, thank you.

FRENCH CJ:   Thank you, Mr Bannon.  Yes, Mr Jackson.

MR JACKSON:   Thank you, your Honours.  Your Honours, may I deal first with the question of being constrained by the pleadings.  What one sees is that there were pleadings.  You will see that the allegation in the pleadings was that the amount was valid and collectable – I am speaking about the smoothing cover – and also that the account that was in the prospectus fairly and accurately, those are the words, represented the position of the company. 

Now, your Honours will also see that what the pleadings meant was brought into paragraph 60 in the sense that the issue that was decided was paragraph 60.  There may be views about the ambit of paragraph 60, but that was the way in which the issue was presented.  If one goes to the references that my learned friend, Mr Gor, gave a few moments ago at page 323 of volume 1, you will see in paragraph 707 the judge says in the second sentence:

That would not be surprising if the plaintiffs’ case – that this was all an artifice designed to produce a US GAAP figure that would show compliance with the minimum net worth covenant under the Dresdner loan agreement – is to be accepted.

So, your Honours will see the judge sets out there his understanding of the case.  Then at paragraph 720 on page 328 he records the submission:

the whole purpose of the process . . . was to enable the company to report a minimum net worth under US GAAP of at least USD125 million.

Your Honours will see he goes on to deal with the matters in paragraphs 720 and 721.  Now, your Honours, it is apparent that the judge’s understanding was of the case that was being presented and if one looks, your Honours, at what is summarised in volume 2 in the Court of Appeal’s reasons at page 741, your Honours will appreciate this is summarising what was said in the Court of Appeal.  What had been said, your Honours, in the pleading was that the balance sheet and the prospectus fairly and accurately represented the position and that the sum set out in there were valid and collectable.  In the submission, we would submit, perfectly open in the light of the case was that, if one goes to paragraph 332(b), a “false representation reflected on the integrity of” the company and to put out a prospectus containing untrue statements, a deliberately incorrect balance sheet was something that inevitably gave rise to material adverse inferences, and also paragraph (c) and what follows.

Your Honours, could I say also, if one goes to volume 3 at page 1084, your Honours will see there a document which is dated, as your Honours will see, relating to a meeting of the board of directors – this is page 1083 – a meeting to be held on Wednesday, 2 September 1998, that is after the relevant financial year.  Your Honours will see then, if one goes over to page 1098, at the bottom of that page they say – and this is something being put to the board:

We have evaluated the relative merits of a “smoothing cover” as requested by the Board.  We have concluded our investigation of such an arrangement –

and so on, and then you go to the top of the next page, lines 10 to 22 or 23, the proposal and you will see in relation to it at about line 17:

Question as to signing accounts as a “True and Fair” accounting in light of the Principal of Transparency.

Now, this is a document that went to the board.  All this talk about saying the board knew – the court did not prove it against this one or this one.  One sees in a document that went to the board that after the end of the year that the creation of these entries resulted in accounting which, to use a very neutral term, is false.  Could I move on then, your Honours, to say this, that your Honours will see that in the case there were at the conclusion of the argument there were submissions made on these issues.  Could I go to No 2 of the supplementary application books, page 306?  Your Honours will see there set out at the bottom of the page, paragraph (83), the submissions that are said should be made in relation to the smoothing cover and, in particular, paragraph (d) on page 307 about line 25.  Those were the plaintiffs’ written submissions at the end of the trial.  Then there was a submission in response by the three directors at page 319, paragraph 47.  It said there is:

no misleading effect at 30 June 1998 because of the $5m special prudential margin offset.

Then your Honours will see that then goes through, I think, to paragraph 51.  Your Honours, one sees then at page 359 a response in paragraphs 7 and 8 on that page:

It is next submitted that there was no misleading effect at 30 June 1998 because of the adoption of a $5 million special prudential margin offset.

Then your Honours will see the reference to the Dresdner covenant at paragraph 8.  Your Honours, could we also say that dishonesty was not part of the cause of action.  Much had been said about dishonesty, but dishonesty is not part of the cause of action.  Your Honours will see the submission we make in reply in that regard in volume 3 at page 1235, paragraphs 15 to 17.  I think your Honours may have been taken to that already.

Could I say this, your Honours.  If one looks at what the case was about, of course it was said the case is being conducted according to the pleadings and that is certainly true at the start of the case.  It is said the case is being conducted according to the pleadings, but cases develop and they developed, your Honours, into issue 60, regarded, of course, by reference to the pleadings.  But if the case goes on into other issues, then the question is, what is the position at the end of it?  It is no use saying this was a great chorus of complaint.  One looks to see what is done as distinct from what complaints are made.

Could I say, your Honours, in relation to one of the submissions made by my learned friend, Mr Gleeson, that one can parse and analyse the

pleadings as much as one chooses, but the fact of the matter is that if one looks at what Justice Ipp did, what he missed out was the fact that section 178L(bb) was the provision that he left out of account and that is the one that picked up the relevant part of the paragraph which I think was 78(l). 

Now, your Honours, could we just say this, that one has to bear in mind too that we had an alternative argument that Mr Peck’s knowledge was to be attributed against Phillips Fox as well.  Your Honours will say it was said also there was an unchallenged finding of no reliance by the board, but if your Honours go to the finding by the primary judge in volume 1 at page 265 in paragraph 514, your Honours will see in the third line of he said that:

Although there was but scant evidence that any director paid any attention to the activities of the DDC, I think it safe to accept that each director (with the possible exception of Messrs Daya and Peck, who were members of the DDC) would not have resolved to sign the prospectus unless satisfied that the DDC had reported appropriately.  To that extent, I think, the directors may be taken to have relied upon the representations made by the DDC prior to the issue of the prospectus.

Your Honours, if one goes to volume 2 at page 666 in paragraph 47 Justice Giles in about the fourth line says:

I do not see a gulf between reliance on the correctness of what was said in the DDC report and reliance to the extent that the DDC had “certified” that the prospectus could proceed.

and your Honours will see the remainder of that paragraph.  Your Honours, those are our submissions.

FRENCH CJ:   Yes, thank you, Mr Jackson.  We will adjourn briefly to determine our decision on these two matters.

AT 11.38 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.48 AM:

FRENCH CJ:   On the first matter, No S2 of 2009, the applicant has complained that the Court of Appeal applied a wrong test to the determination of circumstances in which non‑disclosure may constitute misleading or deceptive conduct.  The reference to commercial morality complained of was not essential to the conclusion reached in the Court of Appeal. 

We are not satisfied that the Court of Appeal erred in principle or that there is sufficient prospect of showing that a different outcome would result if special leave were granted.  Special leave will be refused.

In the second matter, No S4 of 2009, the applicants seek special leave to appeal on the primary basis that an important issue in the case as fought at trial and encompassing the list of issues set out by the trial judge was not dealt with by the trial judge.  The case was one of considerable complexity.  The trial judge made it clear repeatedly that the case would be determined according to the pleadings.  The Court of Appeal gave close and comprehensive attention to the pleaded case and the way in which it was fought.  The propounded issue was elusive. 

We are not satisfied that the Court of Appeal erred.  Special leave will be refused.

MR WOOD:   We would seek costs, your Honour.

FRENCH CJ:   Can you resist that?

MR JACKSON:   In each case with costs.

FRENCH CJ:   Yes.  Special leave be refused in each case with costs.  Thank you.

AT 11.50 AM THE MATTERS WERE CONCLUDED