English v Vantage Holdings Group Pty Ltd - [2021] WASCA 47

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT :   THE COURT OF APPEAL (WA)
CITATION:   ENGLISH -v- VANTAGE HOLDINGS GROUP PTY LTD [2021] WASCA 47
CORAM:   MURPHY JA
MITCHELL JA
VAUGHAN JA

HEARD:   16 OCTOBER 2020
DELIVERED          :   23 MARCH 2021
FILE NO/S:   CACV 144 of 2019
BETWEEN:   MARK ANTHONY ENGLISH
First Appellant
PA AUDIT PTY LTD
Second Appellant
AND
VANTAGE HOLDINGS GROUP PTY LTD
First Respondent
RELIANCE FRANCHISE PARTNERS PTY LTD
Second Respondent
AUSTRALIAN RELIANCE PTY LTD
Third Respondent
AUSTRALIAN RELIANCE GROUP PTY LTD
Fourth Respondent
ANDREW PAUL DONNELLY
Fifth Respondent
KIMBERLEY JAMES HANSON
Sixth Respondent
HAWKSTONE GROUP PTY LTD
Seventh Respondent
INSUBI PTY LTD
Eighth Respondent
DFK PA PARTNERS PTY LTD
Ninth Respondent

ON APPEAL FROM:
Jurisdiction              :   SUPREME COURT OF WESTERN AUSTRALIA
Coram:   SMITH J
Citation: VANTAGE HOLDINGS GROUP PTY LTD -v- DONNELLY [No 4] [2019] WASC 398
File Number            :   CIV 1086 of 2016

Catchwords:

Practice and procedure - Pleadings - Auditor of company carrying on business with AFSL - Whether statement of claim discloses reasonable cause of action on statutory accessorial liability claims under corporations legislation - Whether statement of claim discloses reasonable cause of action on breach of contractual or tortious duties claims - Whether plaintiffs should have leave to replead - Turns on own facts

Legislation:

Corporations Act 2001 (Cth), s 79(c), s 1317H
Corporations Regulations 2001 (Cth)
Rules of the Supreme Court 1971 (WA)

Result:

Leave to appeal granted
Appeal allowed on ground 1
Appeal allowed in part on grounds 2, 3 and 5
Leave to replead granted

Category: B

Representation:

Counsel:

First Appellant	:	M Feutrill SC & C MacMillan
Second Appellant	:	M Feutrill SC & C MacMillan
First Respondent	:	M L Bennett
Second Respondent	:	No appearance
Third Respondent	:	M L Bennett
Fourth Respondent	:	M L Bennett
Fifth Respondent	:	No appearance
Sixth Respondent	:	No appearance
Seventh Respondent	:	No appearance
Eighth Respondent	:	No appearance
Ninth Respondent	:	No appearance

Solicitors:

First Appellant	:	HWL Ebsworth Lawyers (Perth)
Second Appellant	:	HWL Ebsworth Lawyers (Perth)
First Respondent	:	Bennett + Co
Second Respondent	:	No appearance
Third Respondent	:	Bennett + Co
Fourth Respondent	:	Bennett + Co
Fifth Respondent	:	No appearance
Sixth Respondent	:	No appearance
Seventh Respondent	:	No appearance
Eighth Respondent	:	No appearance
Ninth Respondent	:	No appearance

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

Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1
Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; (2014) 48 WAR 1
Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267; (2005) 53 ACSR 305
Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors (1987) 14 FCR 215
Dow Hager Lawrance v Lord Norreys (1890) 15 App Cas 210
Forge v Australian Securities & Investments Commission [2004] NSWCA 448; (2004) 213 ALR 574
Gold Coast City Council v Pioneer Concrete (Qld) Pty Ltd (1998) 157 ALR 135
Mutual Life & Citizens' Assurance Co Ltd v Evatt [1970] UKPCHCA; (1970) 122 CLR 628
NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2020] WASCA 107
Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255
Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217
Quinlivan v Australian Competition & Consumer Commission [2004] FCAFC 175; (2004) 160 FCR 1
Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1
Re HIH Insurance Ltd; Australian Securities & Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253
Sanrus Pty Ltd v Monto Coal 2 Pty Ltd (No 7) [2019] QSC 241
Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299
Vantage Holdings Group Pty Ltd v Donnelly [No 4] [2019] WASC 398
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
Young Investment Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537

MURPHY & VAUGHAN JJA:

Overview

This is an application for leave to appeal against an interlocutory order of a judge of the General Division.[1] Relevantly, the order appealed from dismissed an application by the appellants to strike out certain paragraphs of the first, third and fourth respondents' statement of claim.[2] Ordinarily such an application for leave to appeal against a decision on a matter of practice and procedure has substantial difficulties.[3] This is a rare case where we have been persuaded that appellate intervention is justified.
[1] The primary judge's reasons are Vantage Holdings Group Pty Ltd v Donnelly [No 4] [2019] WASC 398 (primary reasons).
[2] We will refer to the first, third and fourth respondents as 'the plaintiffs' - they being the remaining plaintiffs in the action.
[3] See eg NRW Contracting Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2020] WASCA 107 [117] - [120].
The claim made against the appellants is complex and the pleading lacks clarity. At the appeal hearing counsel for the plaintiffs conceded, correctly, that some amendment is required and other amendments would mean that the plaintiffs' case is more clearly expressed.[4] The substantial nature of the litigation is such that it is in the interests of justice that the pleading be put right as a matter of priority - well before trial - to avoid what might otherwise see a considerable impost on the resources of the court. Leave to appeal should be granted. For the reasons set out below the appeal should be allowed, various pleas should be struck out and the first, third and fourth respondents should be granted leave to amend.
[4] Appeal ts 46, 52 - 58, 61.

The pleaded claim

Some general observations on the statement of claim

The pleading before the primary judge was the first, third and fourth respondents' further re-amended statement of claim dated 15 January 2019 (SOC).[5]
[5] BAB 92 - 193.
The SOC is difficult to read and more difficult to adequately summarise. It suffers from a familiar problem. The appellants - who we will refer to as 'the auditors' - were relatively late additional parties who were joined to the plaintiffs' claim. The various claims against the auditors have been bolted on to a pleading that was originally directed to various other defendants against whom separate and distinct claims are made. The pleading itself is in its fourth major iteration. One of the original plaintiffs - Reliance Franchise Partners Ltd (in liq) (Reliance Partners) - had become subject to external administration by the time of the hearing before the primary judge. The external administrators had stated that they did not intend to cause Reliance Partners to take any steps in the proceedings. In those circumstances the primary judge determined that Reliance Partners should be removed as a party to the proceedings.[6] Nevertheless, the SOC contains continual reference to Reliance Partners.
[6] Primary reasons [4(c)], [194]. See also orders of the court made 8 November 2019 par 3(a)(iv).
The confluence of these factors is that the SOC presents as being disjointed, difficult to follow and replete with matters of little, if any, relevance to the plaintiffs' claims against the auditors. Much of the problem arises because the pleader has chosen to work within the original architecture of a pleading that never contemplated a claim against the auditors.
The primary judge summarised the relationship between the parties and provided a synopsis of the SOC[7] before going to the details of the pleading.[8] Her Honour also developed some observations as to what were described as 'common threads' of the pleaded case against the auditors.[9] For now, although the primary judge's account of the SOC is more than sufficient, to give coherence to these reasons it is necessary to labour through an outline of the plaintiffs' pleaded case.

The parties

[7] Primary reasons [7] - [22], [30] - [34].

[8] Primary reasons [68] - [71], [74] - [81], [83], [116] - [121], [126], [141] - [148].

[9] Primary reasons [35] - [38].

The auditors comprise the first appellant, Mr English, and the second appellant, PA Audit Pty Ltd (PA Audit). Mr English was a director of PA Audit (SOC par 6D.7). The plaintiffs plead that at all relevant times Mr English was the lead auditor for PA Audit in relation to the audit of the third respondent, Australian Reliance Pty Ltd (Australian Reliance) and Reliance Partners for the 2014 and 2015 financial years (SOC par 12K).
The claims made against the auditors relate solely to Australian Reliance and Reliance Partners and PA Audit's and Mr English's association with Australian Reliance and Reliance Partners as auditor and lead auditor respectively.
The relationship between the plaintiffs and the other material defendants is as follows:
1.Australian Reliance and Reliance Partners have the same ultimate parent company (the first respondent, Vantage Holdings Group Pty Ltd) (SOC pars 1.2 - 1.3).
2.Australian Reliance and Reliance Partners provided general insurance broking services; Reliance Partners was also in the business of providing financial services (SOC pars 2.3 - 2.4, 3.3). Each was required to and did hold an Australian Financial Services Licence (AFSL) (SOC pars 2.5, 3.4). In connection with their businesses both Australian Reliance and Reliance Partners maintained a separate trust account pursuant to pt 7.8 div 2 of the Corporations Act 2001 (Cth) (SOC pars 2.6, 3.5).
3.The first defendant, Mr Donnelly, was the CEO and a director of Australian Reliance and Reliance Partners (SOC pars 5.2 ‑ 5.5).
4.The second defendant, Mr Hanson, was a director of Australian Reliance and Reliance Partners and the CFO of the corporate group of which Australian Reliance and Reliance Partners were a part (SOC pars 6.2 - 6.4).
The plaintiffs plead that from mid-2013 until about 13 July 2016
PA Audit was the auditor of Australian Reliance's and Reliance Partners' financial reports and their compliance with various legislative requirements relating to their AFSLs (SOC par 6C.5).
As well as being lead auditor for PA Audit's audit of Australian Reliance and Reliance Partners for the 2014 and 2015 financial years (SOC par 12K), Mr English was an accountant for Mr Donnelly and Mr Hanson and their related entities (SOC par 6D.9).

Client funds, trust accounts and relevant duties

The plaintiffs plead that in the ordinary course of their business, funds were received from clients on account of premium payments which were required to be paid and were paid into Australian Reliance's and Reliance Partners' respective trust accounts (SOC par 7). They plead:
1.The effect of various legal requirements under the corporations legislation as to the holding of such money on trust and the terms on which withdrawals were permitted (SOC pars 8 - 9).
2.The effect of their obligations as trustees (SOC par 10).
Importantly, Australian Reliance and Reliance Partners were required by s 912D of the Corporations Act to notify ASIC if they breached, or were likely to breach, the relevant corporations legislation provisions or the conditions of their respective AFSLs (SOC par 8.6). And, if there was any misapplication of the trust funds, Australian Reliance and Reliance Partners were obliged to reconstitute their respective trust accounts (SOC par 10.3).
The plaintiffs identify Mr Donnelly's and Mr Hanson's relevant duties as officers of Australian Reliance and Reliance Partners both at general law and in terms of s 180(1), s 181(1), s 182(1) and s 183(1) of the Corporations Act (SOC pars 11 - 12).
The plaintiffs also refer to: (1) the engagement of PA Audit as auditor and Mr English as lead auditor (SOC pars 12J - 12K, 12AM - 12AS); (2) various auditing obligations and standards of the auditors as to financial and other reporting obligations of Australian Reliance and Reliance Partners (SOC pars 12A - 12I, 12L - 12AK). These included obligations under s 311 of the Corporations Act to notify the ASIC as soon as practicable (and in any case within 28 days) if becoming aware of circumstances, among others, whereby Mr English had reasonable grounds to suspect a significant contravention of the Corporations Act (SOC par 12AL); (3) PA Audit's contractual duties as auditor of Australian Reliance and Reliance Partners for the 2014 and 2015 financial years (SOC par 12AM - 12AS); and (4) PA Audit's and Mr English's tortious duty of care in relation to the audits of Australian Reliance and Reliance Partners for the 2014 and 2015 financial years (SOC par 12AT - 12AW).
The SOC pleads the audit work undertaken (SOC pars 12AZ - 12BI). For the 2014 audits there was an unmodified audit opinion (SOC par 12BE). The 2015 audits were not completed (SOC par 12BI).

The trust defalcations and the alleged loss

The plaintiffs plead that there were defalcations from the trust accounts. By April 2014 (as to Reliance Partners) and September 2014 (as to Australian Reliance) there were withdrawals for non-permitted purposes which caused the trust accounts to fall below the minimum balance required by the AFSLs and the relevant corporations regulations insofar as funds were used for Reliance Partners' and Australian Reliance's own benefit and for the benefit of other persons and entities. The conduct was pleaded to be in breach of trust and in contravention of s 981B(1)(c) and s 981C(b) of the Corporations Act and reg 7.8.01(5) and reg 7.8.02(6) of the Corporations Regulations 2001 (Cth) (SOC pars 13 - 15).
Paragraph 16 of the SOC makes an allegation that Australian Reliance has suffered loss and damage. As this is significant in relation to ground 1, we will set this plea out in full:
By reason of ~~Reliance Partners’ and~~ Australian Reliance's breaches of Trustee Duties and contraventions of the Corporations Act, further or alternatively of the Corporations Regulations, as pleaded in paragraph 15 herein~~, Reliance Partners and~~ Australian Reliance have [sic] suffered loss and damage.
Particulars of loss and damage
16.1To the extent that the Client Funds have not been restored to the Trust Accounts by or on behalf of ~~Reliance Partners and~~ Australian Reliance, ~~Reliance Partners and~~ Australian Reliance are [sic] indebted to the persons beneficially entitled to the Client Funds and under a duty to restore Client Funds or equivalent funds to the Trust Accounts.
16.2To the extent that the Client Funds have been restored to the Trust Accounts by or on behalf of ~~Reliance Partners and~~ Australian Reliance, ~~Reliance Partners and~~ Australian Reliance have [sic] suffered loss and damage to the extent of any restoration.
16.3Further particulars may be provided prior to trial.[10]
[10] The strike-outs identify portions of the pleading struck-out by the primary judge. See par 3(a)(iv) order of the court made 8 November 2019 BAB 2.
At the appeal hearing, counsel for the plaintiffs accepted that par 16 of the SOC required amendment (see [82] below).
The plaintiffs have provided further and better particulars of the alleged loss.[11] The Particulars clarify that the loss is said to be some $7.503 million for Australian Reliance and $8.236 million for Reliance Partners (being the extent to which trust funds had been or were required to be restored) save to the extent that the entities used those client funds 'to discharge their own genuine liabilities' or 'to make loans which are fully recoverable' (Particulars pars 1 - 2). Accordingly, the plaintiffs accept that there is no loss to the extent that those exclusions apply. The Particulars identify the persons who allegedly benefited from the defalcations (Particulars par 8 and sch B) and the benefits from the defalcations which were not for the benefit of Australian Reliance (Particulars par 10). Curiously, this includes $3,006,787.94 paid to Australian Reliance itself on the basis that it was 'not in Australian Reliance's interests to be misapplying client funds' (Particulars par 10 (item 6)).
[11] Plaintiffs' further and better particulars dated 8 August 2017 (Particulars) BAB 206 - 226.
The Particulars were accompanied by a document described as an 'Explanatory Memorandum' which was prepared as a qualified guide to the way that the plaintiffs put their case.[12]
[12] Plaintiffs' explanatory memorandum dated 8 August 2017 (EM) BAB 194 - 205. The EM was qualified insofar as it was 'not intended as a complete formulation of the plaintiffs' case at trial': EM par 1.
In the EM the plaintiffs describe the background and the pleading (EM pars 2 - 6). It is said that Australian Reliance and Reliance Partners used the funds withdrawn in breach of trust to transfer to or pay creditors of related entities and to pay Australian Reliance's and Reliance Partners' own creditors (EM par 7). The plaintiffs claim that Australian Reliance and Reliance Partners have suffered loss and damage to the extent that they had used or would have to use their own funds to restore the funds withdrawn from the trust account (EM pars 12 - 13, 25.4, 29, 38).
The EM states:
Funds paid for 'own benefit'
33The plaintiffs accept that in quantifying loss and damage and the amount (if any) of compensation to be awarded, the Court would likely consider any genuine payments to discharge creditors of Reliance Partners and Australian Reliance. This will necessarily be a matter for evidence …
Payments to related entities
34The defendants have further queried whether consideration must be given to 'benefits' received by Reliance Partners and Australian Reliance … in considering whether loss and damage has been suffered. The use of the word 'benefit' in the pleading reflects that trust funds were generally transferred to an operating account before being transferred to other persons or entities: Reliance Partners and Australian Reliance did not retain the trust funds or use them exclusively to discharge their own liabilities. The plaintiffs do not take into account any other 'benefits'. If the defendants suggest that other benefits are to be taken into account, they should specify them in a manner that would allow the plaintiffs and the Court to assess them. (emphasis added)

The pleaded causes of action

The plaintiffs' claims against the auditors may conveniently be put into two broad categories. First, statutory claims: the plaintiffs allege that the auditors were involved in contraventions of the corporations legislation on the part of Australian Reliance, Reliance Partners, Mr Donnelly and Mr Hanson. Second, general law claims: the plaintiffs allege breach of contractual and tortious duties by the auditors.
The plaintiffs plead out numerous causes of action against Mr Donnelly and Mr Hanson in relation to the alleged trust account defalcations. It is only necessary to identify those that are relevant to the claims made against the auditors. Initially it is convenient to work back from the first of the claim categories. In terms of the statutory claim made against the auditors, at par 21Aii[13] of the SOC the plaintiffs plead:
PA Audit and Mr English (collectively, the Auditors) were involved, within the meaning of that expression in section 79(c) ~~and/or (d)~~ of the Corporations Act, in Reliance Partners' and Australian Reliance's contraventions of the Corporations Act, further or alternatively the Corporations Regulations, pleaded at paragraphs 13 to 16 hereof and in Mr Donnelly's and Mr Hanson's contraventions of their Statutory Directors' and Officers' Duties pleaded at paragraph 20 hereof, by reason of the matters pleaded in paragraphs 21C to 21AL hereof. [14]
[13] At the appeal hearing counsel for the plaintiffs accepted that par 21Aii of the SOC required amendment (see [75] below).
[14] The strike-out identifies part of the pleading struck-out by the primary judge. See par 3(a)(ii) order of the court made 8 November 2019 BAB 2.

Accordingly, two apparent statutory accessorial liability claims are advanced based on the facts pleaded at pars 21C - 21AL of the SOC (those alleged facts being summarised at [34] - [36] below):
1.A claim that the auditors were knowingly concerned in various contraventions of the corporations legislation on the part of Australian Reliance and Reliance Partners as pleaded at pars 13 - 16 of the SOC.
2.A claim that the auditors were knowingly concerned in various contraventions on the part of Mr Donnelly and Mr Hanson in relation to their (Mr Donnelly's and Mr Hanson's) statutory duties as officers as pleaded at par 20 of the SOC.
Australian Reliance claims compensation from the auditors pursuant to s 1317H of the Corporations Act (SOC par 21A). On the face of the SOC, Australian Reliance also claims damages or an account of profits or equitable compensation (SOC par 21B). However, during the appeal hearing, counsel for the plaintiffs conceded that par 21B of the SOC had to be abandoned.[15]
[15] Appeal ts 46, 56. See [74] below.
The alleged contraventions on the part of Australian Reliance and Reliance Partners as pleaded at pars 13 - 16 of the SOC (which the auditors are said to have been knowingly concerned in) have already been referred to (see [17] - [18] above). As mentioned, the alleged primary contraventions on the part of Australian Reliance and Reliance Partners said to found the accessorial liability claim against the auditors were put in terms of contravention of one or more of s 981B(1)(c) or s 981C(b) of the Corporations Act or reg 7.8.01(5) or reg 7.8.02(6) of the Corporations Regulations.
The allegation in par 20 of the SOC that Mr Donnelly and Mr Hanson contravened their statutory duties as officers invoked s 180(1), s 181(1), s 182(1) and s 183(1) of the Corporations Act in the following way:
By:
20.1knowingly assisting (as pleaded in paragraphs 17 to 17B hereof); and
20.2failing to prevent, or inform ASIC of (as pleaded in paragraph 18 hereof),
Reliance Partners’ and Australian Reliance's breaches of their Trustee Duties and contraventions of the Corporations Act and the conditions of their respective AFSLs as pleaded in paragraphs 13 to 16 herein, Mr Donnelly and Mr Hanson … contravened their Statutory Directors' and Officers' Duties pleaded at paragraph 12 herein.
In par 20 the reference to 'knowingly assisting' in par 20.1 of the SOC is not to the Barnes v Addy equitable cause of action commonly referred to in those terms.[16] Rather, it refers to Mr Donnelly and Mr Hanson having assisted Australian Reliance and Reliance Partners to breach their respective duties as trustees (SOC pars 17 - 17B) by, among other things:
1.Transferring or directing the transfer of the client funds out of the trust accounts to Australian Reliance's and Reliance Partners' respective operating accounts when Australian Reliance and Reliance Partners were not entitled to those funds (SOC par 17B.1).
2.Directing or making payments out of the trust accounts other than in accordance with the corporations legislation or the terms of Australian Reliance's and Reliance Partners' respective AFSL (SOC pars 17B.5 - 17B.6).
[16] Counsel for the plaintiffs confirmed this to be the case: Appeal ts 45 - 46.
The reference in par 20.2 of the SOC to failing to prevent Australian Reliance's and Reliance Partners' breaches or to inform the ASIC of the same is to the plea in par 18 of the SOC that:
Mr Donnelly and Mr Hanson failed to prevent Reliance Partners and Australian Reliance respectively breaching the Trustee Duties and contravening the Corporations Act, further or alternatively, the Corporations Regulations, as pleaded in paragraphs 13 to 15 herein and did not inform or cause anyone on behalf of Reliance Partners or Australian Reliance to inform ASIC of the deficits in the minimum balances from time to time in the Trust Accounts, the breaches of the Trustee Duties and Australian Reliance's and Reliance Partners' respective contraventions of the Corporations Act, further or alternatively, the Corporations Regulations …
Accordingly, broadly speaking, the plaintiffs allege that Mr Donnelly and Mr Hanson contravened one or more of s 180(1), s 181(1), s 182(1) or s 183(1) by:
1.Transferring or causing or not preventing the transfer of client funds out of the trust accounts maintained by Australian Reliance or Reliance Partners (by payment into the relevant entity's respective operating account) when neither entity was entitled to the funds.
2.Not informing or causing anyone else to inform the ASIC of the trust account defalcations, the trust account deficits or the alleged contraventions of the Corporations Act and the Corporations Regulations on the part of Australian Reliance and Reliance Partners.
The plaintiffs allege that the auditors were knowingly concerned in, or a party to, Mr Donnelly's and Mr Hanson's contraventions and thus involved in those contraventions.
The statutory accessorial liability claims against the auditors (in respect of the primary contraventions of both the companies and the directors) rely on the facts pleaded at pars 21C - AL of the SOC. These extend over some 14 pages. Essentially, however, there are pleas falling within the categories of what a reasonable auditor would have done and what in fact was known and was done by the auditors.
The alleged facts pleaded at pars 21C to 21AL of the SOC said to ground the statutory accessorial liability claims against the auditors concern:
1.The statutory, contractual and tortious duties of the auditors in relation to the conduct of Australian Reliance's and Reliance Partners' 2014 and 2015 audits (SOC par 21E; see also pars 12AM - 12AY).
2.Mr English and a senior employee of PA Audit being informed of a deficit in Reliance Partners' trust account in about October 2014 and thereby being put on inquiry that: (a) Australian Reliance's trust account may be in deficit; and (b) funds may have been misapplied from Reliance Partners' and Australian Reliance's trust accounts (SOC pars 21N, 21O, 21P, 21Q).
3.A number of pleas going to the steps that would have been taken, the risks that would have been recognised and the facts that would have been ascertained or concluded by a reasonable auditor conducting Australian Reliance's and Reliance Partners' 2014 and 2015 audits including that:
(a)a reasonable auditor would have made report to the ASIC of, among other things, the trust account defalcations, the trust account deficits and the alleged contraventions of the Corporations Act and the Corporations Regulations
(b)a reasonable auditor would have expressed a modified audit opinion stating, among other things, that the trust accounts had not been operated and controlled in accordance with s 981B and s 982B of the Corporations Act,
(SOC pars 21C, 21D, 21F, 21G, 21H, 21I, 21J, 21K, 21L, 21R, 21S, 21T, 21Z, 21AA, 21AB, 21AC, 21AD, 21AE).
4.The auditors' failure to notify the ASIC of the trust account defalcations, the trust account deficits and the alleged contraventions of the Corporations Act and the Corporations Regulations (SOC pars 21U, 21V).
5.Australian Reliance's and Reliance Partners' 2014 audits resulting in unmodified audit opinions which were never withdrawn (SOC pars 21AF, 21AG) - there being no audit reports for 2015 (SOC par 21AH).
6.Allegations that PA Audit had breached its contractual duties and the auditors had breached their tortious and statutory duties by: (a) failing to notify the ASIC or anyone of the matters referred to in sub-par 5 above; and (b) failing to conduct Australian Reliance's and Reliance Partners' 2014 and 2015 audits as a reasonable auditor would have done (SOC pars 21W, 21X, 21Y, 21AI, 21AJ).
The pleas at pars 21C - 21AL of the SOC as summarised above provide the factual substratum for the plaintiffs' general law claims alleging breach of contractual and tortious duties in the conduct of the 2014 and 2015 audits. The plaintiffs go on to plead:
21AKBy failing to comply with their respective obligations to report the conduct of Australian Reliance and Reliance Partners pleaded in paragraphs 13 and 14 herein to ASIC, further or alternatively in the 2014 Audit Reports, further or alternatively in audit reports prepared in relation to each of Reliance Partners and Australian Reliance for the 2015 financial year, PA Audit and Mr English allowed that conduct to continue and funds to be further misappropriated from the Trust Accounts.
21ALBy reason of the breaches of PA Audit's Contractual Duties, PA Audit's Duty of Care and Mr English's Duty of Care pleaded at paragraph 21AJ herein, ~~Reliance Partners and~~ Australian Reliance have suffered loss and damage as pleaded in paragraph 16 herein.[17]

Allotment of shares in Steadfast to Hawkstone

[17] The strike-out identifies part of the pleading struck-out by the primary judge. See par 3(a)(iv) order of the court made 8 November 2019 BAB 2.

The plaintiffs pursue another claim against the auditors in relation to shares in a company called Steadfast Group Ltd (Steadfast). This claim is factually distinct from the pleaded causes of action associated with the trust account defalcations. Steadfast is a company that is listed on the ASX (SOC par 23). Prior to listing Steadfast undertook a restructuring (SOC pars 23, 25). Pre-July 2013 Australian Reliance held 5 shares in Steadfast (SOC par 24). As part of the capital restructure, Australian Reliance was entitled to an allotment of various shares in Steadfast (SOC par 25). However, on Australian Reliance's case, Mr Donnelly and Mr Hanson instead procured on 23 July 2013 that the new Steadfast shares were to be allotted to Hawkstone Group Pty Ltd - a company associated with Mr Donnelly and Mr Hanson (SOC pars 6A, 26). The new Steadfast shares were so allotted on 7 August 2013 (SOC par 26A).
The plaintiffs plead that this was a diversion of Australian Reliance's corporate opportunity and occurred in contravention of Mr Donnelly's and Mr Hanson's various general law and statutory duties as directors of Australian Reliance (SOC pars 26 - 29). In terms of the latter, by reason of the pleaded reference to 'Statutory Directors' and Officers' Duties', the plaintiffs again invoke s 180(1), s 181(1), s 182(1) and s 183(1) of the Corporations Act, alleging, in effect, that the conduct of the directors was in contravention of those statutory provisions (SOC pars 12, 29).
As part of the conduct said to be in contravention, the plaintiffs plead:
27AMr Donnelly and Mr Hanson did not take any steps to procure the return of the Steadfast Shares from Hawkstone to Australian Reliance.
27BHawkstone has since sold Steadfast Shares and thereby made a profit …
The particulars to par 27B of the SOC provide that Hawkstone sold the Steadfast shares in April and September 2014 (SOC pars 27B.1, 27B.4).
The plaintiffs plead that the auditors knowingly assisted in the directors' various alleged breaches of duty (SOC par 29CA). The basis of the alleged knowledge (SOC par 29CB) and assistance (SOC par 29CC) is the subject of discrete pleas. Relevantly, the earliest that the directors are pleaded to have knowledge is after the 7 August 2013 allotment (SOC par 29CB.3.1) and in terms of an actual timeframe all that is mentioned is in or about September 2014 (SOC par 29CB.1). However, the primary reasons suggest that there are particulars which clarify that the alleged knowledge arose before the September 2014 sale of the remaining Steadfast shares.[18]
[18] Primary reasons [145] - [146]. These particulars were not included in the BAB.
The alleged assistance in the directors' putative contraventions of the statutory duties (and the breach of the general law duties) is said to arise by reason of: (1) advice given by Mr English in September 2014 in relation to proposals for the use of funds to be acquired by Hawkstone from the sale of the Steadfast shares (SOC pars 29CB.1, 29CC.1); (2) failing to notify the ASIC of what had occurred when it was reasonable for Mr English to suspect that the circumstances amounted to a contravention (in breach of s 311 of the Corporations Act) (SOC par 29CC.2); (3) providing an unmodified audit opinion in relation to Australian Reliance's 2014 audit on 31 October 2014 (SOC par 29CC.3); and (4) failing to withdraw the unmodified audit opinion (SOC par 29CC.4). Self-evidently, the last two categories of alleged assistance occurred after the sale of the Steadfast shares.
The plaintiffs claim that:
1.The auditors were involved in Mr Donnelly's and Mr Hanson's alleged contraventions of their statutory duties as officers of Australian Reliance within the meaning and for the purpose of s 79(c) of the Corporations Act (SOC par 29CD).
2.By assisting in the directors' various alleged breaches of duty and failing to inform the ASIC of the circumstances:
(a) PA Audit breached its contractual duties to Australian Reliance; and (b) the auditors breached their tortious duties to Australian Reliance (SOC par 31C).
It might be thought that, in using the language of 'knowingly assisting', the plaintiffs intended to make a Barnes v Addy type equitable claim against the auditors. However, counsel for the plaintiffs confirmed that there was no Barnes v Addy claim for equitable compensation or an account of profits.[19]
[19] Appeal ts 46.
Relief is sought against the auditors in the form of damages (SOC pars 29C, 31A, 31D) and an order for compensation under s 1317H of the Corporations Act (SOC par 31).

Other matters

Various other matters were pleaded. There included a diversion of funds from Australian Reliance which is not relevant to the appeal (SOC pars 32 - 45G). Nor is it necessary to dwell on a section of the SOC headed 'Hawkstone Lease Payments' (SOC pars 52 - 63) or 'Insubi Payment' (SOC pars 64 - 73).
The remaining section is headed 'David Sneddon' (SOC pars 46 - 51). Mr Sneddon was an employee of the corporate group of which Australian Reliance was a member. This part of the SOC seeks to recover, from Mr Donnelly and Mr Hanson, an alleged incentive payment made to Mr Sneddon said to have been made to ensure that Mr Sneddon did not disclose to any person the issues concerning the alleged defalcations by Mr Donnelly and Mr Hanson in respect of the trust accounts. The potential relevance of this part of the SOC is what Mr Sneddon is pleaded to have disclosed to Mr English about the deficit in Reliance Partners' trust account.
The plaintiffs plead that:
1.On or about 24 October 2014 Mr Sneddon informed Mr English that there was a deficit in the minimum balance required to be held in Reliance Partners' trust account (SOC par 46DA).
2.On or about 27 October 2014 there was a meeting between Mr Sneddon, Mr Donnelly, Mr Hanson and Mr English at which, among other things: (a) Mr Sneddon informed the others (including Mr English) of the deficit in Reliance Partners' trust account; and (b) Mr Donnelly, Mr Hanson and Mr English acknowledged the deficit in Reliance Partners' trust account (SOC pars 46E - 46G).

The basis on which the appellants challenged the SOC before the primary judge

The auditors sought summary dismissal of the various claims on the basis, among others, that they disclosed no reasonably arguable cause of action. The auditors said no arguable case arose that they had knowledge of or intentionally participated in the alleged contraventions. The auditors said that there was no arguable case of knowledge of breach in relation to the trust account defalcations so as to raise any obligation to report. Nor, even if so obligated, was there - on the auditors' argument - an arguable case that the auditors' alleged failures to report and involvement in the contraventions resulted in loss to Australian Reliance.
The primary judge observed that the focus of the argument was on the claims alleging accessorial liability through s 79 of the Corporations Act.[20]
[20] Primary reasons [38].
In terms of the trust defalcations, before the primary judge the auditors contended, among other things, that:[21]
1.There was no reasonably arguable case that Australian Reliance had suffered compensable loss insofar as Australian Reliance brought the proceedings in its personal capacity - on the pleaded case no loss could be found to result from the alleged trust account defalcations.
2.There was no foundation for the accessorial liability claim in par 21Aii of the SOC - the auditors' contention focusing on the absence of any plea of actual knowledge of the facts and circumstances constituting the alleged statutory contraventions.
3.There was no foundation for the alleged breaches of contractual duty by PA Audit or the alleged breaches of tortious duty on the part of PA Audit and Mr English - a contention that focused on the absence of circumstances to provide reasonable grounds to suspect a contravention of the Corporations Act so as to enliven reporting requirements in either s 990K or s 311 of the Corporations Act. In this respect the primary judge recorded that the auditors contended that:
[B]y 31 October 2014, their functions as auditors (for the 2014 financial year) had ended and that it was not until six months later, on 29 May 2015, that it is alleged that PA Audit entered into a contract to prepare audit reports for the 2015 financial year, which was not performed.[22]
4.The allegations concerning Reliance Partners were irrelevant and embarrassing insofar as Reliance Partners was not a proper party to the proceedings.
[21] Primary reasons [62] - [66], [82], [84], [91], [122], [132].
[22] Primary reasons [91].
The plaintiffs contended that the pleadings raised an arguable case of actual knowledge; or alternatively, that it could be inferred from the matters pleaded that the auditors had actual knowledge.[23]
[23] Primary reasons [85].
In terms of the Steadfast shares, before the primary judge the auditors contended that:[24]
1.The pleaded facts were insufficient to ground an inference that they had knowledge of Mr Donnelly's and Mr Hanson's alleged contraventions at the time of those contraventions.
2.The pleaded facts alleged to constitute their involvement were not alleged to have been performed in connection with or in the facilitation of the alleged contraventions of Mr Donnelly and Mr Hanson.
[24] Primary reasons [149].
The primary judge recorded that the auditors' contentions before her in relation to the Steadfast shares only challenged the pleas in relation to the Steadfast shares so far as the claim was advanced as an accessorial liability claim invoking s 79(c) of the Corporations Act.[25]
[25] Primary reasons [149].

The decision of the primary judge

The auditors accepted that the primary judge correctly identified the principles applicable on a strike out application of the kind before the court.[26] The auditors were correct to do so. The primary judge stated:
[26] Appellants' submissions par 6 WAB 128.
The principles relevant to the strike out application are as follows:
(a)the essential functions of a pleading are to define and limit the issues for decision, to provide the basis for determining discovery and the admissibility of evidence for trial, and to ensure a fair trial by putting the other side on notice of the case it must meet;
(b)a statement of claim must not plead allegations at too high a level of generality. A pleading must be sufficiently particular to conform with one of the primary objects of pleadings, to inform the opposing party of the case that it must meet;
(c)a statement of claim must state specifically the relief or remedy claimed;
(d)the court should proceed with caution before striking out a pleading on the ground that it does not disclose a reasonable cause of action. While the court may determine a difficult question of law on such an application, it would usually be appropriate to leave the determination of such questions for trial;
(e)in alleging no reasonable cause of action:
(i)the question to be decided is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action. Rather, the question is whether it would be open to the party (on its pleadings) to prove facts at the trial which would constitute a cause of action; and
(ii)'reasonable' means reasonable according to law. If the facts pleaded conceivably give rise to relief, then the cause of action should be held to be reasonable;
(f)the mere fact that a case appears weak is not of itself sufficient to strike out the action;
(g)in considering a strike out application, it is now necessary to consider the role of pleadings in the context of case management techniques. Case management considerations are not, however, necessarily antithetical to the observance of pleading rules. The objects of O 1 r 4A and 4B of the Rules of the Supreme Court 1971 (WA) are often promoted by a clear and precise statement of the issues for decision;
(h)provided a pleading fulfils its basic functions of identifying the issues, disclosing an arguable cause of action (or defence), and apprising the parties of the case that has to be met, the court ought properly be reluctant to allow the time and resources of the parties and the limited resources of the court to be spent extensively debating the application of technical pleading rules that evolved in, and derive from, a very different case management environment;
(i)pleadings may be struck out on the ground that they may prejudice, embarrass or delay the fair trial of the action because they are evasive, they conceal or obscure the real questions in controversy, they are ambiguous or not reasonably intelligible, they raise immaterial or irrelevant issues, they fail to confine the issues or state the case of the party in question with reasonable particularity, or they raise a case in terms which are simply too general; and
(j)irrelevant or unnecessary pleas in a statement of claim will be struck out on the grounds that they will prejudice, embarrass or delay the fair trial of the action where the defendant must traverse the allegations and, thereby, raise false issues.[27] (citations omitted)
[27] Primary reasons [60].

The primary judge collected numerous authorities in support of these propositions. Her Honour's synthesis of the principles is a valuable guide for the determination of any strike-out application. It would serve no useful purpose, on appeal, to repeat the exercise carried out by the primary judge. The relevant principles have been set out comprehensively and correctly by the primary judge. We gratefully adopt the primary judge's statement of the relevant principles.
So too, in the passage we extract below, the primary judge correctly summarised the effect of s 79(c) of the Corporations Act - providing for the circumstances in which a person is involved in a contravention because he or she is knowingly concerned in or party to the contravention - and the principles applicable to accessorial liability under s 79(c):
For a party to be involved in a contravention, within s 79 of the Corporations Act, it must be established that the party has full knowledge of the essential facts or matters constituting the contravention and is an intentional participant by virtue of some act or conduct on his or her part which contributes to the commission of the contravention. As such, three elements to accessorial liability arise under s 79.
The first element is actual knowledge of each of the material facts constituting the contravention (by the principal). Proof of actual knowledge of the elements of the contravention may be found by direct evidence or may be inferred. It may be inferred from suspicious circumstances and a failure to make an inquiry; this has been described as 'wilful blindness'. However, what is required is actual knowledge; constructive knowledge is not sufficient, nor is recklessness or negligence.
…
Proof of actual knowledge must be knowledge of each of the material facts at the time of the contravention. Acquisition of actual knowledge after the fact is not sufficient …
The second element is participation. A person is not involved in a contravention unless he assents to, or concurs in, the conduct which constitutes the contravention. Over and above the element of actual knowledge, the person must have engaged in conduct, by some act or omission, that implicates, or involves, the person in the contravention by establishing a practical connection between that person and the contravention. However, it is not necessary that the person physically do anything to further the contravention. It is sufficient if the person, by what he or she said and agreed to do, in fact became associated with and thus involved, in the relevant sense, in the conduct constituting the contravention.
The third element is the mental element; that is, the accessory must be an intentional participant …[28] (citations omitted)
[28] Primary reasons [50] - [51], [54] - [56].
The primary judge also summarised the principles applicable to s 79(a)[29] and s 79(d).[30] Those principles are immaterial on appeal. The plaintiffs do not rely on s 79(a) in the causes of action against the auditors that are relevant on appeal; and the primary judge struck-out the relevant portions of the SOC so far as those causes of action relied on s 79(d).[31]
[29] Primary reasons [58].
[30] Primary reasons [59].
[31] Primary reasons [115]. See also order of the court made 8 November 2019 par 3(a)(ii) BAB 2.
There was no dispute on appeal as to the principles concerning accessorial liability under s 79 as enunciated by the primary judge. Again, we gratefully adopt the primary judge's statement of the relevant principles. We would, however, emphasise that for involvement in a contravention as one who is 'knowingly concerned' within the meaning and for the purpose of s 79(c):
1.It must be established that:
(a)the person had knowledge of the essential facts or elements constituting the contravention;[32] and
(b)the person was an 'intentional participant'[33] by virtue of some act or conduct on the person's part which shows a 'practical connection' between the person and the contravention - this requires a practical connection with at least one of the essential elements of the contravention.[34]
2.The requisite knowledge must be present at the time of the contravention; the subsequent acquisition of such knowledge is insufficient.[35]
3.The knowledge must embrace all essential material factual ingredients of the contravention.[36] The knowledge must be actual knowledge[37] - although knowledge of suspicious circumstances and failure to make appropriate inquiry when confronted with the obvious may be sufficient to infer actual knowledge of the relevant essential matters.[38]
[32] Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661, 670, 677.
[33] Yorke v Lucas (670).
[34] Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299, 357 - 358.
[35] Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267; (2005) 53 ACSR 305 [113] - [118].
[36] Re HIH Insurance Ltd; Australian Securities & Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 [209] (approved in Forge v Australian Securities & Investments Commission [2004] NSWCA 448; (2004) 213 ALR 574 [202]).
[37] Quinlivan v Australian Competition & Consumer Commission [2004] FCAFC 175; (2004) 160 FCR 1 [8] - [10]; Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1 [261]; Young Investment Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 [11].
[38] Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217, 219. See also: Re HIH Insurance Ltd; Australian Securities & Investments Commission v Adler [358]; Forge v Australian Securities & Investments Commission [202]; Rafferty v Madgwicks [261]; Young Investment Group Pty Ltd v Mann [11].
The primary judge identified, correctly, that acquisition of knowledge after the fact was not sufficient.[39] Her Honour went on to conclude that if a contravention is alleged to be continuing it may be sufficient to acquire knowledge before the contravention is complete.[40] That conclusion was not in issue on the appeal.
[39] Primary reasons [54].
[40] Primary reasons [54].
After summarising the SOC, and identifying the common threads of the plaintiffs' pleaded case, the primary judge made reference to the statutory obligations of auditors.[41] No complaint is made as to her Honour's summary. It is not necessary to repeat the primary judge's observations. The primary judge also referred to many of the various statutory obligations which grounded the SOC - including those pertaining to the holder of an AFSL.[42]
[41] Primary reasons [40] - [44].
[42] Primary reasons [45] - [47].
In considering the auditors' complaints in relation to the SOC so far as it concerned the trust account defalcations, the primary judge concluded:
1.While it was common ground that only funds paid from Australian Reliance's and Reliance Partners' operating accounts to third parties for 'non-genuine purposes' were recoverable, her Honour was 'not persuaded that the pleadings do not raise an arguable case of loss and damage of this category'.[43] To the extent that the defalcations resulted in payments as particularised that were in fact for an authorised purpose that would, in her Honour's view, constitute a defence involving matters of evidence to be considered at trial.[44]
2.It was arguable that it could be inferred that Mr English had actual knowledge of the alleged primary contraventions from: (a) the pleaded suspicious circumstances; and (b) Mr English's pleaded failure to make inquiry when it was arguable that he had a duty to inquire.[45] Her Honour said that there was an arguable case that Mr English was wilfully blind[46] - a finding apparently influenced by his alleged duties to enquire and report meaning that the pleaded case was not only of wilful blindness but also action or inaction.[47] The primary judge was also satisfied that it was arguable that Mr English had participated in the alleged contraventions by failing to make enquiries and provide necessary reports.[48]
3.It was open on the pleaded case to attribute Mr English's knowledge and acts to PA Audit.[49] So too it was arguable that the knowledge of the PA Audit senior employee was attributable to PA Audit and that the knowledge of Mr English and the employee was to be aggregated.[50] Thus it was arguable that, by at least the end of October 2014, PA Audit had knowledge of the trust account misapplications and participated in the alleged contraventions of Mr Donnelly and Mr Hanson.[51]
4.The pleaded case against PA Audit and Mr English for breach of contractual and tortious duties was arguable.[52] Her Honour made specific reference to a contention that any duties were confined by the completion of the 2014 audits (on 31 October 2014) and entry into a contract on 29 May 2015 to prepare audit reports for 2015.[53] However, the primary judge was not satisfied that the SOC did not raise an arguable case that the duties were ongoing and were not confined by the periods when the specific contracts were entered into.[54]
5.Australian Reliance's case as to the trust account defalcations was so factually bound together with the pleaded factual matrix as to the alleged Reliance Partners trust account defalcations that the latter allegations should not be struck out.[55]
[43] Primary reasons [134] - [135].
[44] Primary reasons [138].
[45] Primary reasons [90] - [94].
[46] Primary reasons [90].
[47] Primary reasons [53], [87].
[48] Primary reasons [95]. See also [112(c)], [113(b)].
[49] Primary reasons [100], [108].
[50] Primary reasons [102], [107], [111].
[51] Primary reasons [110] - [113].
[52] Primary reasons [123] (referring to [90], [93] - [95], [107], [109] - [113].
[53] Primary reasons [91].
[54] Primary reasons [93], [110].
[55] Primary reasons [198].
With one exception these findings are challenged by the appeal. The exception is that the auditors do not seek to disturb the primary judge's finding that there is an arguable case that Mr English's knowledge and acts may be attributed to PA Audit (as might the knowledge of the senior employee of PA Audit). The other findings are challenged by grounds 1 - 4.
The primary judge only had to consider the statutory accessorial liability claim against the auditors in relation to the Steadfast shares (see [54] above). The primary judge found that the matters pleaded at pars 29CB.1 - 29CB.3 of the SOC sufficiently identified facts that could conceivably establish that the auditors were involved in (and in any case became 'associated with' and thus 'participated in')[56] Mr Donnelly's and Mr Hanson's alleged contraventions[57] (although, as mentioned at [41] - [42] above, par 29CB is a 'knowledge' plea rather than an 'assistance' or 'participation' plea). Moreover, so far as what is pleaded are 'continuing contraventions', the primary judge found it was arguable that Mr English - and thereby PA Audit - had actual knowledge of the essential facts constituting one or more of the contraventions at the time of their occurrence.[58]
[56] Primary reasons [160].
[57] Primary reasons [151].
[58] Primary reasons [153].
The findings in relation to the Steadfast shares are challenged by ground 5.

The grounds of appeal

The grounds of appeal are prolix (something of an irony given the nature of ground 4). For that reason we will not set them out in full. It is enough to state their effect.
In substance the grounds of appeal contend:
1.The primary judge erred in law in finding that the SOC discloses a reasonable cause of action against the auditors insofar as the SOC discloses no cause of action that the auditors caused Australian Reliance to suffer loss or damage in a personal capacity rather than in Australian Reliance's capacity as trustee (ground 1). Ground 1 directs attention to SOC pars 21A, 21B and 21AL.
2.The primary judge erred in law in finding that the SOC discloses a reasonable cause of action against the auditors insofar as the SOC discloses no cause of action that the auditors were involved in Mr Donnelly's and Mr Hanson's alleged contraventions - there being no arguable case that the auditors had actual knowledge of and participated in the contraventions (ground 2).
3.The primary judge erred in law in finding that the SOC discloses a reasonable cause of action insofar as the SOC discloses no cause of action based on contractual or tortious breach in relation to the 2015 audit or that Australian Reliance suffered any loss or damage caused by any such breach (ground 3).
4.The primary judge erred in law in finding that pleas within the SOC would not prejudice, embarrass or delay the fair trial of the action insofar as various pleas and the statement of claim as a whole were prolix and uninformative and failed to comply with the rules (ground 4). Ground 4 directs attention to SOC pars 6.6, 6C.5.1, 6E.3, 7 - 10, 12B - 12D, 12E.2, 12F, 12H, 12BI and 13 - 21AL.
5.The primary judge erred in law in finding that pars 29C, 31, 31A and 31D of the SOC (in relation to the Steadfast shares claim) disclose a reasonable cause of action against the auditors insofar as the SOC discloses no cause of action because on the facts as pleaded the alleged contraventions were completed and the alleged loss suffered before the auditors were alleged to have obtained knowledge of and to have participated in the contraventions (ground 5).
Two of the grounds of appeal did not expressly identify the pleas within the SOC to which they were directed. Senior counsel for the auditors was asked to identify the pleas that, on the auditors' case, would be struck out if a particular ground was upheld. The response is summarised in the schedule to these reasons. Viewed by individual ground, the response exceeds what was stated in the grounds of appeal and auditors' written submissions in support of the ground. For example, the express terms of ground 5 only direct attention to pars 29C, 31, 31A and 31D of the SOC; yet the auditors seek to strike out pars 29CA - 29CD, 31C - 31D and various references in 29C, 31 and 31A. However, the pleas challenged at the appeal hearing do not in their totality exceed the scope of that challenged before the primary judge and the orders wanted in the appellant's case.
There is significant overlap between the grounds. In particular both grounds 1 and 3 raise whether there is any or any sufficient plea identifying that the plaintiffs had suffered compensable loss for which there might be a claim for compensation or damages. Ground 4 is also a catch-all which applies to the paragraphs attacked by grounds 1 - 3.
The plaintiffs pointed out that, by ground 4, the auditors seek to strike out numerous pleas setting out, among other things, relevant background facts and material facts as to claims against other defendants. The plaintiffs submitted that this went beyond what was sought by the auditors before the primary judge. Then, by par 3(b)(ii) of their minute,[59] the auditors only sought that those pleas be struck out so far as they contained allegations concerning Reliance Partners.
[59] Reproduced in the schedule to these reasons.
The plaintiffs' contention that in this respect the auditors advance a new case on appeal must be accepted. At the appeal hearing senior counsel for the auditors accepted that the auditors advanced a new argument so far as it was now sought to strike out the relevant pleas in their totality on the basis that they may prejudice, embarrass or delay the fair trial of the action.[60] Ground 4 should be assessed in light of the auditors' concession that it advances a new argument not pressed before the primary judge.
[60] Appeal ts 30.
More generally, the plaintiffs contended that leave to appeal should be refused. The plaintiffs submitted that the auditors know the case they have to meet and the causes of action are reasonably arguable and sufficiently pleaded. The plaintiffs said that no error had been identified and that no substantial injustice would be done by leaving the decision unreversed.[61]
[61] Plaintiffs' submissions pars 2 - 4 WAB 156 - 157. See also par 6 WAB 159.

Amendments proposed at the appeal hearing

At the appeal hearing, in the course of debate about the causes of action as pleaded, counsel for the plaintiffs informed the court that some amendments to the SOC were required. These matters should be mentioned now so far as they may impact on consideration of the grounds of appeal. Three different amendments were proposed.
First, the plaintiffs proposed to abandon par 21B of the SOC as against the auditors.[62] Accordingly, that would see the excision of the words 'and the auditors' from par 21B. That part of the relief sought was untenable insofar as the statutory cause of action sounded only in potential relief pursuant to s 1317H of the Corporations Act rather than the wider general law relief as sought in par 21B.
[62] Appeal ts 46, 56.
Second, the plaintiffs proposed to modify par 21Aii of the SOC as follows:[63]
PA Audit and Mr English (collectively, the Auditors) were involved, within the meaning of that expression in section 79(c) of the Corporations Act, ~~in Reliance Partners' and Australian Reliance's contraventions of the Corporations Act, further or alternatively the Corporations Regulations, pleaded at paragraphs 13 to 16 hereof and~~ in Mr Donnelly's and Mr Hanson's contraventions of their Statutory Directors' and Officers' Duties pleaded at paragraph 20 hereof, by reason of the matters pleaded in paragraphs 21C to 21AL hereof.
[63] Appeal ts 55.
The necessity for that amendment became apparent when counsel for the plaintiffs was asked to step through the statutory provisions that were said to ground the statutory accessorial liability claim. The relief sought is compensation under s 1317H of the Corporations Act. One of the conditions for relief by way of a compensation order under s 1317H is that the relevant defendant has 'contravened a corporation/scheme civil penalty provision in relation to the corporation'.[64] At the material time the term 'corporation/scheme civil penalty provision' was defined in s 1317DA by reference to items 1 - 13 and 46 of the table in s 1317E.[65] Involvement in a contravention of s 981B(1)(c) or s 981C(b) of the Corporations Act and reg 7.8.01(5) or reg 7.8.02(6) of the Corporations Regulations (the relevant contraventions pleaded in SOC pars 13 - 16) is not a contravention of a corporation/scheme civil penalty provision as so defined.
[64] Corporations Act s 1317H(1)(a).
[65] Section 1317DA and s 1317E have since been repealed and, in the case of s 1317E, substituted by s 115 and s 116 of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth). However, those changes only commence with effect from 13 March 2019. See also Corporations Act s 1657.
Accordingly, there is no reasonable cause of action for relief pursuant to s 1317H so far as the plaintiffs plead that the auditors were involved in Australian Reliance's and Reliance Partners' contraventions. That part of par 21Aii of the SOC is untenable - as counsel for the plaintiffs correctly identified by the proposed amendment.
There is, in this respect, a similar overreach so far as the statutory accessorial liability claim relies on primary liability in the form of a contravention of s 180(1) of the Corporations Act.
Section 181(2), s 182(2) and s 183(2) provide, in relevant effect, that a person who is involved in a contravention of s 181(1), s 182(1) and s 183(1) respectively contravenes the earlier subsection (ie s 181(2), s 182(2) or s 183(2)). Each of s 181(2), s 182(2) and s 183(2) is a corporation/scheme civil penalty provision. However, as at the material time, there was no similar provision whereby a person involved in a contravention of s 180(1) thereby contravened a provision that constituted a corporation/scheme civil penalty provision.[66] Accordingly, the plea that the auditors were involved in Mr Donnelly's and Mr Hanson's alleged contraventions of s 181(1), s 182(1) and s 183(1) of the Corporations Act could ground a claim for a compensation order pursuant to s 1317H. But that is not the case with the plea that the auditors were involved in Mr Donnelly's and Mr Hanson's alleged contravention of s 180(1) of the Corporations Act. There is no reasonable cause of action in this respect.
[66] Compare s 1317E(4) of the Corporations Act as introduced, with effect from 13 March 2019, by s 116 of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth). However, the amendments do not apply to the alleged conduct of the auditors as the alleged conduct constituting the alleged contravention did not occur on or after 13 March 2019 (being the commencement date of sch 1 to the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth). See Corporations Act s 1657.

One difficulty with par 21Aii of the SOC as it is proposed to be amended is that it refers in a rolled-up way to Mr Donnelly's and Mr Hanson's contraventions of their 'Statutory Directors' and Officers' Duties' - a plea that invokes s 180(1), s 181(1), s 182(1) and s 183(1) without discrimination.
The problem adverted to above in [78] - [80] above also applies to pars 29CD and 31 of the SOC insofar as the statutory accessorial liability claim against the auditors relies on a putative contravention of s 180(1) of the Corporations Act by Mr Donnelly and Mr Hanson.
Third, the plaintiffs proposed to modify par 16 of the SOC as follows:[67]
By reason of Australian Reliance's breaches of Trustee Duties and contraventions of the Corporations Act, further or alternatively of the Corporations Regulations, as pleaded in paragraph 15 herein, Australian Reliance have [sic] ~~suffered loss and damage~~ incurred an obligation to restore the trust account.
Particulars ~~of loss and damage~~
16.1To the extent that the Client Funds have not been restored to the Trust Accounts by or on behalf of Australian Reliance, Australian Reliance are indebted to the persons beneficially entitled to the Client Funds and under a duty to restore Client Funds or equivalent funds to the Trust Accounts.
16.2To the extent that the Client Funds have been restored to the Trust Accounts by or on behalf of Australian Reliance, Australian Reliance ~~have suffered loss and damage to the extent of any restoration~~ incurred the costs of such restoration.
16.3Further particulars may be provided prior to trial.
[67] Appeal ts 54 - 57.
The proposed amendment to par 16 of the SOC was to deal with matters that arose in the course of debate between the court and counsel for the plaintiffs in the context of ground 1.
It is necessary, conceptually, to distinguish between the consequences of a breach of the corporate trustee's duty to the beneficiaries of the trust and a breach of duty by the directors to the company in causing or not preventing the company breaching its duties as trustee. Paragraph 16 of the SOC, being intended to address the former, had to be restated in the manner proposed by counsel for the plaintiff. This, however, left for identification the nature and extent of the loss and damage, if any, suffered by the corporate trustee.

Disposition: Ground 1 - No loss in personal capacity

The nub of ground 1 is that the SOC does not disclose a reasonable case that Australian Reliance suffered loss in its own right; the auditors submit that no reasonable cause of action is pleaded for recovery of compensable loss.[68] The auditors point out that:[69]
1.It is not alleged that Mr Donnelly or Mr Hanson contravened their statutory duties as directors by misappropriating funds of Australian Reliance.
2.It is not alleged that Australian Reliance suffered loss because funds belonging to Australian Reliance in law were misappropriated.
[68] Appellants' submissions pars 17, 26 - 28 WAB 132, 134.
[69] Appellants' submissions par 22 WAB 133.
The auditors submit that Australian Reliance could not have suffered loss or damage by the mere act of misappropriating trust funds for its benefit - the plaintiffs having pleaded that the funds were transferred from Australian Reliance's trust account into its operating account.[70] There was no loss associated with using funds held legally when Australian Reliance expended the funds for its benefit.[71]
[70] Appellant's submissions par 25 WAB 133 - 134.
[71] Appeal ts 11.
The plaintiffs rely on the reasoning of the primary judge. In written submissions the plaintiffs state:
Australian Reliance's position is as follows:
12.1in breach of trust, funds were withdrawn from Australian Reliance's trust account for purposes foreign to the trust;
12.2Australian Reliance has suffered loss and damage to the extent that it has been required to restore its trust account and retains a personal liability to restore the funds not already repaid;
12.3the funds withdrawn from Australian Reliance's trust account were generally deposited into Australian Reliance's operating account before being disbursed. Some of the payments were not for the direct benefit of Australian Reliance; and
12.4Australian Reliance's claim for loss and damage will be reduced if and to the extent that it is found to have used funds withdrawn in breach of trust to discharge its direct genuine liabilities or to make fully recoverable loans.[72]
[72] First, third and fourth respondents' submissions (Respondents' submissions) par 12 WAB 160 - 161.
From the auditors' perspective, there was some confusion as to the nature of the plaintiffs' case. Senior counsel for the auditors posited that the plaintiffs' claim involved two steps: the first the trust account defalcations and the second the payments out from Australian Reliance's operating account for non-corporate purposes.[73] It was suggested that the plaintiffs' true case was one where the trust defalcations were part of a wider scheme that led to payments to the benefit of the directors or companies related to them.[74] The auditors submitted that only the second step could lead to a loss - no loss ever being attributable to the first step alone - and there was no plea that the auditors were knowingly concerned in or a party to the second step or even that the directors were guilty of a relevant primary contravention in that respect.[75]
[73] Appeal ts 7 - 9, 12 - 15, 24 - 25.
[74] Appeal ts 13. Later, however, senior counsel for the auditors accepted that the auditors had perhaps distilled a wider case than could be found in the pleading: Appeal ts 20.
[75] Appeal ts 12, 15 - 17, 19.
It was however contended that, irrespective of an admitted breach of trust, the mere removal of funds from a trust account into a general account did not in itself result in a loss to the trustee.[76]
[76] Appeal ts 20.
The plaintiffs clarified their case in oral submissions to the court. Counsel for the plaintiffs submitted that, where a corporate trustee misapplied trust funds and had an obligation to restore the funds, it had a cause of action against the officers who were responsible for the misappropriation.[77] Australian Reliance sued Mr Donnelly and Mr Hanson in this way for contraventions of their statutory obligations. But Australian Reliance also sued the auditors as being involved in the directors' contraventions. Thus the claim was in respect of the first step as posited by the auditors.[78]
[77] Appeal ts 33.
[78] Appeal ts 34, 36.
According to counsel for the plaintiffs, the so-called 'second step' went only to loss - the money obtained by the trust account defalcations becoming available to be used and in fact being used for non-corporate purposes.[79] Counsel accepted that a causal question arose in this respect but said this was a question for trial[80] - going to no more than the measure of the damage resulting from the trust account defalcation.[81] Breaking down the case in this way was of importance as, on the plaintiffs' case, there was no need for knowledge or participation on the part of the auditors at the stage of the second step as a breach occurred irrespective of whether there was loss and there was no need for knowledge of the damage independent of knowledge of the contravention.[82]
[79] Appeal ts 34 - 36.
[80] Appeal ts 36, 39, 41.
[81] Appeal ts 37.
[82] Appeal ts 39 - 40, 42, 47.
As explained by counsel for the plaintiffs, the loss was the misapplication - by the corporate trustee personally - of the funds it had obtained in breach of trust by the trust account defalcations.[83]
[83] Appeal ts 38 - 39.
The difficulty with this analysis, as we see it, is that on the material facts as pleaded it is not reasonably arguable that the alleged loss as identified by counsel for the plaintiffs is caused by the trust account defalcations. There would be no loss but for the funds the subject of the trust account defalcations subsequently being misapplied by being used for a non-corporate purpose. Any loss suffered by Australian Reliance personally is relevantly caused by the subsequent misapplication for a non-corporate purpose rather than Australian Reliance's initial trust account defalcation.
An example may assist. Let it be assumed that a trustee - say a professional executor company - misappropriates $100 by transferring that amount from a trust account to its general account. The executor company has an obligation to restore the $100; and, to the extent that the $100 is traceable, the $100 remains impressed with the trust. But what is the loss to the executor company while the executor company retains the $100 which was misapplied? There can be no loss. The executor company holds the $100 and it may be applied to meet the obligation to restore.
Counsel for the plaintiffs accepted that there was no loss in this situation.[84]
[84] Appeal ts 37, 52.
Continuing with the illustration, what if the $100 is applied in meeting a debt of the executor company? There is still no loss. The countervailing benefit, in the form of the reduction in the personal liabilities of the executor company, offsets and cancels out the obligation to restore the $100. That will also be the position if the $100 is expended in purchasing some asset (although, here again, the asset may be impressed with the trust). The only circumstance by which the executor company is worse off (to use a neutral term) is if there is a further misapplication or some other waste of the $100. Then the executor company remains obliged to restore the $100 but no longer has any countervailing benefit. However, in this latter scenario any 'loss' is not caused by the misappropriation from the trust account; it is caused by the further misapplication or other waste.
The material facts as pleaded by the plaintiffs were premised on the trust account defalcations resulting in a transfer into Australian Reliance's operating account (SOC par 17B.1; Particulars par 7 and sch B; EM pars 5, 34).[85] That alone - on the plaintiffs' admission - did not result in an actionable loss vis-à-vis the auditors. It was only to the extent that thereafter Australian Reliance applied the funds to a non-corporate purpose - ie not to discharge genuine liabilities or to make fully recoverable loans (Particulars par 1) - that a loss was claimed.
[85] This was also the position adopted by the plaintiffs before the primary judge (Primary reasons [130(a)]) and on appeal (Respondents' submissions par 12.3 WAB 160).
Counsel for the plaintiffs accepted, correctly, that a causation question arose. That is self-evident in relation to the general law claims alleging contractual breach (at least to the extent that non-nominal damages are sought) and tortious breach. The plaintiffs' plea in this respect was in the terms of pars 21AK and 21AL as reproduced at [36] above. At the appeal hearing there was no explanation of how the proposed amendment to par 16 of the SOC would affect what was asserted at par 21AL - the plea at par 21AL referring to par 16 of the SOC.
The causal requirement for the statutory accessorial liability claim arises under s 1317H. There s 1317H(1)(b) necessitates consideration of whether the damage suffered for which the corporation seeks a compensation order is damage that 'resulted from the contravention'. These words require a causal connection between the alleged damage and the contravening conduct; only damage which as a matter of fact is caused by the contravention can be the subject of an order for compensation.[86]
[86] Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 [709]. It is not necessary to consider whether an analogy can be drawn with the approach to causation taken to breaches of near-identical duties in equity as was suggested by Edelman J in Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; (2014) 48 WAR 1 [452].
The problem in the present case is the not uncommon problem of differentiating between a breach (or a contravention) which causes the claimed loss and a breach (or a contravention) which merely provides the occasion or opportunity for the subsequent suffering of the claimed loss.
The plaintiffs' pleaded causation case is in one respect perfunctory and in another respect non-existent. In relation to the general law claims, par 21AL of the SOC asserts, without more, that by reason of the alleged breaches Australian Reliance suffered loss and damage as pleaded in par 16 of the SOC - thus apparently simply directing attention to the obligation to restore. The statutory accessorial liability claim merely invokes s 1317H. There is not even a plea to the effect that damage resulted from the auditors' alleged contraventions. In both respects the SOC does not allege a causal connection between the alleged contraventions (as to the statutory claims) or the alleged breaches (as to the general law claims) and the relevant loss as identified by counsel for the plaintiffs (that being Australian Reliance's misapplication of the funds it obtained in breach of trust by the trust account defalcations).
Sometimes a causal link between a breach or contravention and a particular head of damage may be obvious. In such a case an expressly pleaded causal link may be unnecessary. A general plea, such as that found at par 21AL, may suffice. If, however, the alleged causal link is not obvious, a claimant should plead the material facts relied on to establish the causal link between the breach (or contravention) and the claimed loss - and the alleged causal link must at least arguably establish the necessary causal connection between the breach (or contravention) and the alleged suffering of such a loss.
In short, as French J (as his Honour then was) said in a misleading conduct case, 'the material facts establishing the necessary causal link should be pleaded'. Moreover, it is necessary to plead material facts which give rise to a 'reasonable inference' that the breach or contravention and the alleged loss stand to each other 'in the relation of cause and effect'.[87]
[87] Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors (1987) 14 FCR 215, 221 - 222 (referring to Dow Hager Lawrance v Lord Norreys (1890) 15 App Cas 210, 221). A number of similar authorities are collected by Bond J in Sanrus Pty Ltd v Monto Coal 2 Pty Ltd (No 7) [2019] QSC 241 [17] - [21].
A cause of action should only be struck out as not being reasonable due to the absence of the requisite causal link where the allegation of causation is clearly untenable on the pleading. In this context the term 'reasonable' means reasonable according to law. The question of law stands independently of the facts giving rise to it. The court must proceed on the basis that the facts alleged in the pleading are established. The question is whether, on the facts as pleaded, there is a sufficient causative relationship alleged between the alleged breach (or contravention) and the alleged loss. Any question of causation is quintessentially a question of fact and degree. The question is fact sensitive and will be affected by the evidence. This accentuates the need to take a cautious approach in assessing whether a pleaded claim is untenable. Nevertheless, the basal requirement remains: the material facts as pleaded must be capable of being regarded as sufficient to establish that the required causal connection between a breach (or a contravention) and the loss exists.
The SOC as pleaded does not disclose a reasonable cause of action in this respect. There is no loss so far as the trust account defalcations saw a misappropriation from Australian Reliance's trust account to its operating account. That is as far as the material facts pleaded in the SOC go.
A somewhat wider case was alleged in the Particulars and the EM - as further explained by counsel for the plaintiffs - in terms of loss due to the misapplication by Australian Reliance for non-corporate purposes of the funds it so obtained in breach of trust. There are two difficulties with that wider case. First, the material facts are not pleaded. That shortcoming might be excused. The auditors did not rest on niceties; they were content to deal with the allegations as they appeared from the Particulars and the EM. Second, and more fundamentally, the paucity of the material allegations on the question of causation of loss reading the SOC, the Particulars and the EM as a whole are insufficient to establish - arguably or by reasonable inference - the required specific causal connection between the alleged contraventions or breaches and the loss said to be suffered. On the facts as alleged, while it may be said that the auditors' alleged contraventions and breaches were circumstances that were antecedent to the loss, they were not causative of the loss.
On the plaintiffs' present pleading it is not reasonably arguable that there is a causative link between, on the first part, the auditors' alleged statutory contraventions or their alleged general law breaches, and, on the second part, the claim for loss as articulated on behalf of the plaintiffs. There is, for this reason, no reasonable cause of action for the loss as claimed against the auditors in relation to the trust account defalcations. We consider, respectfully, that the primary judge was in error in coming to the contrary conclusion. Subject to the question of leave to appeal, we would uphold ground 1.
Assuming, subject to leave to appeal, that ground 1 is upheld, consideration ought to be given to what results in terms of the SOC. The auditors sought orders striking out numerous pleas. This goes too far. It may be that by pleading additional material facts the plaintiffs can establish a reasonable cause of action for the losses they presently claim. Alternatively, having considered their position in light of the appeal hearing, the plaintiffs may consider the sort of claim posited by the auditors in the course of argument is tenable. In any event other possible kinds of loss were mentioned in the course of argument.[88] These, being unpleaded, are presently irrelevant. There may or may not be a factual basis to claim such loss. It does mean, however, that while it is appropriate to strike out parts of the SOC as presently pleaded, there should be leave to replead.
[88] For example: recovery costs (Appeal ts 43); and the cost of obtaining funds to restore the trust fund (Appeal ts 54).
As there will be leave to replead, we would not strike out all of the factual pleas going to the auditors' alleged involvement in the directors' statutory contraventions and the auditors' alleged breaches of contractual and tortious duties. It may be that, in giving the pleading further consideration, the plaintiffs will think it appropriate to amend in some respects; but that will be a matter for the plaintiffs and their advisers. Insofar as ground 1 is concerned with establishing compensable loss we consider it sufficient to strike out pars 21A and 21AL and the words 'and the Auditors' in par 21B.

Disposition: Ground 2 - No adequate pleading that auditors were knowingly concerned

The essence of ground 2 is a complaint that the SOC does not plead material facts from which a reasonable inference of actual knowledge could be drawn; nor, according to the ground, is it pleaded that the auditors intentionally participated in the alleged contraventions.
At the outset it should be acknowledged that the SOC does not follow an orthodox approach in identifying the pleaded basis for the alleged knowing involvement in the directors' statutory contraventions. In particular:
1.There is no plea to the effect that the auditors had actual knowledge of the essential facts which constitute the relevant statutory contraventions by the directors - namely, those matters summarised at [30] - [32] above.
2.Nor is there any plea to the effect that, by reason of what was actually known by the auditors and other matters, it should be inferred that the auditors had actual knowledge of the relevant contraventions.

The second alternative mentioned in [111] above is one available means of pleading a claim that a person was knowingly involved in a contravention by being knowingly concerned in or party to the contravention in terms of s 79(c). If, however, that is the kind of case which a claimant seeks to advance, the claimant's pleading should ordinarily identify - as a material fact and in the same way as any other material fact - the inferences which the claimant will seek to have drawn and the material facts relied on which the claimant will contend permit those inferences to be drawn. The pleaded case must disclose a cause of action. It is not enough that a cause of action may materialise in the future from evidence that emerges at trial.
It is regrettable that the pleader did not follow such an orthodox approach. It makes what in many respects is a difficult pleading to follow even more difficult in terms of identifying, with precision, the pathway by which the plaintiffs seek to sheet home actual knowledge by the auditors of and participation in the directors' alleged contraventions - and the individual alleged matters which are relied on in this regard. This, at bottom, informed much of the auditors' complaints as to the SOC. The auditors complained, with justification, that the allegations of involvement (ie knowledge and participation) were left to be divined from numerous paragraphs without adequate identification of the material facts (including material facts arising by inference from other material facts) relied on to sustain the conclusion that the auditors were involved in Mr Donnelly's and Mr Hanson's alleged contraventions.[89]
[89] Appellants' submissions pars 14, 37 WAB 131, 136; Appeal ts 5 - 6.
For example, it appears that the plaintiffs rely on a series of alleged trust account defalcations and thus a series of continuing alleged contraventions on the part of the directors in which the auditors were allegedly knowingly concerned. Based on sch B to the Particulars these occurred over the period 4 September 2014 to 30 November 2015.[90] Presumably, based on the pleading, it is the plaintiffs' case that the auditors accumulated relevant actual knowledge over time. But at no point does the SOC seek to pinpoint what is alleged to have been known by when and why. In this respect the pleading is inadequate and defective.
[90] BAB 216 - 226.
Counsel for the plaintiffs accepted that the SOC did not plead out the claim in an orthodox fashion (as described at [111] - [114] above)[91] and the claim could be more clearly expressed.[92] Counsel said that there was no reason why it would not be possible to expressly plead an allegation of actual knowledge inferred from wilful blindness (that being the plaintiffs' case).[93]
[91] Appeal ts 59.
[92] Appeal ts 61.
[93] Appeal ts 58 - 60.
Where, as here, the allegation is one of involvement in statutory contraventions which amount to serious monetary defalcations, precision in identifying the facts relied on as constituting a statutory cause of action is just as necessary as precision in pleading a case of common law dishonesty - all the more so where the allegation necessarily imports professional misconduct or impropriety.[94]
[94] See Gold Coast City Council v Pioneer Concrete (Qld) Pty Ltd (1998) 157 ALR 135, 149 (referred to with approval in Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255 [36] (and see generally at [35] - [38]).
While, in this respect, the statutory accessorial liability claim in relation to the trust account defalcations is unhappily pleaded, it does not follow that ground 2 is established. Ground 2 contends that the SOC discloses no reasonable cause of action that the auditors were involved in the directors' contraventions within the meaning and for the purpose of s 79(c). In this respect senior counsel for the auditors said that: (1) the relevant pleas went no higher than to say that the auditors were put on inquiry, an allegation of constructive rather than actual knowledge;[95] (2) no actual knowledge of trust account defalcations or other irregularities in relation to Australian Reliance's trust account could be inferred by reason that the auditors allegedly knew that Reliance Partners' trust account had fallen below the minimum balance required by its trust account;[96] and (3) the allegations of knowledge on the part of PA Audit's senior employee in October 2014 were ambiguous.[97] In written submissions the auditors made similar criticisms and attacked the SOC as making allegations as to what a reasonable auditor would have done rather than identifying the actual knowledge held by the auditors as to the directors' alleged contraventions.[98]
[95] Appeal ts 23 - 24.
[96] Appeal ts 23 - 24.
[97] Appeal ts 24.
[98] Appellants' submissions pars 39 - 57 WAB 137 - 140.
For the reasons given by the primary judge,[99] as further addressed in the context of ground 4, knowledge obtained by the auditors in relation to the possible misapplication of trust funds in relation to Reliance Partners was not irrelevant in relation to the directors' alleged contraventions vis-à-vis Australian Reliance.
[99] See in particular Primary reasons [198] - [199]. See also [90].
Otherwise, in assessing whether the SOC disclosed a reasonable cause of action in relation to the accessorial liability claim as to the trust account defalcations, the primary judge carefully considered the pleading as a whole.[100] The material contentions made by the auditors in this court as to the deficiencies in the pleading were essentially mirrored before her Honour.[101] Her Honour identified, correctly, that in considering whether the SOC disclosed a reasonable cause of action the question is whether it would be open to the party - on its pleading - to prove facts at trial which would constitute a cause of action.[102] That is a different question to the matters which informed much of the auditors' complaints as to this aspect of the SOC. The primary judge proceeded to examine whether the pleading disclosed a reasonable cause of action by this criterion.
[100] See in particular Primary reasons [31] - [32], [36] - [37], [61] - [81], [83], [86] - [87], [89].
[101] See in particular Primary reasons [82], [84], [88].
[102] Mutual Life & Citizens' Assurance Co Ltd v Evatt [1970] UKPCHCA; (1970) 122 CLR 628, 631.
Subject to one matter, in concluding that the SOC disclosed a reasonable cause of action, the primary judge was correct for the reasons that the primary judge gave.[103] In particular, nothing stated on appeal demonstrates appellable error in the primary judge's conclusion that:
[I]t is arguable, on the pleadings, that it can be inferred that Mr English had actual knowledge of the alleged contraventions of the Corporations Act and/or Regulations from pleaded suspicious circumstances and his failure to make an inquiry; in other words, there is an arguable case that Mr English was 'wilfully blind'. That is so, having regard to the following pleaded matters which it is arguable are suspicious because they appear to reveal that the Corporations Act and/or Regulations have not been complied with:
(a)the fact that the Reliance Partners trust account was in deficit in April 2014;
(b)the fact that the Australian Reliance trust account was in deficit in September 2014; and
(c)the matters reported to [PA Audit's senior employee] and Mr English in October 2014 (being shortly before the 2014 independent auditor's reports were completed) that the balances of Reliance Partners' and Australian Reliance's trust funds, or one of them, had fallen below the minimum balance.
It is arguable that Mr English had a duty to enquire into those matters, having regard to PA Audit's contractual duties, and Mr English's and PA Audit's statutory duties.[104]
[103] Primary reasons [90], [93] - [95], [100], [102], [107], [109] - [113] (the findings at [100], [102], [107] and [109] not being challenged on appeal).
[104] Primary reasons [90].
The only respect in which this aspect of the SOC failed to disclose a reasonable cause of action is that which was revealed in debate between counsel for the plaintiffs and the court at the appeal hearing as explained at [75] - [80] above. We would in this respect, but no other, uphold ground 2 (subject again to the question of leave to appeal). It is, in our view, appropriate to uphold ground 2 in this respect insofar as counsel for the plaintiffs, quite properly, accepted that par 21Aii of the SOC required amendment given its deficiencies in invoking relief by way of an order for compensation under s 1317H of the Corporations Act.
We would not, in this respect, simply endorse the amendment proposed by counsel for the plaintiffs at the hearing. Given the overreach as to s 180(1), and the rolled-up nature of par 21Aii of the SOC, it will be necessary for par 21Aii to be struck out in whole with liberty to replead.
It is to be expected that, in repleading, the plaintiffs will adopt a more orthodox approach to pleading the statutory accessorial liability claim. Any remaining issues in this respect may be raised before the primary judge following amendment.

Disposition: Ground 3 - No cause of action in relation to 2015 audit and no loss in personal capacity

The auditors' written submissions identify that ground 3 is directed to SOC pars 21C - 21AL.[105]
[105] Appellants' submissions par 61 WAB 141.
There are two apparent threads to ground 3. First, that none of the alleged breaches of contractual or tortious duties are alleged to have caused Australian Reliance to suffer loss in its own right.[106] That essentially raises the same point as ground 1 (something senior counsel for auditors accepted at the appeal hearing).[107] Second, it is asserted that the pleaded facts do not disclose a reasonable cause of action in relation to the 2015 audit.[108]
[106] Appellants' submissions pars 61, 77 WAB 141, 144.
[107] Appeal ts 15, 26.
[108] Appellants' submissions par 61 WAB 141. See also pars 66, 68 WAB 142.
Subject to leave to appeal, as to which more needs to be said, ground 3 should be upheld insofar as it raises the same point as ground 1. The same reasons apply. However, this does not result in any additional relief.
Senior counsel for the auditors explained the second aspect of ground 3 in terms of timing. The submission was that the audit contract in respect of the 2015 year was made on 29 May 2015 (SOC par 12AP). The contention was that the various matters that preceded that time went nowhere in relation to the 2015 audit. Accordingly, while it was accepted that there was a viable cause of action for breach of contractual and tortious duties in relation to the 2014 audit, it was contested that there were any such causes of action in relation to the 2015 audit.[109]
[109] Appeal ts 27 - 28.
The written submissions in support of ground 3 raise a series of pleading niceties which could and should have been dealt with by a request for particulars. Such a course is still open to the auditors.
The second aspect of ground 3 echoed the contention put to the primary judge as is reproduced at [51.3] above. In answering this contention the primary judge held:
It is pleaded that, in order to meet the requirement in s 990B of the Corporations Act, Reliance Partners and Australian Reliance were required to appoint an auditor and to fill that position within 14 days of a vacancy in the office of audit. Further, that, from in or about 2013 until on or about 13 July 2016, PA Audit was registered with ASIC as the auditor appointed by each of Australian Reliance and Reliance Partners pursuant to s 990B. It is also pleaded that, at all relevant times, Mr English was the lead auditor, within the meaning of that expression in s 324AF(1) of the Corporations Act, for PA Audit, in relation to the audit of each of Reliance Partners' and Australian Reliance's financial reports and the compliance with the legislative requirements relating to their respective AFSLs for the 2014 and 2015 financial years. It is further pleaded that Mr English owed a duty to carry out the audits in accordance with Auditing Standard ASA 560 which required an auditor to report subsequent events that occur before and after the financial report is issued.
I am not so satisfied that these pleadings do not raise an arguable case that the duties of the auditor, and Mr English as lead auditor, were ongoing and were not confined to the periods when specific contracts were entered into between PA Audit and Reliance Partners and Australian Reliance to prepare an audit of AFSL compliance, and prepare special purpose financial reports for the financial year and tax calculations.[110]
[110] Primary reasons [92] - [93]. See also Primary reasons [110], [123].
No appellable error is revealed by that passage. The remaining aspect of ground 3 should be dismissed for the reasons that the primary judge gave.

Disposition: Ground 4 - Pleading prolix, uninformative and fails to comply with Rules

Ground 4 challenges the primary judge's finding, at [198] - [199] of the primary reasons, that the pleaded trust fund defalcations in relation to Australian Reliance are so factually bound up with the pleaded factual matrix of the alleged Reliance Partners' trust fund defalcations that the pleas relating to Reliance Partners should not be struck out. The auditors assert that:[111]
1.The allegations in relation to Reliance Partners should be struck out as they may prejudice, embarrass or delay the fair trial of the action.
2.The allegations in relation to Reliance Partners are prolix and uninformative and fail to comply with O 20 r 8(1) and r 13(1)(b) of the Rules of the Supreme Court 1971 (WA).
[111] Appellants' submissions par 79 WAB 144 - 145.
In support of ground 4 the auditors develop minutiae as to the pleaded case (much of which was also explored in relation to grounds 2 and 3) to advance the proposition that the parts of the pleading attacked by ground 4 lack precision, do not identify as alleged material facts what inferences, if any, should be drawn, contain many irrelevancies and are otherwise prolix and uninformative. The auditors emphasise alleged inadequacies as to: (1) the manner in which Australian Reliance is alleged to have suffered loss; and (2) the nexus between any breach of an obligation and loss. The auditors assert that the SOC does not fulfil the basic function of a pleading as it does not fairly inform them of the case they have to meet.[112]
[112] Appellants' submissions pars 80 - 84 WAB 145.
The auditors' substantive complaints with the SOC at the level of principle have been raised and dealt with in grounds 1 and 2. Ground 4 seeks to leverage off those matters, in part overlapping with and repeating the complaints made in grounds 1 and 2, to seek that a much wider portion of the pleading be struck out. There is no merit in this aspect of the appeal. The additional non-overlapping complaints under the rubric of ground 4 are either misconceived or pleading niceties. The latter ought simply to have been dealt with, and may still be dealt with, by appropriate requests for particularisation and need not now be further considered.
The initial point raised by ground 4 was a broad submission that all the allegations concerning Reliance Partners introduced 'completely' irrelevant and unnecessary material.[113]
[113] Appeal ts 30 - 31.
There was no error in the primary judge's finding that, so far as the case against the auditors is concerned, the Australian Reliance trust account defalcations were factually bound up with the similar defalcations in relation to Reliance Partners - meaning that the allegations relating to Reliance Partners should not be struck out. Australian Reliance and Reliance Partners were part of the same corporate group. The auditors were engaged to conduct the audits of both entities. Knowledge, in relation to one entity, that its trust account had fallen below the minimum balance or was in deficit, may mean that the auditors were put on inquiry as to any contraventions in relation to the other entity. That is particularly so given the auditors' pleaded obligations to make due enquiries and report. In the circumstances the forensic significance of any trust account defalcation, trust account deficit or contravention in relation to Reliance Partners is obvious. It is, on the plaintiffs' case, relevant factual context on which they intend to rely at trial in their case concerning Australian Reliance - and as such must be pleaded.
The auditors went on by ground 4 to contend that, even if this was so, the pleas as to Reliance Partners were prolix and may prejudice, embarrass or delay the fair trial of the action (this being the aspect of the ground that was conceded to raise a new point; see [70] - [71] above).
That argument has little force when consideration is given to many of the pleas sought to be challenged in this way. For example, par 6.6 of the SOC pleads that Mr Hanson was an authorised representative of Australian Reliance and Reliance Partners. How this plea was prolix or uninformative, or proof of that fact might prejudice, embarrass or delay the fair trial of the action, was ignored by the auditors' argument on appeal. Many of the impugned pleas are similarly benign (see eg SOC pars 6C.5.1, 6E.3, 7 - 10, 12B - 12D, 12E.2, 12F, 12H, 12BI).
When this was raised with senior counsel for the auditors he submitted, in substance, that the auditors' real complaint was that they had to rake through all the material to discern what was being relied on in the case against them. Senior counsel submitted that the allegations relevant to the claims against the auditors should be pleaded clearly and distinctly. To the extent that the facts concerning Reliance Partners were relevant to the drawing of inferences in the claims concerning Australian Reliance, it should not be for the auditors or the court to try and work out what facts were relied on and what inferences were sought to be drawn.[114]
[114] Appeal ts 31.
To the extent that this concern is validly based it is no more than the concern that underpins ground 2. It will, in our view, be substantially alleviated so far as ground 2 is upheld and par 21Aii of the SOC is struck out. We are unable to identify any independent error on the part of the primary judge in terms of ground 4. That is all the more so where the argument now advanced is conceded to amount to a new case on appeal.
We do not consider this to be one of the exceptional circumstances in which a new point might be entertained on appeal. The argument could and should have been agitated before the primary judge who, as case manager, was far better placed than this court to assess this type of complaint. It is inconsistent with the interests of justice, and the public interest in the finality of litigation, that the argument be advanced for the first time in the context of an interlocutory appeal.
Ground 4 should be dismissed.

Disposition: Ground 5 - No cause of action in relation to Steadfast shares

Ground 5 concerns the claim made against the auditors that relates to the Steadfast shares as summarised in [37] - [45] above.
The auditors submitted that the primary judge should have found that the pleaded facts did not disclose a reasonable case that: (1) the auditors participated in the directors' alleged contraventions at the time of the contraventions; or (2) loss could have resulted from the alleged participation. The auditors contended that any contravention was complete, and any loss was suffered by no later than, allotment of the shares (on 7 August 2013) - well before the auditors' alleged knowledge and participation in September 2014.[115]
[115] Appellants' submissions pars 86, 88 WAB 146.
Accordingly, as senior counsel for the auditors summarised the argument, it was purely a timing question.[116]
[116] Appeal ts 25.
The plaintiffs' initial response to ground 5 was to point out that, on appeal, the auditors seek to challenge the claim against them in contract and tort relating to the Steadfast shares. However, before the primary judge the claim as to the Steadfast shares was only challenged to the extent that it relied on s 79 of the Corporations Act. That answer must be accepted (see [54] and [64] above). In the same way that we would not permit a new case on appeal in relation to ground 4, we would not permit a new case on appeal in relation to ground 5. Ground 5, if upheld, should be limited to the statutory accessorial liability claim. It cannot justify the striking out of pars 31C and 31D of the SOC. Insofar as those pleas should not be struck out it would be inappropriate to strike out the pleas in pars 29CA - 29CC and 29C. Instead, consideration ought to be confined to the part of the pleading that is exclusively concerned with the statutory claim.

The plaintiffs go on to refer to the pleading - focusing on pars 27A and 27B of the SOC - and the primary judge's characterisation of the SOC as pleading continuing contravening conduct as to the alleged diversion of the Steadfast shares. The plaintiffs say that steps could have been taken to return the Steadfast shares to Australian Reliance prior to the sale of the shares but that, once sold, the shares could not be recovered.[117]
[117] Respondents' submissions pars 48 - 56 WAB 170 - 172.
The primary judge was correct to identify that the plaintiffs pleaded continuing contraventions by the directors: first, as to procuring the allotment (SOC pars 26 - 26A); second, in not taking steps to procure the return of the Steadfast shares to Australian Reliance (SOC par 27A). The former was complete by 7 August 2013 - the date of allotment of the Steadfast shares. The latter continued until the Steadfast shares were sold in mid-September 2014.
While, on the pleaded case, there were continuing contraventions, the rolled-up way in which the plaintiffs put their various claims of primary and accessorial liability creates serious difficulty. One of the difficulties has already been mentioned (see [81] above). There is no reasonable cause of action so far as a compensation order is sought under s 1317H based on an allegation that the auditors were involved in the directors' alleged contravention of s 180(1) of the Corporations Act. There is a further difficulty. The primary judge identified that it was arguable, on the pleaded facts, that Mr English (and thereby PA Audit) had actual knowledge of the essential facts constituting one or more of those contraventions at the time of their occurrence.[118] However, the primary judge did not find that there was the requisite actual knowledge and involvement in all of the contraventions.
[118] Primary reasons [153].
In our view, the SOC reveals no reasonable cause of action to the extent that the plaintiffs claim the auditors were knowingly concerned in, or a party to, a contravention by the directors insofar as Mr Donnelly and Mr Hanson allegedly procured that the Steadfast shares were allotted to Hawkstone.
The allegations of knowledge and involvement on the part of the auditors are pleaded at pars 29CB and 29CC of the SOC respectively (see also SOC pars 29CA, 29CD). These have been summarised at [41] - [42] above. There is no allegation of knowledge that pre-dates the allotment. Nor does the alleged participation or involvement precede the allotment. The absence of any pleaded material facts in these two respects is fatal to par 29CD of the SOC so far as - in its rolled-up fashion - par 29CD claims that the auditors were involved in the directors' contraventions of the director duty provisions of the Corporations Act in allegedly procuring the allotment of the Steadfast shares to Hawkstone.
For these reasons, subject to the question of leave, ground 5 should be upheld.
However, at the most success on ground 5 results in par 29CD being struck out and the consequential striking out of the words 'PA Audit, Mr English' in par 31 and 'PA Audit and Mr English' in par 31A. There must also be leave to replead insofar as we otherwise respectfully agree with the primary judge's conclusions as to the continuing contraventions in not taking steps to procure the return of the Steadfast shares to Australian Reliance.

Leave to appeal

The auditors' submissions in support of leave to appeal were perfunctory.[119] It was suggested that substantial injustice would occur if the decision was left unreversed because the auditors would be required to spend substantial legal costs defending an unmeritorious claim and in giving discovery on irrelevant issues. Costs will seldom provide a sufficient basis for the grant of leave to appeal against an interlocutory order on a matter of practice or procedure. Any such costs may be dealt with by appropriate order after trial. There is no interference with substantive rights as is normally required to justify leave.
[119] Appellants' submissions pars 3 - 4 WAB 127 - 128.
In this case the professed concern as to costs was hollow. Even if the appeal was successful: (1) the SOC made other claims against the auditors (not mentioned in these reasons because they are not otherwise relevant) which meant that the auditors would remain parties to the action; and (2) the auditors' orders wanted on the appeal provided, appropriately, that if the appeal was successful the plaintiffs should have leave to replead.[120] The auditors will remain subject to the claims and other claims whatever the outcome of the appeal.
[120] Orders wanted par 3 WAB 151.
A basis for leave to appeal could only be found in the interests of justice in the wider sense rather than the decision under appeal causing substantial injustice to the auditors.
We are acutely conscious of the tendency of interlocutory appeals to fragment litigation, delaying the time for resolution of the case at first instance and generally consume the parties' and the court's resources in a way that is unjustified. To a degree that has occurred in the present case. It would have been better, for example, had the auditors not sought to enlarge their challenge beyond what was advanced before the primary judge. The appeal could and should have been confined to matters of principle.
Balancing these considerations we are ultimately persuaded that there should be leave to appeal. A material error has been established in relation to ground 1. That error may, if unreversed, see large and complex litigation proceed to a lengthy trial on a flawed basis in a manner which is inconsistent with the objects in O 1 r 4B(b), (c), (e) and (f) of the Rules of the Supreme Court. Insofar as ground 1 justifies a grant of leave to appeal, and all grounds were fully argued and have been addressed in these reasons, we would grant leave to appeal generally.

Conclusion and orders

The auditors should have leave to appeal. Grounds 1, 2, 3 and 5 should be upheld (grounds 2, 3 and 5 in part only). Although grounds 1, 2, 3 and 5 should be upheld, we would not strike out the numerous parts of the SOC as contended for by the auditors. Rather, what is required is the more limited relief as described in [109], [122] and [152]. The plaintiffs should have leave to replead.
We would make orders that:
1.The appellants have leave to appeal against the order of the court made 8 November 2019 in action CIV/1086/2016.
2.The appeal is allowed.
3.Paragraph 3 of the order of the court made 8 November 2019 in action CIV/1086/2016 is varied by inserting the following sub-par (iA) before par (i):
'the following paragraphs and words within specific paragraphs:
(A)pars 21Aii, 21A, 21AL, 29CD;
(B)in par 21B the words 'and the Auditors';
(B)in par 31 the words 'PA Audit, Mr English';
(C)in par 31A the words 'PA Audit and Mr English'.
4.The proceedings are remitted to the primary judge for further directions relating to the repleading of the statement of claim in accordance with the order of the court made 8 November 2019 as varied by par 3 above.
The parties should be heard on any questions concerning costs.

Schedule

The pleas challenged in the application before the primary judge

Paragraph 3 of the minute of proposed orders dated 16 April 2019 states:
In the alternative to paragraph 2, the following paragraphs of the further re-amended statement of claim be struck out on the following grounds insofar as those paragraphs contain allegations against the fifth and sixth defendants:
(a)paragraphs 13, 14, 16, 21Aii to 21AL, 29CA to 31A, 31C to 31D and 45A to 45G on the grounds that these paragraphs are frivolous or vexatious or otherwise disclose no reasonable cause of action, pursuant to one or more of Order 20 rule 19(1)(a) and Order 20 rule 19(1)(b);
(b)further, or alternatively:
(i)paragraphs 1, 2, 7, 8, 9, 10, 21O, 21P and 29CB.2 of the further reamended statement of claim and Schedule A and Schedule B of the amended further and better particulars of 9 August 2017; and/or
(ii)paragraphs 6.6, 6C.5.1, 6C.5.2, 6E.3, 7, 8, 9, 10, 12B, 12C, 12C.1, 12D. 12E.2, 12F, 12H, 12I, 12I.3, 12J.1, 12K, 12T, 12U, 12AA.1, 12AA.2, 12AB, 12AC, 12AH, 12AK, 12AK.2, 12AL, 12AM, 12AM.1, 12AM.3(ii), 12AP, 12AP.1 , 12AS.4.3, 12AT, 12AU, 12AV, 12AX, 12AY, 12BC, 12BH, 12BI, 13, 13.2, 13.4, 14, 15, 16, 17.2, 17A, 17A.5, 17B, 17B.1, 17B.2, 17B.5, 17B.6.2, 17B.7.1, 17B.7.2, 17B.7.3, 17B.8, 17B.9, 17B.10, 17B.11, 17B.13, 18, 18.1, 18.2 , 19, 19AA, 20, 21, 21Aii, 21C, 21D, 21E.1, 21F, 21F.2, 21G, 21H, 21I, 21J, 21K, 21R, 21R.1.1, 21R.2.3, 21S, 21T, 21U, 21V.2.1, 21V.2.2, 21W, 21Y, 21Z, 21AA, 21AB, 21AC, 21AD, 21AH, 21AI, 21AK, and 21AL of the further reamended statement of claim (insofar as these paragraphs contain allegations concerning the second plaintiff),

on the grounds that these paragraphs may prejudice, embarrass or delay the fair trial of the action, pursuant to Order 20 rule 19(1)(c); and
(c)paragraphs 6C, 6D, 12A to 12BI on the grounds that the allegations in these paragraphs depend on the paragraphs referred to in sub-paragraph 3(a) or subparagraph 3(b).[121]
[121] BAB 90.

The pleas challenged in the 'Orders Wanted'[122]

[122] WAB 151.

Paragraphs 6.6, 6C.5.1, 6E.3, 7 - 10, 12B - 12D, 12E.2, 12F, 12H, 12BI, 13 ‑ 21AL, 29CA - 31D.

The pleas challenged at the appeal hearing[123]

[123] Appeal ts 69.

Ground 1	13, 14, 15, 16, 21Aii - 21AL.
Ground 2	21Aii - 21B.
Ground 3	13, 14, 15, 16, 21AC - 21AL.
Ground 4	13, 14, 15, 16, 21Aii - 21AL; and the references to 'Reliance Partners' in 6.6, 6C.5.1, 6E.3, 7 - 10, 12B - 12D, 12E.2, 12F, 12H, 12BI, 16A - 19AA, 20, 21Aii - 21AL.
Ground 5	29CA[124] - 29CD, 31C - 31D; and the references to 'the auditors' in 29C, 31 and 31A.

[124] Senior counsel for the auditors actually referred to 'par 21CA' but as there is no such paragraph he must have intended par 29CA which appears under the heading 'Auditors' involvement in breaches'.

There is thus significant overlap between the grounds other than ground 5. For example:
1.Paragraphs 13, 14, 15, 16 are the subject of grounds 1, 3 and 4.
2.Paragraphs 21Aii - 21AL are the subject of grounds 1 and 4. Within those pleas:
(a)paragraphs 21Aii - 21B are also challenged by ground 2;
(b)paragraphs 21AC - 21AL are challenged by ground 3.

MITCHELL JA:

This case illustrates the threat that protracted arguments about pleadings, extending to appeals against interlocutory pleadings decisions, pose to the efficient and fair determination of litigation.
Mr English and PA Audit were joined as defendants in the primary proceedings by amendment of the writ made on 2 October 2017. The statement of claim which is the subject of the appeal was filed on 15 January 2019. It prompted the appellants to make a summary judgment and strike-out application filed on 16 April 2019. The primary judge found that it was appropriate to grant a 70-day extension of the time to bring the strike-out application given the legally complex and factually dense nature of the pleading.[125] The application was heard on 20 June 2019. Understandably, given the complexity of the pleadings and the arguments advanced in relation to them, the primary judge was not able to deliver judgment on the application until 8 November 2019. At that point, almost a whole year had been consumed by arguments about the plaintiffs' pleaded case against the appellants.
[125] Primary decision [6].
The primary judge delivered a lengthy judgment in relation to the pleadings and certain other issues. As Murphy and Vaughan JJA have explained, the primary judge correctly identified all of the relevant legal principles. Her Honour applied those principles to the detail of the pleading which she was considering, and reached a carefully reasoned conclusion that some, but not all, of the pleadings attacked by Mr English and PA Audit should be struck out. Formal orders were made on 8 November 2019.
On 22 November 2019, Mr English and PA Audit instituted the present appeal against the primary judge's orders refusing to strike out certain paragraphs of the statement of claim. On 19 December 2019, the primary judge stayed orders for the filing of the appellants' defence and a reply to that defence until further order. No doubt that stay was prompted by the institution of this appeal. It appears from the primary court file that no substantive progress has been made towards the resolution of the primary proceedings since that time.
The appeal was heard on 16 October 2020. This court has not been in a position to resolve the appeal until March 2021. Murphy and Vaughan JJA, after very careful and detailed analysis, have reached a different conclusion to the primary judge on some aspects of the strike‑out application. I respectfully agree with their reasoning on the merits of the appeal.
I have, however, taken a different view on the question of whether leave to appeal should be granted on what is a pleading point. The determination of this appeal has taken about 16 months from its institution. In the meantime, there has been no substantive progress of the primary proceedings. The benefits arising from the determination of this appeal have been limited. The outcome of the appeal has not been to finally resolve any substantive aspect of the dispute between the parties. Some additional paragraphs of the statement of claim will be struck out, but the matter is to be remitted for the plaintiffs to be given leave to re-plead some deficiently pleaded causes of action. Over 3 years and 5 months after Mr English and PA Audit were joined in the proceedings, and over 2 years 2 months after the SOC was filed, the plaintiffs are to be given the task of reformulating aspects of their claim against Mr English and PA Audit. The prospect of further disputes about the adequacy of the reformulated pleadings remains. The appellants still face the prospect of a long complex trial on challenging pleadings.
Much of the responsibility for this sorry state of affairs rests with the legal advisors to the plaintiffs who prepared a statement of claim of almost impenetrable density and complexity. I say 'almost' impenetrable because, after considerable time and effort, the primary judge, as well as Murphy and Vaughan JJA, have been able to divine meaning from the text. However, it also appears that the appellants' advisors have sufficiently understood the pleading to be able to identify some fundamental defects in the case pleaded against them. I am not convinced that the current state of the pleadings precludes the appellants from receiving a fair trial. Perhaps undeservedly given their approach to the pleadings, the plaintiffs appear to be the principal beneficiaries of the exercise which has identified those defects and the plaintiffs now have an opportunity to address them before trial. They have avoided the prospect that the fundamental defects would simply result in their claim as pleaded being dismissed on its merits at trial.
A factor counting towards the grant of leave to appeal at this stage is that, looking forward from this point, the litigation will be conducted more efficiently if the fundamental defects in the case as currently pleaded are addressed. I accept that there is something to be said in favour of a grant of leave on that basis, when the detriment of the delay, fragmentation and increased cost of the primary proceedings resulting from the appeal has now been incurred in any event.
On the other hand, notwithstanding that the detriment has already been incurred, the court should not unjustifiably reward the bringing of an application for leave to appeal which should not have been granted at the time it was made. Further, it is necessary to weigh the impact of this appeal on the efficient conduct of the primary proceedings and the delay and fragmentation of the primary proceedings occasioned by this appeal. To that must be added the cost to the parties of prosecuting and defending this appeal, and the diversion of the limited public resources of this court to addressing a complex and detailed pleading question that is appropriately resolved in the general division of the court. In my view, the overall deleterious impact of this appeal on the fair and efficient resolution of the substantive dispute between all parties to the primary proceedings outweighs the benefits which may flow from the determination of the pleading questions raised by the grounds of appeal.
In my view, on balance, the interests of justice are best advanced by this court respecting the role of the primary judge as case manager of the primary proceedings, even though it might adopt a different view in some respects. This court should not, by the grant of leave to appeal, encourage the additional expense, delay and fragmentation of primary proceedings which inevitably results from interlocutory pleadings appeals of this kind. In my view, the grant of leave to appeal in such cases ought to be exceptional. On balance, in my view, the particular circumstances of the present case do not warrant a departure from the general approach of refusing leave to appeal against interlocutory pleadings decisions.
For these reasons, I would refuse leave to appeal in this case. However, this is a minority view. The majority of this court would grant leave to appeal. Once leave to appeal is granted, I agree that orders 2 - 4 proposed by Murphy and Vaughan JJA should be made for the reasons which their Honours give.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AT
Research Associate to the Honourable Justice Vaughan
23 MARCH 2021