Esined No. 9 Pty Limited v Moylan Retirement Solutions Pty Ltd; P&S Kauter Investments Pty Ltd Atf the Kauter Superannuation Fund v Moylan Retirement Solutions Pty Ltd; Graeme Manning v Arch Underwriting At Lloyds...

[2020] NSWSC 359

Supreme Court

New South Wales

Medium Neutral Citation:

Esined No. 9 Pty Limited v Moylan Retirement Solutions Pty Ltd; P&S Kauter Investments Pty Ltd ATF the Kauter Superannuation Fund v Moylan Retirement Solutions Pty Ltd; Graeme Manning v Arch Underwriting At Lloyds Limited on Behalf of Syndicate 2012 (No. 2) [2020] NSWSC 359

Hearing dates:

5-16 November & 5 December 2018

Date of orders:

08 May 2020

Decision date:

08 May 2020

Jurisdiction:

Equity

Before:

Slattery J

Decision:

Judgment for the defendants. The plaintiffs will be ordered to pay the defendants’ costs of the proceedings unless any party applies by motion for a special costs order within 28 days. Directions made in relation to the making of any application for a special costs order.

Catchwords:

INSURANCE – a corporate financial planner and holder of an Australian financial securities licence issued under the Corporations Act 2001, gave financial advice to the plaintiffs, who are four separate groups of its clients – based on this financial advice the plaintiffs advanced funds into a series of recommended investments, which failed as a result of the global financial crisis – the licenced entity was deregistered and its principal made bankrupt – the plaintiffs sued the licenced entity’s professional indemnity insurers pursuant to Corporations Act, s 601AG on the basis that the deregistered entity had a liability to the plaintiffs and that the professional indemnity insurance policies covered that liability immediately before its deregistration – whether the deregistered licenced entity had a liability to the plaintiffs at the time it was deregistered – whether the deregistered entity’s insurance policy with the defendants covered any liability that the deregistered entity had to the plaintiffs – whether exclusion clauses in the insurance contract excluded the defendants’ liability to the plaintiffs.

Legislation Cited:

Banking Act 1959 (Cth)
Civil Liability Act 2002, ss 34, 34(1), 34(2), 35, 35(1)
Competition and Consumer Act 2010 (Cth), Schedule 2, ss 18, 20
Corporations Act 2001 (Cth), Chapter 5C, Chapter 6D, Chapter 7, ss 9, 706, 708, 601AG, 601AG(a), 601AG(b), 601EB(2), 912A, 912A(1), 912B, 914A, 914D, 940C(1)(b), 942B(2), 947B(1), 947B(2), 946A, 1012A, 1013A, 1013D, 1013E
Corporations Regulations 2001 (Cth) reg 7.6.02AAA(1)
Evidence Act 1995 (Cth), s 140(2)
Fair Trading Act 1987, ss 42, 43
Insurance Contracts Act 1984 (Cth), ss 21, 21(1), 21(2), 22, 26, 27, 27A, 28, 28(2), 28(3), 40, 40(3), 54(2)

Cases Cited:

Aequitas Ltd v Sparad No 100 Ltd (formerly Australian European Finance Corp Ltd) (2001) 19 ACLC 1006
Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd; Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 62 NSWLR 148
Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419
Anglo-African Merchants Ltd v Bayley [1971] 1 QB 311
Bartlett v Barclays Trust Co [Nos 1 and 2] (1980) Ch 515
Briginshaw v Briginshaw (1938) 60 CLR 336
CGU Insurance Ltd v Porthouse (2008) 235 CLR 103
CIBC Mortgages Plc v Pitt (1994) 1 AC 200
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390
Commonwealth v Verwayen (1990) 170 CLR 394
Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371
Elkateb v Lawindi (1997) 42 NSWLR 396
Esined No 9 Pty Limited v Moylan Retirement Solutions Pty Ltd; P&S Kauter Investments Pty Ltd ATF the Kauter Superannuation Fund v Moylan Retirement Solutions Pty Ltd; Graeme Manning v Arch Underwriting At Lloyds Limited on Behalf of Syndicate 2012 [2018] NSWSC 1706
FAI Insurance v Australian Hospital Care (2001) 204 CLR 641
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Greenhill v Federal Insurance Co Limited [1927] 1 KB 65
Hansen v Marco Engineering (Aust) Pty Ltd [1948] VLR 198
Hadid v Lenfest Communications Inc [1999] FCA 1798
Hitchens v Zurich Australia Ltd [2015] NSWSC 825
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613
Jones v Dunkel (1959) 101 CLR 298
Maguire v Macaronis (1997) 188 CLR 449
McKenzie v McDonald (1927) VLR 134
Murdock v Lipman (2012) NSWSC 983
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd & Ors (1992) 110 ALR 449
Newcastle City Council v GIO General Limited (1997) 191 CLR 85
Palmer v Dolman; Dolman v Palmer [2005] NSWCA 361
Payne v Parker [1976] 1 NSWLR 191
Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV (2013) 302 ALR 732
San Sebastian Pty Ltd v The Minister Administering the Environment Planning and Assessment Act 1979 and Another (1986) 162 CLR 340
Sargent v ASL Developments Ltd; Turnbull v ASL Developments Ltd (1974) 131 CLR 634
Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd [2015] NSWSC 392
Soole v Royal Insurance Co Ltd [1971] 2 Lloyd’s Rep 332
Spellson v George (1992) 26 NSWLR 666
Warman International Ltd v Dwyer (1995) 182 CLR 544
TBI Pty Ltd v AON Financial Planning Limited (2004) 13 ANZ Ins Case 61-601
Tepko Pty Ltd and Ors v The Water Board (2001) 206 CLR 1

Category:

Principal judgment

Parties:

(2012/374893)
Esined No. 9 Pty Ltd (first plaintiff)
Esined No. 10 Pty Ltd (second plaintiff)
Moylan Retirement Solutions Pty Ltd (first defendant)
Arch Underwriting at Lloyd's Ltd on behalf of Syndicate 2012 (second defendant)
Barbican Managing Agency Limited (third defendant)
Hiscox Dedicated Corporate Member Limited (fourth defendant)
Liberty Mutual Insurance Europe Limited    (fifth defendant)

   

(2013/314260)
P&S Kauter Investments Pty Ltd ATF the Kauter Superannuation Fund (first plaintiff)
Moylan Retirement Solutions Pty Limited (first defendant)
Matrix Planning Solutions Limited (non-enforceable) (second defendant)
Hunter Financial Planning Pty Ltd (non-enforceable) (third defendant)
Arch Underwriting at Lloyd’s Ltd on behalf of Syndicate 2012 (fourth defendant)
Hiscox Dedicated Corporate Member Limited (fifth defendant)
Liberty Mutual Insurance Europe Limited (sixth defendant)
Barbican Managing Agency Limited (seventh defendant)

    (2015/252310)
Graeme Manning (first plaintiff)
Nancy Manning (second plaintiff)
Jalin Holdings Pty Ltd (third plaintiff)
Arch Underwriting at Lloyds Limited on behalf of Syndicate 2012 (first defendant)
Hiscox Dedicated Corporate Member Limited (second defendant)
Barbican Managing Agency Limited (third defendant)
Liberty Mutual Insurance Europe Limited (fourth defendant)

Representation:

(2012/374893)
Counsel:
J. S. Drummond (first and second plaintiffs)
J. Sexton SC with S. Kanagaratnam (second, third and fourth defendants)
M. Jones SC with E. Anderson (fifth defendant)

 

Solicitors:
Michael Nolan, Nolan Commercial Law Practice (first and second plaintiffs)
Veronica Chapman, Kennedys (Australasia) Pty Ltd (second, third and fourth defendants)
Tricia Hobson, Norton Rose Fulbright Australia (fifth defendant)

   

(2013/314260)
Counsel:
J. S. Drummond (first plaintiff)
J. Sexton SC with S. Kanagaratnam (fourth, fifth and seventh defendants)
M. Jones SC with E. Anderson (sixth defendant)

 

Solicitors:
Michael Nolan, Nolan Commercial Law Practice (first plaintiff)
Peter Mackenzie, Mackenzie Thomas Law (second defendant)
Lisa-Marie McKechnie, Mills Oakley (third defendant)
Veronica Chapman, Kennedys (Australasia) Pty Ltd (fourth, fifth and seventh defendants)
Tricia Hobson, Norton Rose Fulbright Australia (sixth defendant)

   

(2015/252310)
Counsel:
J. S. Drummond (first, second and third plaintiffs)
J. Sexton SC with S. Kanagaratnam (first, second and third defendants)
M. Jones SC with E. Anderson (fourth defendant)

  Solicitors:
Michael Nolan, Nolan Commercial Law Practice (first, second and third plaintiffs)
Veronica Chapman, Kennedys (Australasia) Pty Ltd (first, second and third defendants)
Tricia Hobson, Norton Rose Fulbright Australia (fourth defendant)

File Number(s):

(2012/374893); (2013/314260); (2015/252310)

Publication restriction:

No

Judgment

1. Mr Christopher Moylan, the principal of Moylan Retirement Solutions Pty Ltd (“MRS”) gave financial advice to four Hunter Valley families and their associated self-managed superannuation funds (“SMSFs”) over five financial years, FY07, FY08, FY09, FY10 and FY11. Throughout these five financial years MRS held an Australian Financial Services Licence (“AFSL”) issued under the Corporations Act 2001 (Cth), and Mr Moylan acted as an Authorised Financial Services Representative (“AFSR”) under MRS’ AFSL.

2. The trustees of the superannuation funds of these four families have become the plaintiffs in three separate actions, which were heard together in these proceedings. The relevant family members of each family involved in these proceedings and their respective controlled SMSF trustees are:

1. Dallas and Sandra Davey and their corporate superannuation entity, Esined No. 9 Pty Ltd (“Esined No. 9”), which is the trustee of the D and S Davey Family Retirement Fund;

2. Peter and Lucy Smith and their corporate superannuation entity, Esined No. 10 Pty Ltd (“Esined No. 10”), which is the trustee of the P and V Smith Family Retirement Fund;

3. Paul and Stephen Kauter and their corporate superannuation entity P&S Kauter Investments Pty Ltd (“Kauter Investments”), which is the trustee of the P and S Kauter Family Retirement Fund; and

4. Graeme and Nancy Manning and their corporate superannuation entity, Jalin Holdings Pty Ltd (“Jalin”), which is the trustee of the Sandgate Auto Superannuation Fund.

3. On Mr Moylan’s advice these SMSF trustees, and some family members, advanced funds into various loan investments and corporate investment vehicles. Mr Moylan controlled the principal corporate investment vehicle, Moylan Investment Group Pty Ltd (“MIG”), into which he recommended most of the funds advanced by these clients to be channelled. The advances to MIG were in turn applied on Mr Moylan’s advice to other investment vehicles that mostly conducted property development and land subdivision.

4. As a result of the global financial crisis these other investment vehicles failed, were placed in liquidation, ceased to trade, or otherwise became worthless. None of the monies advanced through MIG and into these other investment vehicles were repaid to them. Mr Moylan was made bankrupt.

5. The Daveys and the Smiths had operated the same small business together for a long time. In 2012 together they caused their two respective SMSFs, Esined No. 9 and Esined No. 10, to cooperate in commencing the first action (proceedings 2012/374893) against MRS to recover the losses they claim they had suffered from their following of Mr Moylan’s advice (“the Esined action”).

6. In 2013 the Kauters and Kauter Investments commenced a second action (proceedings 2013/314260) against MRS (“the Kauter action”), which made similar allegations and sought similar relief to that in the Esined action.

7. MRS was deregistered in August 2014. As a result of its deregistration, the respective SMSFs of the Daveys, the Smiths and the Kauters joined the professional indemnity (“PI”) underwriters of MRS under Corporations Act, s 601AG, as further defendants to the two existing actions.

8. Finally, in 2015 the last group of clients, the Mannings, and their SMSF trustee, Jalin, commenced a third action (proceedings 2015/252310), which made similar allegations and sought similar relief to that in the first two actions. This third action (“the Manning action”) was commenced directly against the PI underwriters of MRS under Corporations Act s 601AG, MRS having by then been deregistered. Unlike the Daveys, the Smiths and the Kauters, the Mannings also sued in a representative capacity. By the time they commenced the Manning action, they were the executors of the estate of Nancy Manning’s deceased parents, the late Roy and Joan Maytom, who had also made investments on Mr Moylan’s recommendation.

9. It was a condition of MRS’ AFSL that it hold PI insurance. MRS obtained policies of PI insurance from DUAL Pty Ltd (“DUAL”) as agent for certain Lloyd’s-based underwriters for the period of 5 February 2012 to 5 February 2013 (“the 2012/2013 policy”). These were Arch Underwriting at Lloyd's Ltd on behalf of Syndicate 2012, Barbican Managing Agency Ltd and Hiscox Dedicated Corporate Member Ltd. This group of underwriters is referred to collectively in these reasons as “the Arch underwriters”, or “Arch”.

10. MRS obtained further PI insurance from 5 February 2013 to 5 February 2014 (“the 2013/2014 policy”) from Arch and from another group of co-underwriters, Liberty Mutual Insurance Europe Limited. This group of underwriters is referred to in these reasons as “Liberty underwriters” or “Liberty”. The Liberty underwriters only provided co-insurance support to the Arch underwriters for the 2013/2014 policy year.

11. The plaintiffs contend that MRS notified DUAL of a potential claim against it on 15 January 2013, towards the end of the 2012/2013 policy year and they further contend that MRS notified DUAL on 3 February 2014 towards the end of the 2013/2014 policy year. The Arch underwriters and the Liberty underwriters were defendants in all three actions. All three actions raised issues about whether or not claims had been validly notified against each group of underwriters during the 2012/2013 policy year or in the 2013/2014 policy year.

12. Matrix Planning Solutions Pty Ltd (“Matrix”) and Hunter Financial Planning Pty Ltd (“HunterFP”), other defendants related to Mr Moylan’s advisory practice and to MRS, were also joined as defendants in the Kauter action. But the plaintiffs’ cases did not develop the actions against either company.

13. The plaintiffs’ claim against the Arch and Liberty underwriters is founded on Corporations Act, s 601AG, which provides as follows:

“Claims against insurers of deregistered company

A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if:

(a)   the company had a liability to the person; and

(b)   the insurance contract covered that liability immediately before deregistration.”

14. In order to make a successful claim against each group of underwriters, the plaintiffs must satisfy both limbs of s 601AG:

1. that the deregistered entity, MRS, had a liability to each plaintiff immediately prior to its deregistration and the quantum of any such liability (s 601AG(a)); and

2. that the relevant policies of insurance entered into by the underwriters respond to the liability of MRS referred to in sub-paragraph (a) (s 601AG(b)).

15. CorporationsAct, s 601AG has received judicial consideration, which reinforces the plain wording of the section. The liability referred to in s 601AG(a) must subsist as at the date of the company’s deregistration: Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 53 ACSR 422; (2005) 62 NSWLR 148; [2005] NSWCA 19 (“Almario”). Immediately before the company’s deregistration, the policy referred to in s 601AG(b) must cover the deregistered company’s liability to the plaintiffs: Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd [2015] NSWSC 392 at [136].

16. The underwriters defended the three actions under both limbs of s 601AG. First, the underwriters disputed that MRS had any liability to the plaintiffs prior to its de-registration. For example, the underwriters argue that the plaintiffs were well aware of the risks associated with the investments they were undertaking on Mr Moylan’s recommendation and that there was no causal connection between any financial advice MRS gave to the plaintiffs and any loss that they suffered. The underwriters say that these losses were merely the predictable results of market forces.

17. Second, the underwriters also put in contest that their respective policies covered any liability that MRS might be found to have had to the plaintiffs immediately prior to its deregistration. The Arch and Liberty underwriters deny liability on several sub-grounds, the principal among which were the following: that no notification of any claim for civil liability was reported during each of the relevant insurance periods; that the insurance cover written was limited to retail clients and the plaintiffs are sophisticated, or wholesale, clients of MRS; that MRS is guilty of material (including fraudulent) non-disclosure and a failure to comply with its duty of disclosure under Insurance Contracts Act 1984 (Cth), s 21; and that various exclusion clauses apply, so that the policies do not respond to the plaintffs’ claims against MRS.

18. And the underwriters’ defences also include a claim that Mr Moylan had been acting in conflict of interest, when he gave any allegedly negligent financial advice. The underwriters contended that most of the investments recommend to the plaintiffs were investment vehicles in which Mr Moylan either had a direct or indirect beneficial interest, or with whom Mr Moylan or MRS had a business relationship.

19. The Arch and Liberty underwriters both contended that when Mr Moylan gave this financial advice to the plaintiffs, he was aware that his own beneficial interests in these investments were already at risk, in part due to their illiquidity. They contended that Mr Moylan would benefit from directing the plaintiffs’ funds into these poorly capitalised investment vehicles, because injection of the clients’ funds into them would reduce the risk that he and MRS would suffer loss from Mr Moylan’s existing investment interests in those vehicles. Without disclosing his position of conflict of interest to the plaintiffs, Mr Moylan is alleged to have given them advice which preferred his own interests over theirs, enlivening various exclusion clauses within the policies.

20. Mr J. S. Drummond of counsel, instructed by Michael Nolan of Nolan Commercial Law Practice acted for the plaintiffs in all three proceedings.  Mr J. Sexton SC and Mr S. Kanagaratnam of counsel, instructed by Veronica Chapman of Kennedys (Australasia) Pty Limited acted for the Arch underwriters in all three actions. Mr M. Jones SC and Mr E. Anderson of counsel, instructed by Tricia Hobson of Norton Rose Fulbright acted for Liberty Mutual Insurance Europe Limited in all three actions. The Court was much assisted in its analysis of the complex claims and defences in all these actions by counsel and solicitors on all sides.

21. This is the Court’s second judgment in these proceedings. In the Court’s first judgment, the Court determined in favour of the plaintiffs a question about the admissibility against the underwriter defendants of certain statements of Mr Moylan, the principal of MRS, about the contents of the MRS approved products list: Esined No 9 Pty Limited v Moylan Retirement Solutions Pty Ltd [2018] NSWSC 1706.

22. A narrative of the relevant history follows. The narrative records the Court’s findings on the matters covered, except to the extent that context indicates that only the parties’ allegations are being recorded in these reasons. For reasons of economy this narrative does not include reference to versions of the facts that have been rejected. The narrative is divided into two limbs: the first limb includes findings leading to the Court’s conclusions on s 601AG(a) issues and the second limb includes findings leading to the Court’s conclusions on s 601AG(b) issues.

23. The credibility of those persons who gave evidence in the proceedings is an important basis for the Court’s findings in the narrative of facts. The Court’s credibility assessments were recorded the same day that each of these witnesses gave evidence and are set out as witnesses are reached in the course of the narrative of facts below.

Introduction to MRS, His Four Groups of Clients and the Policies

Mr Moylan and His Clients

24. Many of Mr Moylan’s clients were recommended to his firm by a solicitor, Mr Michael Hill, a partner of the Hunter Valley legal firm, Turnbull Hill Lawyers, which practised from Charlestown, a suburb of Newcastle. For more than 20 years Mr Michael Hill had been the solicitor for D & S Fabrications Pty Ltd (“D & S Fabrications”), the corporate vehicle for the steel fabrication business that Mr Dallas Davey and Mr Peter Smith had operated over many years. As the company’s directors and shareholders, Mr Davey and Mr Smith, acting on behalf of D & S Fabrications, had retained Mr Hill as the company’s solicitor since the early 1980s.

24. In October 2005, Mr Smith and Mr Davey were looking for advice to structure their financial affairs in anticipation of their retirement. Mr Michael Hill recommended Mr Moylan to them, with the description “he is very capable”. Mr Moylan’s advisory practice operated out of the same building in Charlestown as Turnbull Hill Lawyers.

25. The Daveys and the Smiths followed Mr Michael Hill’s advice and consulted Mr Moylan. In July 2006, Mr Moylan took steps to set up the D & S Davey Family Retirement Fund under the trusteeship of Esined No. 9 and the P & V Smith Family Retirement Fund under the trusteeship of Esined No. 10.

26. Mr Moylan had also known the Kauters and the Mannings for longer than the Daveys and the Smiths. Since the early 1990s he had given financial advice from time to time to both Paul and Stephen Kauter and had created the Kauter Family Retirement Fund with Kauter Investments as its trustee.

27. The Mannings had also been Mr Moylan’s clients since the early 1990s. They, and their superannuation trustee, Jalin, had long retained Mr Moylan to assist them with financial advice when required.

28. The Kauters and the Mannings reposed great trust and confidence in Mr Moylan. And Mr Michael Hill’s recommendation of Mr Moylan to the Smiths and the Daveys was sufficient for them to quickly develop a similar relationship with him.

Mr Moylan’s Business Structures

30. The various business structures that Mr Moylan used to advise his clients changed over the years and they differed depending upon the kind of advice that he was giving to clients.

31. MRS, the principal original defendant in these proceedings, evolved out of an early association between Mr Moylan and Mr Michael Hill. In August 2004 Mr Moylan and Mr Michael Hill incorporated and became the first directors and shareholders of HunterFP. In October 2005 HunterFP changed its name to Acuity Retirement Planning Specialists Pty Limited (“Acuity”). A short time later, Acuity changed its name to Retirement Planning Specialists Pty Ltd which by May 2007 had again changed its name to its final title, MRS.

32. Prior to January 2006, Mr Moylan had been an AFSR of Matrix operating under its AFSL. In June 2005, Mr Moylan resigned as a director of Matrix and as one of its authorised representatives. He wanted to establish his own company with its own AFSL. MRS obtained an AFSL (Licence XX40) on 30 January 2006. On 16 February 2006, Mr Moylan was appointed as the AFSR for MRS. Mr Moylan held this licence throughout the period that he gave the relevant financial advice complained of in these proceedings.

33. Mr Moylan provided accounting and taxation services (as distinct from financial advice) to his clients, including the plaintiffs, through a number of entities, the names of which changed from time to time. In May 2004, Mr Moylan and Mr Michael Hill incorporated Hunter Accounting and Taxation Services Pty Limited, the directors of which were Mr Moylan and Mr Michael Hill. In October 2005, Hunter Accounting and Taxation Services changed its name to Moylan Business Solutions Pty Limited (“Moylan Business Solutions”) from October 2005 Moylan Business Solutions was the principal entity through which Mr Moylan provided accounting services and taxation advice to clients.

34. Each of Mr Moylan and Mr Michael Hill remained directors and shareholders of Moylan Business Solutions until it was wound up in June 2013. Moylan Business Solutions was a trustee of the Moylan Business Solutions Unit Trust, a trust in which Mr Moylan and Mr Michael Hill each also held units.

35. Mr Moylan and Mr Michael Hill also incorporated another company to provide specialised financial planning advice to the corporate trustees of his clients’ SMSFs. Its name was Moylan's Business Solutions Pty Limited (Moylan’s Business Solutions”), a confusingly similar name to Moylan Business Solutions. The precise borderline between any financial advice Moylan’s Business Solutions gave to SMSFs and financial advice that MRS gave to retirees and superannuation funds was obscure. But it seems to have been quite distinct from the accounting and taxation services that were provided through Moylan Business Solutions.

36. Incorporated as another entity in 1999, Moylan’s Business Solutions was so named from 1 September 2001. Its shareholders and directors were at all times Mr Michael Hill and Mr Moylan. But it was controlled by Mr Moylan and his father, Mr Derrick Moylan.

37. Between 1 August 2001 and 8 September 2005, Moylan’s Business Solutions was also the trustee of the Cartel Investment Unit Trust ("Cartel Investment UT").

38. Later in its life, Moylan’s Business Solutions changed its name to MCD Holdings Pty Limited ("MCD Holdings"). MCD Holdings was wound up by an order of this Court in June 2013.

The Recommended Investments

39. Later in these reasons the Court must examine in some detail each of the transactions which Mr Moylan recommended in order to assess his liability to the plaintiffs and to assess whether their circumstances engaged the insuring clause of the policies, any policy extension, or policy exclusion. This involves a fact-specific consideration of each recommended transaction.

40. But in order to place each transaction in its overall context, an overview of the various investment structures into which Mr Moylan recommended that his clients invest should be given. Mr Moylan’s various recommendations, that are said to create a liability in MRS, raise common patterns of conduct and common issues. It is useful therefore to look first at the various investment structures he used, then analyse the individual transactions through which he recommended that his clients channel their money into these investment structures.

41. The investments Mr Moylan recommended fall into four broad groups:

1. Advances made to MIG, as loans or otherwise, from which monies were in turn:

1. applied to the Bolwarra Heights Property Trust or to the Wallalong Investment Trust; or

2. misapplied contrary to the clients’ (specifically the Mannings’) instructions; and

2. Investments made into the Regional Land Property Fund;

3. Loans to Ms Crittle; and

4. Other minor investments.

42. These investment channels and destinations are dealt with in more detail below.

43. (1) MIG - The Main Investment Channel. Mr Moylan’s company, MIG, was incorporated in July 2006. Mr Moylan was its sole director and shareholder throughout its existence. Its funds were advanced into several other investment vehicles. MIG was the recommended recipient of loans from all the plaintiffs.

44. (1)(a) The Bolwarra Heights Property Trust. Principal among MIG’s investments was some 41 hectares of land at Bolwarra Heights, a northern suburb of the city of Maitland. In about mid-2006, MIG was appointed the trustee of the Bolwarra Heights Investment Trust. In its capacity as the trustee of the Bolwarra Heights Investment Trust, MIG entered into a funding facility agreement with Charlestown Consulting Pty Ltd (“Charlestown Consulting”), an entity controlled by an associate of Mr Moylan, Mr Kenneth Hill, who was its principal director and shareholder.

45. In June 2006, Charlestown Consulting entered into a contract for sale of land to purchase the Bolwarra Heights land for $1.75 million. The purchase was completed in November 2006. At the time of entering into the purchase, Charlestown Consulting was appointed a trustee of the Bolwarra Heights Property Trust. The main function of the Bolwarra Heights Property Trust was to hold and develop the Bolwarra Heights land.

46. MIG as trustee of the Bolwarra Heights Investment Trust advanced the funding for the development of the Bolwarra Heights land. On 1 August 2006 the Bolwarra Heights Investment Trust agreed to advance to Charlestown Consulting, as trustee of the Bolwarra Heights Property Trust, the sum of $2 million. The interest on this advance was agreed to be capitalised and no principal or interest was required to be repaid before 1 August 2011. This five year loan capitalisation was to permit development of the Bolwarra Heights land to take place before repayments were required.

47. When purchased by Charlestown Consulting, the Bolwarra Heights land comprised undeveloped broad acres. Before subdivision was possible the land required a successful application to the Maitland City Council for the re-zoning of the land, followed by a grant of development consent. The Bolwarra Heights land was mortgaged by Charlestown Consulting to assist in funding the subdivision development. But Maitland Council neither re-zoned the land, nor granted the necessary development consent. As a result, Charlestown Consulting, as trustee of the Bolwarra Heights Property Trust, was unable to repay the advance to MIG as the trustee of the Bolwarra Heights Investment Trust.

48. Charlestown Consulting completed the purchase of the Bolwarra Heights land with funding of $1 million advanced from Suncorp Metway Limited and secured by mortgage over the subject land. In March 2010, Charlestown Consulting refinanced Suncorp Metway’s first mortgage and obtained further advances totalling $1.6 million secured by a mortgage to a private lender, Kiriwina Investments Pty Ltd (“Kiriwina Investments”). Later the same year, on 22 August 2010, Kiriwina Investments assigned its mortgage over the Bolwarra Heights land to a solicitor, Mr Ralph Keith Ward. Finally, on 31 October 2012 Mr Ward assigned his mortgage to a company he controlled Durndrax Pty Ltd.

49. MIG was wound up on 11 September 2011. Charlestown Consulting was wound up on 17 February 2012. The Bolwarra Heights land was ultimately taken out of Charlestown Consulting’s control and sold by the mortgagee in possession on 23 December 2013. After the mortgagee was paid out, no surplus was left available to Charlestown Consulting in its role as trustee of the Bolwarra Heights Property Trust. None of MIG’s advances as trustee of the Bolwarra Heights Investment Trust to Charlestown Consulting were secured and none were repaid.

50. (1)(a) The Wallalong Investment Holdings Land. Another corporate investment vehicle that received funds from MRS’ clients, through MIG, was Wallalong Investment Holdings Pty Limited (“Wallalong Investment Holdings”) as trustee for the Wallalong Investment Trust. Wallalong Investment Holdings was previously known as River Island Property Holdings Proprietary Limited (“River Island”), a company of which Mr Moylan and a Ms Ellen Tompkins were directors. Its sole shareholder was Ellen V Tomkins Pty Ltd.

51. In June 2005, River Island contracted to purchase for consideration of $10 million contain land at Wallalong near Port Stephens in the Hunter region of this State. A deposit of $1 million was payable and was released to the vendor. On completion, special condition 9 of the contract for sale required the vendor to provide vendor finance in the sum of $9 million secured by first mortgage over the Wallalong land. In August 2005, the contract for sale was varied, extending the date for completion to 9 May 2006 on conditions which included the purchaser paying the interest rate of 26% per annum on the amount outstanding from 9 August 2005. The directors of River Island, Mr Moylan and Ms Tompkins, guaranteed the obligations of River Island to the vendor.

52. River Island changed its name to Wallalong Investment Holdings in March 2008 and was made trustee of the Wallalong Investment Trust. Wallalong Investment Trust did not complete the purchase of the Wallalong land and on 15 February 2010, the vendor issued a notice to complete requiring completion to take place on 12 March 2010. But the Wallalong Investment Trust did not complete and the vendor terminated the contract for sale on 10 May 2010.

53. In proceedings in the Equity Division of this Court, the notice of termination was declared to be invalid because the notice to complete failed to provide a reasonable period of notice. But the outcome of the proceedings was that Wallalong Investment Holdings, Mr Moylan and Ms Tomkins, the latter as guarantors of Wallalong Investment Holdings, became liable for the agreed interest on the varied contract for sale.

54. The Wallalong Investment Holdings’ purchase of the Wallalong land was never completed. And Wallalong Investment Holdings’ obligations to the vendor were never satisfied either directly, or by the guarantors, Mr Moylan and Ms Tompkins. Wallalong Investment Holdings was wound up on 8 February 2013.

55. (1)(b) The Mannings’ Misapplied Funds. Some of the advances made to MIG from the Mannings through MRS were misapplied by Mr Moylan. On MRS’ advice, the Mannings agreed to invest in the BT Financial Group (“BT”) and in financial products marketed by Macquarie Bank (“Macquarie”). In contrast to MIG, these were proposed investments in well-known public financial institutions.

56. To facilitate the Mannings’ investment, Mr Moylan recommended that they deposit their investment funds with MIG, which would in turn invest those funds in the BT and Macquarie products Mr Moylan had recommended. The Mannings deposited monies with MIG. But MIG failed to invest the monies as agreed and used the monies for its own purposes. MRS did not tell the Mannings that it had not invested the funds as they had instructed.

57. Mr Moylan disregarded a series of instructions from the Mannings between October 2010 and March 2011, a period during which his principal investments were already under a high degree of financial stress. For example, MIG ceased paying any interest to clients by about October 2009.

58. These instructions were the following. In October 2010, the Mannings instructed Mr Moylan to return a payment of $215,000 to a BT Wrap Account in which it had originally been invested but was withdrawn by Mr Moylan. In March 2011, the Mannings instructed him to invest $350,000 in a cash management account at Macquarie but he failed to do so. The same month, March 2011, Mr Moylan was instructed on behalf of Mrs Manning’s parents, Roy and Joan Maytom, to invest $225,000 in a cash management account at Macquarie and he failed to do so.

59. Instead, ignoring these instructions, Mr Moylan, acting through MRS, advanced those monies to MIG on an unsecured basis. The Mannings’ and the Maytoms’ misapplied funds were never recovered from MIG.

60. (2) The Regional Land Property Fund. Prior to December 2005 a unit trust known as the Hardie Estates Joint Venture, held land for residential subdivision in Muswellbrook, Singleton and other sites in country New South Wales. In December 2005, the first tranche (‘tranche one”) of another unit trust, the Hardie Estates Property Fund was established. Tranche one of the Hardie Estates Property Fund was completed by converting the unit holders in the Hardie Estates Joint Venture, into tranche one unit holders in the Hardie Estates Property Fund. After December 2005, when tranche one of the Hardie Estates Property Fund closed, further investors were issued units in what became tranche two of the Hardie Estates Property Fund.

61. At the same time as tranche one was created, in December 2005, the Hardie Estates Property Fund became a managed investment scheme under the Corporations Act, Part 5C, and was given a scheme number under Corporations Act, s 601EB(2). Complicating the recognition of these funds and recognising a change in its management, the Hardie Estates Property Fund changed its name in July 2007 to the Regional Land Property Fund.

62. The responsible entity of the Hardie Estates Property Fund was Pacific General Services Limited. It in turn retained a company called Hardie Estates Management Pty Limited ("Hardie Estates Management") to manage the residential subdivision of the Singleton and Muswellbrook land. Hardie Estates Management changed its name to Regional Land Pty Limited in July 2007 ("Regional Land"), in parallel with the change of name of the managed investment scheme to Regional Land Property Fund.

63. The investment business of this fund remained throughout those changes the development of land for residential subdivision in Muswellbrook, Singleton and other sites in country New South Wales. But this development was unsuccessful. In May 2010, BankWest Ltd, the mortgagee of Regional Land Property Fund’s land, appointed receivers and managers over all the land in tranche two of the Regional Land Property Fund. Finally, on 4 April 2011, both tranches one and two of the Regional Land Property Fund were wound up by its responsible entity.

64. (3) Loans to Ms Trudy Crittle. The Mannings allege that MRS advised that they should make a loan of $120,000 to a Ms Trudy Crittle, who was described by Moylan as “…a client of mine who is purchasing a unit at McMahons Point, Sydney”. Moylan is said to have represented that the loan would be for a term of “about two years”, would earn a rate of interest of 13.5% to be paid “at the expiration of the loan” and “will be quite safe and secure as I will hold the deed”.

65. The Mannings entered into a loan agreement on 31 October 2006 and advanced the sum requested. Mrs Manning produces documents to show that the loan was rolled over for a further 12 months in late 2006. But the evidence is unsatisfactory as to whether the money advanced was ever actually lent to Ms Crittle. She did purchase a property in November 2006 and sold it on 12 December 2012. But the Mannings never received payment principal or interest on the loan.

66. (4) Other Minor Investments. Two other very minor property developments into which MIG’s funds were channelled should be mentioned to complete the overall picture of Mr Moylan’s recommended investments. Only peripheral reference is made to these minor property developments in the evidence.

67. The Algona Road Property. Some of the funds channelled through MIG were invested into a property development comprising two adjoining lots in Algona Road, Gateshead, a suburb of Newcastle (“the Algona Road property”). Title to the Algona Road property was held by Algona Road Pty Ltd (“Algona Road”), a company controlled by Mr Kenneth Hill and Mr Justin O’Brien, a real estate agent.

68. M & J Development Enterprises Pty Ltd (“M & J Development”) was incorporated in May 2005 to develop the Algona Road property. Mr Kenneth Hill and Mr O’Brien were the directors of M & J Development and its shares were held respectively by the Hill family trust and the O’Brien family trust. Algona Road was also the trustee of the Algona Road Property Trust.

69. In July 2007 MIG entered into a facility agreement with M & J Development pursuant to which MIG agreed to advance $300,000 to M & J Development to assist in its development of the Algona Road property. Mr Kenneth Hill and Mr O’Brien guaranteed M & J Development’s obligations under that facility.

70. The Lawson Road Property. The final significant development into which MIG funds were channelled was certain development lands in Lawson Road, Macquarie Hills, a residential suburb of the City of Lake Macquarie (“the Lawson Road property”). Cimneth Pty Ltd was the registered proprietor of the Lawson Road property and the trustee of the Lawson Road Unit Trust.

71. In July 2006, MIG entered into a facility agreement to advance $1.2 million to Cimneth as trustee for the Lawson Road unit trust, to assist in development of the Lawson Road property.

72. Cinmeth’s development of the Lawson Road property did not proceed and MIG’s advances to it were never repaid.

73. As can be seen from this brief survey, all of these various investment vehicles into which MIG channelled funds were property developments. Their wisdom as investments generally depended upon factors such as gaining development approval, the financial viability of the developments taking into account total building and development costs and the likelihood of sales of developed property, and the timing of cash flows during the development process.

74. The main investment structures that appear in the narrative below have now been introduced. MIG monies were channelled into some other investments upon Mr Moylan’s advice. But these will be mentioned in the course of the narrative of facts when specific findings are made in each of the actions below.

Findings in the Esined Action against MRS

75. The Esined proceedings were brought on behalf of the SMSFs of the Davey and the Smith families, Esined No. 9 and Esined No. 10 respectively.

The Daveys and the Claim of Esined No. 9

76. Mr Dallas Davey gave evidence on behalf of the Davey family and Esined No. 9. He was a direct, honest and engaging witness who did not prevaricate or qualify his answers. He made admissions against interest when that required a truthful answer. He was astute and alert and conceded he had enough knowledge to make some judgments about what constituted financially risky investments. His testimony was reliable in almost all matters.

77. Mr Davey’s impressive directness and honesty extended, for example, to acknowledging without qualification that he understood the effect of guarantees. Mr Davey agreed he understood that the security being offered for Charlestown Consulting Investments by the personal guarantee of its directors was only as good as the assets of the company’s four directors.

78. But an important factor emerges with Mr Davey that is also a feature of other plaintiffs’ witnesses’ evidence. Honest man that he was, he saw other people in the same image. He came across as a person with well-developed empathy, as a man expecting from his professional advisers, such as Mr Moylan, the same candour with which he himself spoke. He consequently placed great trust in Mr Moylan, who ultimately entirely moulded the Daveys’ perception of the investment risks they were undertaking.

79. Mr Davey was closely cross-examined about his own capacity for and knowledge of financial risk. But a dominant feature of his outlook, in my view, was that whatever his perception of risk, Mr Moylan’s assurances about risk displaced them and he deferred to them.

80. Mr Davey and his wife Sandra live in Wallsend, a suburb of Newcastle. They are both directors of the plaintiff, Esined No. 9. He left school at the age of 15 after completing his intermediate certificate and pursued an apprenticeship as a boilermaker at the BHP Steelworks in Newcastle. He remained employed by BHP Steelworks until about 1979, leaving that year to work for P&J Welding as a boilermaker. He reunited in this workplace with a teenage friend, Mr Peter Smith.

81. Work brought them even closer together. In 1981, when Mr Davey was 37, he and Mr Smith decided to venture out on their own and start up the business known as D&S Fabrications in the industrial area of Tomago. Initially D&S Fabrications comprised just Mr Smith and Mr Davey but at its peak it employed approximately 50 people on three rotating shifts, mainly servicing the aluminium smelter in Tomago. In the midst of the advice which is the subject of these proceedings, in 2010, Mr Smith and Mr Davey sold D&S Fabrications and retired. At that time Mr Davey, who was born in 1944, was aged 66.

82. Mr Davey did not have any formal education or vocational training after completing his apprenticeship in 1964. But he and Mr Smith did develop a practical capacity to read financial accounts so they could run D&S Fabrications. Mr Davey acknowledged he needed assistance from the business accountant of D&S Fabrications to understand the finer details of financial accounting.

83. The favourable business environment in which D&S Fabrications operated ended up limiting Mr Davey’s business experience. For over 30 years the major customer of D&S Fabrications was the Tomago aluminium plant, which is located in the same suburb and has continuously employed about 1200 people in the production of aluminium, through good economic times and bad. Consequently D&S Fabrications had very few bad debts and Mr Davey and Mr Smith had little experience of actual financial risk impacting directly upon their small business.

84. In mid-2005, when Mr Davey was 61, he and Mr Smith began to give detailed consideration to their retirement plans and the need to increase their available superannuation. Mr Davey and Mr Smith took the view that the company accountant for D&S Fabrications did not have the right skill-set to advise on superannuation, so they looked elsewhere.

85. Mr Smith suggested to Mr Davey that they both speak to Mr Michael Hill, of Turnbull Hill Lawyers of Charlestown. This seemed logical to Mr Davey as Mr Michael Hill had acted as the lawyer advising the companies and trusts associated with D&S Fabrications for many years since its establishment in 1981. Mr Davey saw Mr Michael Hill as a successful solicitor and businessman, who was well known in the Newcastle business community. Mr Davey valued Mr Michael Hill’s opinion and was ready to listen to that opinion about where he and Mr Smith should go for good superannuation advice.

86. Scratchley’s on the Wharf is a popular harbourside seafood restaurant in Newcastle. In September 2005, Mr Davey and Mr Smith met Mr Michael Hill for lunch there to discuss where they should look for good superannuation advice. Mr Michael Hill had the answer, “Yes I know a financial planner who can help you. He knows his stuff”. He then gave them Mr Moylan’s contact details.

87. Mr Davey and Mr Smith met Mr Moylan a short while later, in October 2005 at the Tomago offices of D&S Fabrications. They briefed Mr Moylan about their business history, gave him copies of some of the company and trust accounts for the entities behind D&S Fabrications, including a joint superannuation fund “The D&S Fabrications Superannuation Fund”. Mr Moylan explained that his plan was that they should each start to separate out their individual interests from their joint interests in the D&S Fabrications Superannuation Fund and then, set up two other superannuation funds, one for each family. At Mr Moylan’s suggestion, they supplied to Moylan Business Solutions more detailed company accounts for the various entities associated with D&S Fabrications.

88. When they first met together, Mr Moylan was still working as an AFSR representative of Matrix. But in January 2006, Mr Moylan separated from Matrix and obtained his own AFSL in the name of Retirement Planning Services, later changed to MRS. In February 2006, he sent out to the Daveys a letter and enclosed an Introductory Financial Services Guide to introduce Retirement Planning Specialists.

89. The other plaintiffs received this letter early in their relationship with Mr Moylan. The letter announced that a new licence had been obtained and explained:

“Having our own license now means we can concentrate on the holistic financial advising approach to high net worth individuals just like you who also have their own Self-Managed Superannuation Fund.

It also means that we can now easily introduce you to more complex, non-traditional financial products, which we were not able to do so under the old license.”

90. The Introductory Financial Services Guide further explained under the heading “the business” that “our business purpose is to provide outstanding accounting, technical, taxation and financial planning advice for trustees of self-managed superannuation funds”. And under the heading “our philosophy”, that Retirement Planning Services “is a place where the genuine financial care of our client is our highest mission. We pledge the finest technical service to our clients who will also enjoy a warm, relaxed, yet professional ambience is when dealing with us.”

91. Other relevant qualities of Retirement Planning Services, and by inference later MRS, were set out in the introductory financial services guide under the heading “our commitment to you” as follows:

“You are assured of professional advice…Honesty, integrity and confidentiality are given in our business relationship…The highest quality strategies to maximise retirement savings…We can direct you to other professional advisers should they be required”.

92. Under the heading “our approach”, the Introductory Financial Services Guide declared that “our approach is to provide professional advice and services in a productive and exceptional manner to our clients to meet their needs” which relevantly included “investment strategy and review” and “financial plan for the fund”.

93. MRS’ claim to professionalism, promoting the best interests of the client, and integrity, emphasised in these representations, was repeated in various ways throughout subsequent documents distributed to the clients and reinforced orally by Mr Moylan.

94. The plaintiffs’ directors did read these documents and accepted the claims within them, which is a matter relevant to the Court’s inference that MRS assumed both a fiduciary position, and a duty to take reasonable care to give advice, with respect to all the plaintiffs.

95. The Introductory Financial Services Guide explained the role of the principal actors on behalf of MRS that feature in these proceedings. Mr Moylan was described as the “authorised representative” and “part owner” and with other biographical information concluding that he is a chartered accountant who “holds the coveted designation ‘CA financial planning specialist’”. The guide also introduced Mr Alan Spicer as an accountant to provide tax, accounting, financial and strategic planning advice. The other employee, Ms Amanda Sweeney, was described as an administrative assistant to the firm.

96. It took a little while for this early contact with Mr Moylan to mature into investment advice. But that process began in late May or early June 2006 in Mr Moylan’s offices in Charlestown. As Mr Davey and Mr Smith were trusted business partners, they took these first steps together. At this meeting, Mr Moylan explained to Mr Davey and Mr Smith and their wives how the retirement plans for each of their families would evolve from the present company structure, essentially by paying the present excess cash balance of the D&S Fabrications Superannuation Fund and future superannuation balances in that fund into the new individual superannuation entities that he would set up for them. He explained that once there were sufficient funds in the two separate family SMSFs, that he would start to give them investment advice.

97. In the meantime, he asked them to complete documents, including a questionnaire, to inform him about their respective risk profiles and then he explained that his “retirement planning specialist”, as he described it, would give them a statement of advice and make recommendations as to how they could achieve their investment goals.

98. At this early meeting, Mr Smith said to all present:

“Chris [Moylan], all of us are cautious people. We have all worked very long and hard. We don’t want to lose what we have put together. We are not interested in shares or any risky investments. Although we would like our investments to grow, we only want one is which are safe and secure. We do not want to lose what we have.”

99. To this, Mr Moylan responded, “I understand”. That reassured Mr Davey and Mr Smith. Their joint thinking about risk, as Mr Smith had just explained to Mr Moylan, was uppermost in each of their minds and fundamental to their decision to take Mr Moylan’s advice. In their minds this was what they thought was a mutually understood covenant with Mr Moylan: that they were not at risk of losing “what we have”.

100. Mr Moylan made his first recommendations at this meeting, recommendations which first exhibited a pattern which was to be repeated on many occasions subsequently to them and to the other plaintiffs in these proceedings. Through a number of companies D&S Fabrications and its superannuation fund owned investment property, known as the Laman Street property, and the D&S Fabrications business premises in Tomago. Mr Moylan explained to them all:

“From my examination of your assets you appear to be overweight in shares through your holding in D&S Fabrications Superannuation Fund. In my view you are also overweight in property. That is in large measure because of your ownership of the land at Lamar Street and the business premises at Tomago. Do not think you need any more property or shares. However once you have completed the questionnaire we will discuss with you further what investments we think are appropriate. However the best thing to do at present is for you to invest in fixed interest products. That will assist in providing a better balance to your portfolio.”

101. This was an important statement which Mr Moylan reiterated many times afterwards and that defined the Daveys’ and the Smiths’ outlook on investments by their superannuation funds. Mr Moylan was apparently recommending to them that they invest in “fixed interest products”. That was their focus then, and remained their focus.

102. Before the statement of advice was received, Mr Moylan suggested that Mr Davey and Mr Smith should create a Macquarie Investment Management Ltd Cash Management Trust account (refer to in these reasons as the “Macquarie CMT” or the “CMT”) to take the excess funds from the D&S Fabrications Superannuation Fund on an equal basis and that any further superannuation contributions for each of Mr Davey and Mr Smith would go into the new accounts to be held by the new super funds, when they were created.

103. Both couples filled out the pro forma questionnaires and the account opening forms. They were invoiced by Moylan Business Solutions for these services.

104. In early July 2006, Mr and Mrs Davey re-attended at Mr Moylan’s office and signed the documents necessary to set up the Davey Superannuation Fund with Esined No. 9 as its trustee. Moylan Business Services provided the new entities with tax file numbers and Australian business numbers. On 3 July 2006, they opened a Macquarie CMT, known as account 4982, in the name of Esined No. 9, as trustee of the D&S Davey Family Retirement Fund.

105. Mr Moylan had still not yet completed the statement of advice that he had promised the Daveys and the Smiths, when in December 2006 he first recommended to them an investment in MIG. By then the Daveys had $300,000 in cash in the Macquarie CMT in the name of Esined No. 9. Mr Moylan said the following:

“C. Moylan:   I know that we have not yet completed your statement of advice, however there is presently near $300,000 in cash in your Macquarie CMT. Whilst we are finishing the statement of advice I recommend that you invest some of those monies.

D. Davey:   What do you suggest?

C. Moylan:   I suggest that you invest some of the funds in Moylan Investment Group, a company which I own and manage.

D. Davey:   What does Moylan Investment Group do?

C. Moylan:   It is a company that invests money in property developments. It pays a good rate of interest of 9% per annum quarterly.

D. Davey:   How long will the investment be for?

C. Moylan:   It will be for 12 months. As it is an investment in residential land development it will be quite safe. It is a company you should invest in.

D. Davey:   If we need the money back how long will it take?

C. Moylan:   Not long, only a week or so.

D. Davey:   Do you recommend that we invest that sort of money in MIG?

C. Moylan:   Yes.

D. Davey:   Very well.”

106. Mr Moylan’s characterisation of the investment was important. It created Mr Davey’s mindset that this was a fixed interest investment in MIG, a company that invested in other companies but one that Mr Moylan characterised and recommended simply as a fixed interest investment. Mr Davey assumed, based on his previous conversations with Mr Moylan, that Mr Moylan was recommending investments in which he and his wife would not lose their capital.

107. Mr and Mrs Davey signed the loan and other documents to authorise the loan advance of $100,000 to MIG on or around 5 December 2006. But they did not read the terms of the loan or the documents. They were not given sufficient time to do so. They followed Mr Moylan’s recommendation to sign the loan agreement between Esined No. 9 and MIG. They did not receive a copy of that agreement until April 2009. The terms of the loan agreement were not explained to them. So far as Mr Davey could see, no one witnessed his and his wife’s signatures.

108. Why did they not ask for a copy? They completely trusted Mr Moylan. They did not perceive him as being on the other side of any transaction. He was seen as their trusted advisor acting in their interest. The incidental effect of not having a copy was that it was difficult for them to work out when the capital was due to be repaid to them. The loan agreement was an unremarkable document provided for a 12 month loan term, and the payment of 9% interest. It purported to charge all the assets of MIG, such as they were, in favour of the lender. All the subsequent loan agreements that the Daveys signed were in the same form and followed the same pattern of execution and retention by MRS.

109. On the same day they signed an authority, authorising the transfer of the $100,000 from Esined No. 9’s CMT account, account 4982, to another CMT held by MIG.

110. Esined No. 9 pleads that at approximately this time, in December 2006, that an oral contract was made between MRS and Esined No. 9 for MRS to provide a range of investment advisory and ancillary services to Esined No. 9 for consideration payable by Esined No. 9 to MRS. Based on what was exchanged in the several preceding conversations and the mutual conduct that followed, including the payment from time to time of MRS invoices for advisory fees, the Court concludes substantially in accordance with Esined No. 9’s contention, that such a contract was made and applied to all services subsequently provided. The more detailed terms of this contract are dealt with in the analysis of the first limb issues below.

111. Esined No. 9’s superannuation account was replenishing rapidly with cash from D&S Fabrications. In early March 2007, Mr Moylan rang Mr Davey, mentioning again that “[w]e haven’t yet finished your statement of advice” but suggesting that they make a “further investment”. They were invited into his office and came in on 12 March 2007, when the following conversation between them took place:

“C. Moylan:   Dallas and Sandra, we haven’t yet finished your Statement of Advice, we are still working on it. However I have noticed that the CMT account has quite a large sum of money sitting in it. I suggested to Dallas the other day that you should make a further investment.

D. Davey:   What sort of investment do you think we should make?

C. Moylan:   As there is over $250,000 in the account I think you should invest another $100,000 in MIG, $50,000 with UBS Property Securities Fund, $50,000 with City Pacific Mortgage Trust and $50,000 with Credit Suisse Australian Fixed Interest Fund.

D. Davey:   Who are they?

C. Moylan:   Each of them are registered funds which are secure and pay a good rate of interest. Here is a copy of the Lonsec Report for City Pacific Mortgage. As you can see it is a well-recognised fund. It is secure and will give you a good rate of return. All of these are products which are recommended by us.

D. Davey:   Do you think that each of them are good investments?

C. Moylan:   Yes. Do you want me to make those investments for you?

D. Davey:   Yes.”

112. The centrepiece of this conversation was Mr Moylan’s recommendation that each of these destinations for the Daveys’ money was a “good investment”. That was certainly true of some of the $150,000 recommended to be invested in the entities other than MIG but not the $100,000 earmarked for MIG. But the Daveys were not cognisant of the differences between MIG and the other destinations of their funds. Mr Moylan lumped them all together as being of the same quality, effectively equating MIG with other larger better scrutinised deposit taking institutions.

113. Mr Alan Spicer was also present at this meeting on 12 March 2007. The Court accepts that Mr Moylan also said on this occasion that the investment products that were being recommended were “each approved products of Retirement Planning Services” Mr Moylan did explain to the Daveys that a company by the name of Lonsec reviewed their investment products. Mr Moylan gave the Daveys some Lonsec reports in relation to the City Pacific mortgage trusts and the Credit Suisse Australian Fixed Interest Fund.

112. The Daveys were probably also provided at the March 2007 meeting with a document describing the investment activities of MIG. It is possible but less likely that this document was given to them as early as December 2006, or even as late as June 2007. The document included a description of investments in residential subdivision, including the developments at Algona Road and Lawson Road.

113. On 12 March 2007, the Daveys paid $100,000 to MIG once again, executing documents for the transfer of funds out of Esined No. 9’s CMT account 4982. About the same time, on 14 March 2007, they were told that MRS was the renamed entity now advising them about their superannuation in place of Retirement Planning Specialists.

114. Mr Moylan was closely watching the accumulation of funds into the Macquarie CMT being operated by Esined No. 9. As will be seen, this was the pattern of his conduct with the other plaintiffs. In late April or early May 2007, whilst explaining again that their statement of advice was still not complete, Mr Moylan suggested that the Daveys invest a further $100,000 in MIG, and at the same time, that they advance $50,000 to the Bolwarra Heights Investment Trust. Mr Moylan explained that MIG was the trustee of the Bolwarra Heights Investment Trust, which was “developing some land” at Bolwarra Heights.

115. The Daveys received the following assurances from Mr Moylan at this time about the Bolwarra Heights Investment Trust:

“D. Davey:   Is it a safe investment?

C. Moylan:   Yes, it is quite safe. You will receive the same interest, being 9% quarterly.

D. Davey:   How long will it be for?

C. Moylan:   The same as the other loans to MIG, 12 months.

D. Davey:   Very well.”

118. A few days later, on 4 May 2007, these further investments into MIG of $100,000, and into the Bolwarra Heights Investment Trust of $50,000, were documented, with the Daveys signing the loan and account transfer documentation, according to the usual pattern. All the investments the Daveys had made so far were made without any written statement of advice being given to Esined No. 9. The Daveys wholly trusted Mr Moylan’s word and were content to proceed without a written statement of advice.

119. A month later, further investments were recommended to the Daveys. On 20 June 2007, they attended a meeting at the offices of MRS in Charlestown. By then the statement of advice for Esined No. 9 had been completed. The statement of advice dated 20 June was given to them. It described them as “cautious investors” and made recommendations about investments which Mr Moylan described verbally in this way: “it is important to note that the products which we recommend are all part of our approved product list.” Mr Moylan encouraged the Daveys to take advantage of the Australian government’s “one-off” opportunity to contribute a large sum to their superannuation fund in FY07, free of the 15% superannuation contribution levy. He pointed to the availability to them of $470,000 from D&S Fabrications and their capacity to borrow money.

120. The statement of advice, which was dated 20 June 2007, included a representation that Retirement Planning Specialists (now MRS) operated from an “approved list put together by an external research committee, Lonsec, and is regularly reviewed.” The Daveys, like most of the other plaintiffs, did not ask for a copy of this list, because they trusted Mr Moylan.

121. The statements of advice provided to the Daveys and each of the other plaintiffs were in a substantially similar form. They set out the financial position of each plaintiff and made particular recommendations that reflected the court’s findings about the oral recommendations made to each plaintiff.

122. MRS assessed most of the plaintiffs as having a similar cautious risk profile and offered to provide them with similar services. The statement of advice given to the Daveys was not the first one given to the plaintiffs; for example a statement of advice was provided to the Smiths on 20 March 2007. But it is convenient now to highlight some relevant common features of the statements of advice by reference to the one given to the Daveys in June 2007.

123. The covering letter of the statement of advice recommended investment “in Fixed Interest products, such as Moylan Investment Group, Citipacific Mortgage Trust and MFS will balance up your portfolio and provide you with capital security”. Then followed a set of more detailed recommendations.

124. The statement of advice examined each plaintiff’s risk profile, on the basis of the questionnaire distributed to them, and assessed them all. Given what the clients had said to MRS; the Daveys were each assessed as “a cautious investor”, who desires “capital stability”.

125. The thrust of the investment strategy set out in the statements of advice was that the Daveys, and indeed the other plaintiffs, should invest in fixed interest products and a diverse range of managed investments involving such products. The statements of advice explained the benefits of this as being: investing in “the asset class of fixed interest”, which would help bring the clients’ asset “allocation in line with your benchmark”. And they implied that the strategy and the products recommended would be properly evaluated and were, as a result, appropriate to each client’s risk profile.

126. Under the heading, “Do I guarantee the managed funds I have recommended”, MRS stated, “No. By law, the managed funds I have recommended must be ‘appropriate’ for you. However, I do not guarantee that those managed funds are the best for you or that they will perform in a particular way”. But Mr Moylan’s technique in dealing with his clients was to get them to focus on what he said and he gave little prominence to their reading the documents he gave them. They were steered away from focus or cautions such as this.

127. The statements of advice also emphasised the need for regular review. They promised continued ongoing attention to the clients’ financial affairs after the initial investments so as to ensure their appropriateness.

“An important objective of our review process is to compare your actual position to the projected position. We will identify any departures from the plan, establish why this has occurred in either make adjustments to your plan, or investment program to provide coaching to help you get back on track. We will ensure that your plan continues to meet your needs.

As part of our ongoing service to you we will closely review your situation every six months. Your six monthly reviews will involve: reassessment of your goals and objectives… Review of your investment portfolio to ensure it remains appropriate to your situation”.

128. The plaintiffs’ breach of contract case contends that these reviews did not take place, or if they did that they did not conform to these assurances in the original statements of advice. Later portfolio reviews, portfolio valuations and statements of advice were given to each of the plaintiffs. But a common feature of all them was that they did not recommend that the plaintiffs reduce their exposure to MIG or the other recommended investments the subject of these proceedings.

129. The plaintiffs were briefly offered consideration of “alternative strategies” in the original statements of advice but these were not discussed in any detail. Nor were alternative strategies recommended in the later portfolio reviews, portfolio valuations and statements of advice.

130. Once their assent to further superannuation investments was secured, the conversation continued in the following terms about where the Daveys’ superannuation money should be invested:

“D. Davey:   Very well. What do you propose that we invest the money

in?

C. Moylan:   Once we have transferred the money into the CMTI we recommend that you invest $300,000 in Hardie Estates Property Trust and a further $200,000 in MIG.

D. Davey:   We know what MIG is but what is Hardie Estates Property

Trust? I have not heard of them before.

C. Moylan:   Hardie Estates Property Trust is managed by Duncan Hardie. Duncan Hardie is a very successful businessman who has done a lot of residential property development. He is in fact one of the largest residential property developer in New South Wales. The Fund consists of Tranche 1 and Tranche 2. Tranche 1 is nearly complete and has been extremely profitable. Tranche 2 involves the development of land at Muswellbrook, Singleton, Tamworth and Bellbird. It is anticipated that Tranche 2 will be even more successful than Tranche 1.

D. Davey:   I am not sure about investing in real estate.

C. Moylan:   You should look at it as this is an opportunity to invest in real property but without having to deal with builders or subcontractors. It is an excellent investment. In my view it is both safe and secure and you won’t have to deal with builders or contractors.

D. Davey:   What sort of investment is it?

C. Moylan:   They pay interest at 15% per annum paid quarterly. There is also the opportunity of receiving on completion a bonus.

D. Davey:   As you know we are only interested in secure, safe investments.

C. Moylan:   This is a secure, safe investment.”

131. Mr Moylan repeated his overall recommendation and then specifically recommended that they invest another $90,000 in MIG and $60,000 into the Bolwarra Heights Investment Trust, making their total investment in the Bolwarra Heights Investment Trust $110,000 up to that point.

132. The Daveys were comfortably receptive to Mr Moylan’s broad assurances of equal investment safety across all categories of recommended investment. Based on these recommendations, the Daveys assumed that their investment in the Bolwarra Heights Investment Trust was safe.

133. In early July 2007, Mr Moylan told the Daveys that the Hardie Estates Property Fund had changed its name to the Regional Land Property Fund as at 1 July 2007. But they were assured there was no difference in the funds and that the new fund was still “a good secure investment”. On the basis of that assurance, they proceeded to invest in the fund.

134. A few days later, on 11 July 2007, the Daveys signed the necessary documentation in front of Mr Moylan’s office assistant according to the usual pattern. This was a further loan agreement from Esined No. 9 to MIG in the sum of $90,000, and another loan agreement from Esined No. 9 to MIG as trustee for the Bolwarra Heights Investment Trust in the sum of $60,000. And on 5 July 2007, they had authorised the payment of $300,000 to the Hardie Estates Property Fund. MRS invoiced Esined No. 9 for the statement of advice, which was paid.

135. The Daveys’ investment in the Regional Land Property Fund was not accompanied by any advice from Mr Moylan that such investment was only possible if Esined No. 9 and the Daveys qualified as a “wholesale” client. The Court also accepts that the Daveys would have stoutly resisted the idea of being classified as wholesale rather than retail clients of MRS. They simply did not see themselves that way. No information memorandum for the Regional Land Property Fund was left with them.

136. Later, in July 2007, after the Daveys had invested the $300,000 in the Hardie Estates Property Fund, they received information from that fund that Mr Duncan Hardie had sold his interests in it. The Daveys say, and the Court accepts, that had they been aware of this at the time they were contemplating investment in the fund, they would not have invested in it.

137. Mr Moylan introduced the Wallalong Investment Trust to the Daveys about 12 months later. In early August 2008, at a time well into the global financial crisis, Mr Moylan telephoned Mr Davey and had the following conversation with him:

“C. Moylan:   Dallas there is a parcel of land being developed at Wallalong. It is a residential property development. As you are not dealing with builders or contractors there is no risk. It will provide a good rate of return.

D. Davey:   What is the interest rate?

C. Moylan:   The same as usual, 9%.

D. Davey:   How long will the money be invested for?

C. Moylan:   Two years.

D. Davey:   All right, l m happy with that.

C. Moylan:   l also suggest that you invest another $100,000 in MIG.

D. Davey:   What are the terms of that?

C. Moylan:   They are the same as before.

D. Davey:   Do you still recommend we make these investments?

C. Moylan:   Yes. Each of them is a safe and secure investment which will provide you with a good return.

D. Davey:   Very well.

C. Moylan:   I will have to bring some more documents around for you to sign.

D. Davey:   Very well.”

138. This conversation is remarkable at several levels. In the first place, although the global financial crisis was well underway, it is not mentioned in the conversation. Mr Davey did not obviously associate the global financial crisis with the stability of any of these investments; nor did Mr Moylan warn the Daveys about these financial storm clouds when recommending a property development related investment.

139. Esined No. 9 invested on this recommendation. The Daveys signed documents on the assurance that they were the “same as you have formerly signed for MIG”. They signed documentation on 22 July 2008 authorising the withdrawal of $110,000 from Esined No. 9’s CMT, and its loan of $100,000 to MIG, according to the usual pattern. The $110,000 was transferred to MIG on 28 July 2007.

140. Mr Davey expected that the $100,000 was going to be on lend to the Wallalong Investment Trust in addition to the $110,000 to be lent to MIG. But in early September 2008, on reviewing his bank statements for Esined No. 9’s account 4982, Mr Davey noted that in addition to the withdrawal of the $110,000, not one but two withdrawals of $100,000 had been made on 7 August 2008. One withdrawal was directed to Wallalong Investment Trust and one by cheque to MIG. He was concerned that $200,000 rather than $100,000 had been withdrawn contrary to his instructions.

141. He contacted Mr Moylan’s office and complained. Both withdrawals were later reversed and a single $100,000 withdrawal was made on 4 November 2008. On questioning about these changes, Mr Moylan disclaimed any knowledge of them and attributed the alteration to some issue at Macquarie Bank. Mr Davey did not follow this up because the reversals of the earlier transactions and the final single $100,000 withdrawal reflected his and his wife Sandra’s instructions.

142. Between December 2008 and March 2009, Esined No. 9 received a number of documents from MIG and from the manager of the Regional Land Property Fund, Regional Land.

143. Mr Moylan attended at the Daveys’ home on 24 or 25 April 2009. He gave them two letters from Moylan Business Solutions addressed to Mr and Mrs Davey. They did not have time to read the letters before the following conversation ensued:

“C. Moylan:   Following a review of the MIG Loan Agreements with the Davey Super Fund it has become apparent that in order to protect everyone's interests the terms of each of those loan agreements needs to be changed. I have brought with me Deeds to vary each of those agreements.

D. Davey:   How does it change the terms of the agreement?

C. Moylan:   As all the projects are running well, all it does is extend the loan but does not otherwise affect it. All of the directors' guarantees remain in place. You will continue to receive 9% on the moneys invested.

D. Davey:   How long does this extend the loan?

C. Moylan:   It extends the time to 31 December 2011.

D. Davey:   Do you recommend that we sign them?

C. Moylan:   Yes, just sign where I have indicated.”

144. Mr Moylan then placed what became known as the “supplemental deed” documentation before each of Sandra and Dallas Davey. Neither of them had an opportunity to read or consider the contents of these documents or to look at the loan agreement so they could consider how their terms were being changed by the supplemental deed. This lack of opportunity to read documents being signed had occurred with the Daveys’ previous signings. So far as Mr Davey could see, no one witnessed his and his wife’s signatures and no copies of the signed supplemental deed documents were provided to them until a much later date.

145. An equivalent of the supplemental deed was signed by all the plaintiffs, apart from the Kauters, at about this time. All the signings were in circumstances and similar to those that were made on this occasion to the Daveys. Statements such as those made here typically preceded the signing of all the supplemental deeds. The broader financial picture of these investments, analysed below, shows that these statements fell well short of giving true situational awareness to the clients.

146. This conversation, and the supplemental deed conversations with the other plaintiffs, are remarkable for what Mr Moylan does not say. Mr Moylan does not lay out and review with his clients the advantages and disadvantages of calling up the loans at this time. He does not discuss possible alternative investments. He just steers them back into the same loan investments.

147. Mr Alan Spicer, who was employed by MRS until August 2009, explained why Mr Moylan needed these supplemental deeds in April 2009: MIG faced a cash flow crisis.

148. Mr Moylan needed to have all his clients’ loan agreements with MIG extended in April 2009. He admitted to Mr Spicer shortly before the supplemental deeds were drafted that all the existing loan agreements with MIG had "expired which means we will either have to pay the money back or get them extended". Mr Moylan said to Mr Spicer that he would achieve that by preparing a supplemental deed for each loan agreement. In a significant indicator of Mr Moylan's then financial desperation, to Mr Spicer's question "what happens if the people won't sign them", Mr Moylan responded, "I’ll just have to convince them to do it, because we haven't got the money to pay them back".

149. Mr Spicer's account of this conversation shows that Mr Moylan was well aware that MIG was insolvent by April 2009. What Mr Moylan said to Mr Spicer in these conversations was not shared with any of the plaintiffs. Instead, they were sprinkled with misleading euphemisms about the need for the supplemental deeds. These were statements like “all it does is extend the loan but does not otherwise affect it” (to the Daveys), or that these deeds were ‘to protect everyone’s interests” (to the Smiths).

150. Mr Spicer saw the supplemental deeds before they were given to the clients. He was surprised at what he saw: the loans were being extended for more than two a half years. He expressed doubt to Mr Moylan that "the clients will agree" to this. But Mr Moylan said to Mr Spicer that the approach was to be "just get it done".

151. Mr Spicer did not try to distance himself from his involvement in these or other events the subject of these proceedings. He was conscious of his own potential liability to the plaintiffs but to his credit it did not colour the quality of his evidence. He was an honest and generally reliable witness. He was attacked in cross-examination on the basis he had participated in frauds upon the plaintiffs. But he was careful enough to keep some contemporaneous documents to be able to defend himself later. He thought Mr Moylan might cast blame on him to the clients. He feared these clients might then sue him. Mr Spicer ultimately left MRS because he was uncertain about what Mr Moylan was saying to clients and he did not trust him.

152. By this time, Mr Spicer had also often witnessed the monthly MIG bank account reconciliations conducted by an MRS staff member, Ms Stephanie Hinds. At the end of these account reconciliations Ms Hinds would commonly report to Mr Moylan that the reconciliation showed “[MIG] hasn’t got enough money to pay the interest on all the loans”. To this Mr Spicer says Mr Moylan would frequently respond, “Leave it with me. I will have to talk to some of my clients”. Mr Spicer recalls that Mr Moylan would usually go on to explain to Mr Spicer that the shortfall that had been identified would be made up by clients investing an amount to make up the deficiency at MIG. He would then usually request Mr Spicer to “get a loan agreement prepared”.

“CLAIM or liability directly or indirectly based upon or attributable to or in consequence of any…financial products or instruments not contained in the INSURED’S approved product list at the time the advice was given.”

681. This wording raises the questions: whether or not the loss that the plaintiffs claim is for a financial product or investment that was on MRS’ approved product list; and for the purpose of answering that first question, what was the MRS approved product list for the purposes of clause 5(a). MRS’ procedures for maintaining an approved product list were less than rigorous. What constituted its “approved product list” at any one time was disputed.

682. What was on the MRS Approved Product List? The defendants contended that no financial product involving MIG, the Wallalong Investment Trust, the Bolwarra Heights Investment Trust, the Bolwarra Heights Property Trust, the Regional Land Property Fund or the loans to Ms Crittle were on any approved product list of MRS when the relevant advice was given. The plaintiffs contended that all the investment products that MRS recommended to the plaintiffs were on MRS’ approved product list. The plaintiffs sought to advance this case principally through the evidence of Mr Spicer.

683. Mr Spicer was involved in maintaining what he said was the approved product list of MRS. Mr Spicer says, and the Court accepts, that as at June 2007 MRS retained an approved product list. The Court has confidence in Mr Spicer as a witness and accepts his evidence about the maintenance of an MRS approved product list. The Court accepts his evidence that MRS retained Lonsec Fiscal Pty Ltd (“Lonsec”) to provide investment product reports and on a quarterly basis to review what products would be included in the MRS approved product list: CB 4412 – 4496, 4814 - 4990. Lonsec provided reports on larger institutional investments such as the City Pacific First Mortgage Fund and Colonial First State First Choice Investments.

684. MRS’ deregistration meant that a comprehensive audit of its filing systems has not been undertaken. It not surprising therefore that Mr Spicer was mostly only able to give secondary evidence about the contents of the MRS approved product list apart from what was in the Lonsec reports and some documents he produced in answer to a call.

685. But Mr Spicer is sure there was such a list and that most of the financial products the subject of these proceedings were on it and his evidence is accepted. Mr Spicer believed that he was participating in a genuine approval process, when he held regular meetings with Mr Moylan and confirmed the approval for particular approved products of Retirement Planning Services, and later MRS. Mr Moylan and Mr Spicer held these meetings together at which they reviewed the material presented and decided whether or not to approve a product as part of the approved products list.

686. At these meetings Mr Moylan and Mr Spicer approved as part of MRS’ approved products the following: MIG, the Bolwarra Heights Investment Trust, the Hardie Estates Property Fund, the Cartel Unit Trust and the Regional Land Property Fund. Mr Spicer did not recall approving any products associated with the Wallalong Investment Trust or Ms Trudy Crittle and the Court finds that they were not on any MRS approved products list.

687. The practice within MRS, as described by Mr Spicer, was that Lonsec produced reports on Colonial First State, City Pacific and Octavia/Wellington and the larger institutional investment funds that Mr Moylan commonly recommended to clients, including the plaintiffs. The quarterly Lonsec reports were used to monitor the continuing position of these products on the approved product list.

688. It was Mr Spicer’s belief that as a result of that process the approved products of MRS could be recommended to its clients. Mr Spicer was not the kind of person who would have participated in a product approval process which he regarded as a sham. He resigned from MRS in August 2009, when his own ethical standards were not being met by Mr Moylan. Despite the attacks on his evidence in cross-examination on the approved product list issue, it is accepted.

689. Mr Spicer particularly recalls MIG and the Regional Land Property Fund, as two of the prominent financial products on the MRS approved product list, which were also reviewed by Mr Gregory Redfern, a consultant at MRS. Both Mr Spicer, and Mr Redfern, say that Mr Redfern was engaged to review each investment product. Mr Spicer says that Mr Redfern provided a compliance certificate in respect of some financial products and once the certificate was obtained, the certified products were added to the MRS approved product list. According to Mr Spicer, this practice continued from June 2007 until the termination of Mr Spicer’s employment in August 2009. Whilst some of the investments in these proceedings post-date Mr Spicer’s departure from MRS the Court infers the process continued.

690. Mr Redfern gave evidence that he was indeed engaged to do the audits of MRS investment lists. He was a guarded and cautious witness, but one nevertheless who was mostly helpful. His recollection of some events was not strong. Mr Redfern was alert to the potential damage his answers in cross-examination might do to him and was careful in crafting them. He was overtly defensive, deliberately limiting his answers, or finding reasons why he could not give answers at all. Because of these features the Court has approached his evidence cautiously. But his and Mr Spicer’s evidence about the product approval process largely coincide and the Court accepts them both on the subject.

691. Mr Spicer was also involved in preparing statements of advice for clients and in reviewing client files to respond to queries. The approved products list maintained within MRS was used for this process. Investment products that had not been approved by Lonsec were kept in a research folder. Upon each product being approved by Mr Moylan or Mr Spicer, they placed its research papers into this research folder. The approved products in the research folder were colloquially referred to within the MRS offices as the “white papers”. Mr Spicer says he received updating reports about the contents of the white papers and attended meetings with Mr Moylan when they would discuss the updates, as the result of Mr Redfern’s compliance reviews.

692. The written statements of advice issued to each of the Daveys and the Smiths stated that Retirement Planning Specialists (soon to become MRS) “can only recommend products on the Approved List. This means that I only looked at products on this list when I prepared your advice”. The statements of advice explained that “the Approved List is put together by an external research committee, Lonsec, and is regularly reviewed”. These written statements of advice offered the plaintiffs a copy of the list, if they were interested. None of them asked for one.

693. The Court was left with the impression that Mr Redfern’s reviews of the white papers of non-Lonsec products did not involve overly rigorous scrutiny on his part. He had difficulty in articulating whether MIG was actually a “product” offering. He looked at the written updates that were provided by Mr Moylan, such as the March 2009 MIG property update and assessed their financial logic, but he did no independent investigation of the merits of such investments in a way which would be strongly protective of the MRS clients’ interests.

694. His evidence was unsatisfactory about identifying whether there was of formal “list” of the non-Lonsec products. At times he called then “unlisted”. But this merely seemed to express his doubts that that there was a single list created in one document as distinct from a folder of these products. That does not detract from the Court’s inference that they were “approved products” and kept in a way that could be described as “a list”. In the end the Court accepts his evidence that a lever arch file of the products he reviewed was kept with the products individually tabbed and a handwritten list was at the front. The way they were kept partly explains why they were not provided with the papers accompanying the 2013 proposal.

695. The Approved Product List and the Policy. The defendants argued that the “approved product list” referred to in clause 5(a) of the 150PI endorsement was the one attached to the 2013 proposal for that policy. The plaintiffs contend that it is the list actually kept in the insured’s business from time to time.

696. An interesting feature of this argument is that there is no regulatory requirement under the Corporations Act to keep an approved product list. But it appears to be referred to in the 150PI endorsement because it is an aspect of industry practice.

697. There are several difficulties with the defendants’ construction of the of the 150PI endorsement. First, the policy wording and the 150PI endorsement assume that the insured’s approved product list is constructed, used and reviewed in a dynamic business environment. The proposal asks questions that make it quite clear that underwriters understand and convey to the proposed insured that in the financial planners underwriting portfolio, approved products are likely to enter and depart from an approved product list quite frequently during the year. The proposal accepts and probes about how the proposed insured will make adjustments in advising clients that to take into account changes that will occur from time to time in the insured’s approved product list. It is quite inconsistent with such a background of assumed facts on both sides that the insured would be seen as representing to underwriters that the list enclosed with the proposal was the one would bind the insured throughout the year. The approved product list attached the proposal is therefore an unlikely candidate for being the one referred to in the policy.

698. Second, the text of the 150PI endorsement, clause 5(a) is inconsistent with the defendants’ construction. The exclusion operates to deny liability in respect of financial products not contained in the insured’s “approved product list at the time the advice was given” (emphasis added). This exclusion refers to the state of the insured’s approved product list at the time of advising, which is well after the proposal is sent to underwriters.

699. Third, the proposal is consistent with the same construction. The addendum to the proposal only asks for the “current approved product list” (emphasis added) of the client. The proposal contemplates the obvious that that is all that the proposed insured can provide, because the list will change. The approved product list referred to in the policy is the one which can objectively be established was in existence within the insured’s business at the time the advice was given which is complained of by client and leads to a claim.

700. But whether there was adequate disclosure in the 2013 proposal of the then current approved product list is a difficult question. The 2013 proposal had a list of the van Eyk Research AA and A rated products with it. But the only reference in the proposal to the other products was their description as “other select products”.

701. In conclusion, the defendants cannot establish that the financial products the subject of the various actions in these proceedings were not on the MRS approved product list with the exception of the Wallalong Investment Trust and the loan to Ms Trudy Crittle. The approved product list exclusion is enlivened only with respect to advances to the Wallalong Investment Trust and the loan to Ms Trudy Crittle, but not otherwise.

Does the Clause 5(c) Statement of Advice Exclusion Apply?

702. The defendants contend that the statement of advice exclusion in the 150PI endorsement, clause 5(c) also applies to exclude all the plaintiffs’ claims. Clause 5(c) operates to exclude:

“Any CLAIM or liability directly or indirectly based upon or attributable to or in consequence of any…failure to provide a financial services guide, a product disclosure statement or statement of advice in breach of the FSR PROVISIONS (contained in Chapter 7 of the Corporations Act 2001)”

703. The statement of advice exclusion will exclude cover where the insured does not comply with the procedural requirements that Corporations Act, Chapter 7 imposes upon the insured when dealing with retail clients. The relevant procedural requirements are to provide financial services guides, product disclosure statements and statements of advice to clients when the clients are acquiring financial products through the services of an AFSL licensee. Compliance with these Chapter 7 procedural requirements will tend to alert clients to the true nature of the risks in any proposed investment. Failure to conform to these requirements is potentially a sign that an advisor has failed to convey the true risks of an investment to the client.

704. Corporations Act Part 7.7 – Financial Services Disclosure deals with the procedural requirements for the provision of financial services guides and statements of advice to clients. Corporations Act Part 7.9 deals with the preparation and content of product disclosure statements. The provisions of the legislation are complex and it is not necessary to set them out in full in these reasons.

705. The application of this exclusion can be assessed by reference to each class of regulatory documents that MRS was required to provide to the plaintiffs, the financial services guide, the statements of advice and product disclosure statements.

706. Financial Services Guides. An AFSL licensee must give a financial services guide to retail clients as soon as practicable after it is apparent to the licensee that financial services will be provided to the client: Corporations Act s 914A and s 914D. The financial services guide is required to be in writing: s 940C(1)(b). Subject to the regulations, the Corporations Act prescribes the contents of a financial services guide: s 942B(2). For present purposes, the relevant part of the prescribed content is s 942B(2)(e) and (f) which are as follows:

“942B Financial Services Guide given by financial services licensee—main requirements

(1)  This section applies if the providing entity is a financial services licensee.

(2)  Subject to subsection (3) and to the regulations (see subsection (4)), the Financial Services Guide must include the following statements and information:

…

(d)  information about any remuneration (including commission) or other benefits that any of the following is to receive that might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice:

(i)  the providing entity;

(ii)  a related body corporate of the providing entity;

(iii)  a director or employee of the providing entity or a related body corporate;

(iv)  an associate of any of the above;

(v)  any other person in relation to whom the regulations require the information to be provided; and

(e)  information about the remuneration (including commission) or other benefits that any of the following is to receive in respect of, or that is attributable to, the provision of any of the authorised services:

(i)  the providing entity;

(ii)  a related body corporate of the providing entity;

(iii)  a director or employee of the providing entity or a related body corporate;

(iv)  an associate of any of the above;

(v)  any other person in relation to whom the regulations require the information to be provided;

(f)  information about any associations or relationships between the providing entity, or any related body corporate, and the issuers of any financial products, being associations or relationships that might reasonably be expected to be capable of influencing the providing entity in providing any of the authorised services;…”

707. The findings in the first limb show that a form of a financial services guide was provided to each of the plaintiffs near the outset of MRS providing them with financial services. It was a guide issued by Retirement Planning Services but it was understood on all sides that that company would be renamed as MRS.

708. But none of the financial services guides explained the depth of the conflicts of interest which have already been discussed in these reasons and they therefore did not comply with s 942B(2)(e) and (f). Prima facie there was a breach of Corporations Act Chapter 7 obligation to give a compliant financial services guide.

709. Statements of Advice. Some of the plaintiffs’ investments attract this exclusion because they precede in time MRS giving the first written statement of advice to the plaintiffs. These investments are identified first. Different contests about the application of clause 5(c) arise concerning the plaintiffs’ investments subsequent to the first statements of advice. But this first group of investments (that precede any statements of advice) can be identified for all plaintiffs.

710. Corporations Act Part 7.7, Division 3 deals with the provision of personal advice to clients as retail clients. The AFSL licensee must give the client a statement of advice, contemporaneously with any oral advice and the statement of advice must be in writing: s 940C(1)(b). The required contents of the statement of advice about disclosure of benefits received by the licensed advisor and information about other pecuniary interests are in substantially identical terms to those set out above in respect of the financial services guide: s 947B(2)(d) and (e).

711. In this case, there was very substantial non-compliance with MRS’ obligations to provide statements of advice. This can be considered at three levels. No written statement of advice was given at all before certain dates, which are set out below in more detail below for each client. The Court’s findings on the first limb show expressly find the very limited occasions in which a written statement of advice was given to each of the plaintiffs. On all other occasions, a written advice was not given. And one was required because personal advice to a retail client was being given. But even the written statements of advices that were given did not comply with s 947B(2)(d) and (e) in providing disclosures about receipt of related benefit and conflicting pecuniary interests.

712. The Daveys’ Statement of Advice. On 21 June 2007, the Daveys attended a meeting with Mr Moylan and Mr Spicer at the offices of MRS. During the meeting, the Daveys were provided with their statement of advice. The Daveys did not execute an authority to proceed until 27 June 2007. Mr Davey had read the statement of advice by the time he and Mrs Davey signed the authority and invested the sum of $300,000 in Hardie Estates Property Fund on behalf of Esined No. 9. The Daveys returned both the executed statement of advice and the withdrawal form together to MRS.

713. By 27 June 2007, Esined No. 9 had invested $300,000 in MIG and $50,000 in the Bolwarra Heights Investment Trust. As this $350,000 preceded the Daveys’ receipt of any written statement of advice, it immediately engages exclusion clause 5(c) to that extent.

714. The Smiths’ Statement of Advice. On 20 March 2007, the Smiths attended a meeting with Mr Moylan and Mr Spicer at the offices of MRS and were provided with a draft statement of advice, signed that day. But Mr Moylan said, “I will forward it to you in final form when it is completed”. By 20 March 2007, Esined No. 10 had already invested $200,000 in MIG.

715. The final form of the statement of advice was mailed to the Smiths under cover of a letter dated 3 April 2007. There is no basis for the Court to conclude that the final form received by the Smiths on 3 April 2007 differs from the draft they signed on 20 March 2007. But the earlier one was only described as a “draft”, by which MRS was indicating it was not yet ready to be bound by it.

716. So, 3 April 2007 should be taken as the date of giving the written statement of advice to the Smiths. They had invested another $100,000 in MIG by then. Therefore, Esined No. 10 had invested a total of $300,000 before receiving a written statement of advice. And the clause 5(c) exclusion is immediately engaged to that extent.

707. The Kauters’ Statement of Advice. A statement of advice was given on behalf of Retirement Planning Services to the Kauters on 27 January 2004. All of their lost investments were in the period of August 2005 to October 2005. The clause 5(d) exclusion is not engaged with respect to any of those investments on the basis that they preceded the giving of statements of advice.

708. The Mannings’ Statement of Advice. The statement of advice given to the Mannings is dated 29 January 2008. However, it was not received by them until some time early in February 2008, when they signed and returned an authority to proceed.

709. By early February 2008, Jalin had invested $120,000 in the loan to Ms Trudy Crittle and $200,000 in the Regional Land Property Trust. Jalin invested another $150,000 in Regional Land Property Trust on 7 February 2008. But it is likely that its statement of advice had been received by then. Thus Jalin had invested a total of $320,000 before receiving the statement of advice, and clause 5(d) was immediately engaged to that extent.

710. Appendix 2 to the Revised August 2017 Report of Mr Wesley McMaster sets out a chronological history of the advice provided to each plaintiff and states whether or not a statement of advice was provided to each plaintiff. Mr McMaster’s summary concerning the giving of the statements of advice is consistent with the Court’s findings.

711. Product Disclosure Statements. Corporations Act Part 7.9 provides for obligations of AFSL licensees who are recommending the acquisition of a particular financial product to give a product disclosure statement to the retail client in respect of that financial product: s 1012A. The product disclosure statement must be in the form of a document: s 1013A. The contents of the product disclosure statement are provided for by Corporations Act s 1013D. A product disclosure statement must contain information about significant benefits and risks associated with holding the product: s 1013D(1)(b) and (c). A product disclosure statement is also required to provide detailed information concerning the cost of the product and the rate of return. Importantly, the product disclosure statement should also include information that “might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product”: s 1013E.

712. A product disclosure statement was required to be given here as Mr Moylan was recommending the acquisition of particular financial products. But no product disclosure statement was given to these plaintiffs in respect of any the products on which they claim losses in these proceedings. And none of the important content about the financial products was provided which would comply with s 1013E. Perhaps the closest document that came to a product disclosure statement was an information memorandum about the Hardie Estate Investments but no such documents were declared to be product disclosure statements.

713. The plaintiffs argue with respect to clause 5(c) that it should not be construed so that non-compliance with the content requirements of the Corporations Act Chapter 7 for the provisions of financial services guides, statements of advice and product disclosure statements should not engage this exclusion. There is some force in this argument because exclusion 5(c) refers to “failure to provide financial services guide, product disclosure statement or statement of advice in breach of the [Chapter 7 of the Corporations Act]” (emphasis added). The provision is focused upon the “failure to provide” and the plaintiffs’ point is quite arguable that the exclusion attaches itself to the failure to provide a document rather than a document that is compliant with the regulated content in every respect. But even if that interpretation is accepted, except in very limited circumstances, statements of advice were not provided and no product disclosure statements were provided in respect of MRS’ recommendations to the plaintiffs.

Does the Clause 5(d) Unregulated Loans Exclusion Apply?

724. The defendants also rely upon an exclusion relating to unregulated loans in the 150PI endorsement, clause 5(d). It excludes the following claims:

“Any claim or liability directly indirectly based or attributable to or any consequence of any:

…

(d) repayment of a debt or money deposited with or lent to a body including, but not limited to, under a promissory note, debenture or similar instrument which is not regulated by the managed investment scheme provisions or the fundraising disclosure provisions and which body is not an authorised deposit-taking institution for the purpose of the Banking Act;

...

725. The unregulated loans exclusion will exclude informal loan investments from cover. Clause 5(d) describes a class of loans not made to authorised deposit-taking institutions under the Banking Act 1959 (Cth) and which also do not qualify for regulation under the managed investment scheme provisions in Corporations Act, Chapter 5C, or the fundraising disclosure provisions in Corporations Act, Chapter 6D. Such loans are more likely to be risky than those to authorised deposit-taking institutions.

726. The defendants say this exclusion applies to all the plaintiffs’ investments. The application of the unregulated loans exclusion does not depend upon how the plaintiffs made each investment. Rather its application depends upon the characteristics of the corporate vehicles into which the plaintiffs’ monies were invested.

727. In the Court’s view this exclusion is effective in respect of the plaintiffs’ claims in all three actions. But it is sufficient to consider here the plaintiffs’ loans to MIG, by far the most frequent type of advance. They were not regulated by the managed investment scheme provisions in Corporations Act, Chapter 5C, or the fundraising disclosure provisions in Corporations Act, Chapter 6D. MIG is not an authorised deposit-taking institution for the purposes of the Banking Act.

728. The fundraising disclosure provisions in Corporations Act Chapter 6D do not apply to the offers Mr Moylan made for the clients to move the MIG loans. Corporations Act s 706 provides that an offer of securities for issue needs disclosure to investors under Part 6D “unless section 708 says otherwise”. Corporations Act s 708(1) to (4) relevantly provides as follows:

“708  Offers that do not need disclosure

Small scale offerings (20 issues or sales in 12 months)

(1)  Personal offers of a body’s securities by a person do not need disclosure to investors under this Part if:

(a)  none of the offers results in a breach of the 20 investors ceiling (see subsections (3) and (4)); and

(b)  none of the offers results in a breach of the $2 million ceiling (see subsections (3) and (4)).

This subsection does not apply to an offer for sale to which subsection 707(3) (sale amounting to indirect issue) or (5) (sale amounting to indirect sale by controller) applies.

…

(2)  For the purposes of subsection (1), a personal offer is one that:

(a)  may only be accepted by the person to whom it is made; and

(b)  is made to a person who is likely to be interested in the offer, having regard to:

(i)  previous contact between the person making the offer and that person; or

(ii)  some professional or other connection between the person making the offer and that person; or

(iii)  statements or actions by that person that indicate that they are interested in offers of that kind.

(3)  An offer by a body to issue securities:

(a)  results in a breach of the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period; and

(b)  results in a breach of the $2 million ceiling if it results in the amount raised by the body by issuing securities exceeding $2 million in any 12 month period.

(4)  An offer by a person to transfer a body’s securities:

(a)  results in a breach of the 20 investors ceiling if it results in the number of people to whom the person sells securities of the body exceeding 20 in any 12 month period; and

(b)  results in a breach of the $2 million ceiling if it results in the amount raised by the person from selling the body’s securities exceeding $2 million in any 12 month period.

…”

729. The defendants argue persuasively that all of Mr Moylan’s offers to clients to invest were made to them individually on an ad hoc basis when they had available money, as part of a one off recommendation between Mr Moylan and the individual client. These were clearly personal offers that could only be accepted by each of the clients within s 708(2). None of what he offered to these plaintiffs was part of raising funds from multiple persons. Because the loans to MIG were individual offers, they do not satisfy the aggregation provisions in s 708(3) or (4). Section 708(1)(a) and (b) commence with the words “none of the offers results in a breach” of the 20 investors ceiling of the $2 million ceiling. As none of the offers made to the plaintiffs involve individual breaches of the ceilings set by s 708(1), disclosure is not required.

730. The loans to MIG do not fall within the definition of “managed investment scheme” within Corporations Act s 9. That means that the advances to MIG are unregulated by the Act and are all captured by exclusion 5(d).

731. For similar reasons, the unregulated loans exclusion also excludes the loan made to Ms Trudy Crittle. This informal one-off advance to Ms Crittle to complete a property purchase was not to an authorised deposit taking institution, nor did it require her to deposit money she was advanced into such an institution. Nor was the loan to her regulated under Corporations Act, Chapter 5C or 6D.

Conclusions and Orders

732. For these reasons, the defendants are successful in all three actions. Costs would normally follow the event. But one or other party may now seek a special costs order. For that reason the Court will not enter orders for costs on the ordinary basis in the defendants favour until 28 days has expired.

733. Before concluding this judgment the Court wishes to note three matters. First, although the plaintiffs have failed, this outcome is not from any want of detailed and careful preparation of their case on their behalf by their counsel and solicitor. The presentation of three actions on behalf four groups of plaintiffs in the one proceeding was a significant challenge, which added its own complexity to this litigation, as the length of these reasons shows. But the legal representatives on all sides commendably assisted the Court with the necessary detailed analysis of the facts and law.

734. Second, the Court’s duty at times is to decide according to law which of two innocent parties will bear the financial consequences of fraud or other misconduct by an impecunious or bankrupt third-party. This is such a case. The Court’s findings show that the plaintiffs are entirely to be believed that they were the innocent victims of Mr Moylan’s calculated deception over several years. Mr Moylan was able to perpetrate the deception that he did in this case because the family members associated with the corporate plaintiffs were all hard-working people who looked upon other people positively and who were content to defer to the professional judgment of people like Mr Moylan, who they had been told they could trust totally. They assumed for a long time that Mr Moylan had the same personal qualities that they did it and was consequently worthy of their trust. Sadly they were gravely mistaken about this. The Court acutely understands that Mr Moylan’s grave misconduct left them suffering a grievous financial plight. But despite that, for the reasons set out in this judgment, the law does not provide them with a remedy against these particular insurer defendants.

735. Third, the Court is not aware whether any regulatory or criminal action has been taken against Mr Moylan. The Court has made findings of serious misconduct against him in this case. The Court should not be seen as condoning contraventions of the law. It is appropriate therefore that the Court refer this judgment to a proper authority to investigate whether breaches of law have occurred by Mr Moylan, which may result either in criminal or other regulatory prosecution against him. For that the purpose the Court will provide a copy of these reasons to the Attorney General of New South Wales as first law officer of the Crown in this State.

736. The Court therefore makes the following notations and orders:

1. Note that in these orders the following actions, which were heard together, will be referred to by the following names: proceedings 2012/374893, as “the Esined action”; proceedings 2013/314260, as “the Kauter action”; and proceedings 2015/252310, as the “Manning action”.

2. Judgment for the defendants in each the Esined action, the Kauter action and the Manning action;

3. Unless any party applies by motion within 28 days in accordance with the mechanism described in order (4) for a different order, the plaintiffs in each action are ordered to pay the defendants’ costs in each action.

4. If any party in any of the three actions wishes to seek a special costs order they should do so by motion (together with any evidence in support) served on the other party and provided to my associate by email by Friday, 5 June 2020.

5. If a motion is filed in accordance with order (4), then subject to any party taking advantage of the liberty to apply granted under (6) below, including to seek an oral hearing of the motion, the following directions will apply:

1. the motion will be dealt with on the papers, without further opportunity for oral hearing;

2. the party opposing the motion shall provide any evidence in reply within a further seven days; and

3. thereafter the parties will exchange their submissions on the motion within a further seven days.

6. Grant liberty to apply.

Decision last updated: 08 May 2020