Forest Enterprises Australia Ltd v Atkins - [2015] TASSC 22

[2015] TASSC 22

COURT: SUPREME COURT OF TASMANIA

CITATION: Forest Enterprises Australia Ltd v Atkins [2015] TASSC 22

PARTIES: FOREST ENTERPRISES AUSTRALIA LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED)
v
ATKINS, Ian Peter

FILE NO:  1206/2013
DELIVERED ON:  29 May 2015
DELIVERED AT:  Hobart
HEARING DATE:  20 May 2015
JUDGMENT OF:  Holt AsJ

CATCHWORDS:

Procedure – Supreme Court procedure – Tasmania – Practice under rules of court – Pleadings – Generally – Striking out – Failure to disclose a reasonable cause of action.

Supreme Court Rules 2000 (Tas), r 259.
Aust Dig Procedure [272]

REPRESENTATION:

Counsel:
             Plaintiff:N J Shaw
             Defendant:  J Sleight
Solicitors:
             Plaintiff:  McMahon and Clarke
             Defendant:  Neville and Hourn Legal

Judgment Number: [2015] TASSC 22
Number of paragraphs: 37

Serial No 22/2015
File No 1206/2013

FOREST ENTERPRISES AUSTRALIA LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) v

IAN PETER ATKINS

REASONS FOR JUDGMENT HOLT AsJ

29 May 2015

The plaintiff has sued for $379,504.21 together with costs and interest, being monies alleged to be owing under a loan agreement entered into in June 2008 with the loan funds paid by the plaintiff to the responsible entity for a forestry managed investment scheme. The defendant has filed a defence and counterclaim.
The defence is based upon the construction of the terms of the documentation upon which the plaintiff relies and upon a claim that the money paid by the plaintiff into the managed investment scheme was paid without the authority of the defendant. The counterclaim is relied upon by the defendant only in the event that the defence is unsuccessful. The counterclaim, insofar as damages are claimed, does not claim damages in excess of the amount necessary to extinguish, by set off, the defendant's indebtedness.
The plaintiff says that the counterclaim, as pleaded, does not disclose a reasonable cause of action and is without any prospect of success, so that it should be struck out. In anticipation of an order striking out the counterclaim the plaintiff has also applied for summary judgment on the ground that the defendant does not otherwise have a viable defence to the claim.
The hearing of the plaintiff's pleading application has proceeded. The hearing of the plaintiff's summary judgment application has been adjourned, pending the determination of the pleading application.
As the plaintiff company is under external administration, the counterclaim cannot be proceeded with without leave. The Corporations Act 2001 (Cth), s 444E(3). A grant of leave (having retroactive effect) is not opposed in the event that the plaintiff is unsuccessful in its application to have the counterclaim struck out as a defective pleading.
The plaintiff concedes that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in his defence. The defendant has applied for an order under the Corporations Act, s 1335, requiring security to be given for his anticipated trial costs and for orders staying the proceedings until security is given.
I begin with the plaintiff's application for an order that the defendant's counterclaim be struck out.
The application is specified as being made pursuant to the Supreme Court Rules 2000 (Tas), r 259. The rule is as follows:
"If a pleading does not disclose a reasonable cause of action or answer or shows that the cause of action or defence is frivolous or vexatious, the Court or a judge may order –
(a) that the action be stayed or dismissed or the pleading be struck out; and
(b) that judgment be entered accordingly."
A pleading which omits any one material fact necessary for formulating a complete cause of action is liable to be struck out. Bruce v Odhams Press Ltd (1936) 1 KB 697 at 712. The reason is that, unless otherwise agreed, a party cannot assert at trial a fact necessary for the grant of relief if such fact has not been pleaded. Dare v Pulham (1982) 148 CLR 658 at 664.
A pleading which does contain all necessary allegations to give rise to a cause of action may, nevertheless, be struck out if on the face of the pleading it can be seen that the claim is frivolous or vexatious. A claim which is obviously untenable is frivolous or vexatious. Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 at 462–463 [24].
The approach to be adopted in considering whether a pleading will be struck out was outlined in Lindon v Commonwealth of Australia(No 2) (1996) 136 ALR 251. There, Kirby J said at 256:
"1     It is a serious matter to deprive a person of access to the courts of law for it is there that the rule of law is upheld, including against government and other powerful interests. This is why relief, whether under O 26, r 18 or in the inherent jurisdiction of the court, is rarely and sparingly provided.
2      To secure such relief, the party seeking it must show that it is clear, on the face of the opponent's documents, that the opponent lacks a reasonable cause of action or is advancing a claim that is clearly frivolous or vexatious.
3      An opinion of the court that a case appears weak and such that it is unlikely to succeed is not, alone, sufficient to warrant summary termination. Even a weak case is entitled to the time of a court. Experience teaches that the concentration of attention, elaborated evidence and argument and extended time for reflection will sometimes turn an apparently unpromising cause into a successful judgment.
4      Summary relief of the kind provided for by O 26, r 18, for absence of a reasonable cause of action, is not a substitute for proceeding by way of demurrer. If there is a serious legal question to be determined, it should ordinarily be determined at a trial for the proof of facts may sometimes assist the judicial mind to understand and apply the law that is invoked and to do so in circumstances more conducive to deciding a real case involving actual litigants rather than one determined on imagined or assumed facts.
5      If, notwithstanding the defects of pleadings, it appears that a party may have a reasonable cause of action which it has failed to put in proper form, a court will ordinarily allow that party to reframe its pleading. A question has arisen as to whether O 26, r 18 applies to part only of a pleading. However, it is unnecessary in this case to consider that question because the Commonwealth's attack was upon the entirety of Mr Lindon's statement of claim.
6      The guiding principle is, as stated in O 26, r 18(2), doing what is just. If it is clear that proceedings within the concept of the pleading under scrutiny are doomed to fail, the court should dismiss the action to protect the defendant from being further troubled, to save the plaintiff from further costs and disappointment and to relieve the court of the burden of further wasted time which could be devoted to the determination of claims which have legal merit." [Footnotes omitted.]
In order to understand the counterclaim, it is necessary to begin with a brief overview of the relevant provisions of the Corporations Act 2001 (Cth) ("CA") and the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC").
The issuer of a "financial product" is a "regulated person" (CA, s 1011B). A financial product is a facility through which a person makes a financial investment (CA, s 763A). A regulated person who offers to issue a financial product must give a Product Disclosure Statement ("PDS") for the financial product (CA, s 1012B). A PDS must include information about any significant risks associated with holding the financial product (CA, s 1013C and s 1013D) and must contain all information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, to acquire the product (CA, s 1013E). A PDS is defective if it omits information about any significant risk associated with holding the financial product or contains a misleading or deceptive statement (CA, s 1022A). Where a person gives or sends to another person a defective PDS, causing the recipient to suffer loss or damage, the person by whom, or on whose behalf, the defective PDS was prepared and each person involved in the preparation who caused or contributed to the PDS being defective is liable to the recipient for that loss or damage (CA, s 1022B). A court also has the power to declare void a contract relating to the giving or preparing of a defective PDS and the power to order the return of the money paid with interest (s 1022C, CA). The more general statutory prohibition on engaging in conduct that is false or misleading is not engaged in the case of financial products or financial services in relation to a PDS (CA, s 1041H, and ASIC, s 12DA).
In broad terms, the allegations in the counterclaim are as follows:
•     FEA Plantations Ltd ("FEAP") caused the plaintiff company to come into existence for the purpose of providing loans to investors in financial products sold by FEAP and the plaintiff became a member of the same group of companies as FEAP.
•     In June 2008, FEAP was a regulated person issuing invitations to invest in a forestry managed investment scheme ("the project") of which it was the responsible entity.
•     The plaintiff authorised FEAP to procure borrowers on its behalf by consenting to FEAP including the plaintiff's loan application form with the project application for investment form and by including the project name on the loan application form with a direction that the form be sent to the entity responsible for the project, being FEAP. FEAP thereafter received and processed loan applications.
•     The project was a long-term enterprise with returns to investors not available until timber was harvested and sold.
•     The long-term viability of the project was doubtful.
•     FEAP was obliged to comply with statutory obligations relating to the issue of a PDS.
•     FEAP issued a PDS.
•     The doubtful viability of the project gave rise to a significant risk to investors and was a matter that might reasonably be expected to have a material influence on potential investors.
•     The doubtful viability of the project was not disclosed in the PDS or otherwise.
•     In the event that it is found on the plaintiff's claim that the defendant borrowed money from the plaintiff with the plaintiff having authority to apply the loan funds to an investment by the defendant in the FEAP managed investment scheme, the defendant was an investor in the scheme.
•     The purchase price paid by the defendant was raised entirely from the money advanced by the plaintiff.
•     FEAP and the plaintiff knew of the doubtful financial viability of the project.
•     The failure by FEAP and the plaintiff to disclose to the defendant the doubtful viability of the project was a representation by silence which was misleading conduct.
•     The plaintiff's conduct in procuring the loan from the defendant was unconscionable.
•     Had FEAP and the plaintiff not engaged in the impugned conduct, the defendant would not have entered into the loan agreement, nor made the investment.
•     The defendant suffered the loss of the entire investment sum of $343,035, being the amount borrowed from the plaintiff.
•     The defendant is entitled to damages payable by the plaintiff to compensate him for his loss and entitled to an order setting aside or preventing enforcement of the loan agreement.
Firstly, the defendant relies on liability arising under CA, s 1022B(3)(b)(i), in relation to the PDS which is alleged to have been defective. As set out earlier in these reasons, potential liability under the provision is not triggered unless the PDS is given or sent to the person suffering detriment. CA, s 1022B, relevantly provides:
"(1)    This section applies in the following situations:
…
(c) a person:
(i)gives another person (the client ) a disclosure document … that is defective in circumstances in which a disclosure document or statement is required by a provision of this Part to be given to the client; …
(2)     In a situation to which this section applies, if a person suffers loss or damage:
…
(c) if paragraph (1)(c) applies--because the disclosure document or statement the client was given or sent was defective …
the person may recover the amount of the loss or damage by action against the, or a, liable person
(3)     For the purposes of subsection (2), the, or a, liable person is:
…
(b) if paragraph (1)(c) … applies …
(i)the person by whom, or on whose behalf, the disclosure document … was prepared … ."
Secondly, the defendant relies on ASIC, s 12DA. This is the provision dealing with misleading conduct. As set out earlier in these reasons, the provision relied upon can have no application in relation to the content of a PDS which has been given. Any false or misleading statement in the PDS attracts the operation of the provisions under the Corporations Act which deal with the required content for a PDS. ASIC, s 12DA, relevantly provides:
"(1)    A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
(1A)   Conduct:
…
(c)     in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;
does not contravene subsection (1)." (Emphasis added.)
Thirdly, the defendant relies on an allegation against the plaintiff of unconscionable conduct. Equity may intervene where there is a disabling condition or circumstance seriously affecting the ability of the innocent party to make a judgment as to his or her own best interests, when the other party knows, or ought to know, of the existence of that condition or circumstance and of its effect on the innocent party. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, per Mason J (as he then was) at 462.
Counsel for the defendant conceded, that if the PDS was not given to the defendant, no remedy is available under CA, s 1022B. Conversely, it was conceded that if the PDS was given to the defendant no remedy is available under ASIC, s 12DA.
The counterclaim contains no plea either way. All that is there is at par36, which impermissibly pleads a hypothetical case as follows:
"If the PDS was supplied to Atkins then he was supplied with a defective PDS … ".
The failure to plead either that the PDS was given to the defendant, or that the PDS was not given to the defendant, means that a cause of action has not been disclosed under either CA, s 1022B, or ASIC, s 12DA.
The defendant must set out all facts necessary to constitute complete causes of action intended to be put forward in the counterclaim. The fact that alternative causes of action involve inconsistent facts is no bar and does not relieve a party of the obligation to plead all necessary facts. Rule 230(1) provides:
"(1) A party may claim relief on 2 or more inconsistent sets of facts or rights in the alternative but is to show on what facts or rights each claim is founded."
It follows that the claims under both CA, s 1022B and ASIC, s 12DA must be struck out for failing to disclose causes of action.
The only part of the counterclaim remaining is the claim for relief in respect of unconscionable conduct. Even assuming (but without deciding it, because there was no argument directed to the point) that a misapprehension about the viability of the project was a relevant disabling condition or circumstance of the defendant so as to potentially attract equitable relief, the plea does not disclose a cause of action. There is no allegation that the defendant was under a misapprehension and there is no allegation that the plaintiff knew, or ought to have known, of the misapprehension and its effect on the defendant.
The counterclaim asserts three causes of action. The facts necessary to constitute any of them have not been set out. It follows that the whole of the counterclaim, is liable to be struck out. The plaintiff, at this stage, does not ask for judgment on the counterclaim. Accordingly, the form of the order to be made will be that, unless amended, the counterclaim is struck out.
There were several other grounds upon which counsel for the plaintiff asserted that the counterclaim, or parts of it, should be struck out. Because of the possibility of an application for leave to amend being brought by the defendant, I should deal with these grounds. I begin with the grounds which I consider to have been made out.
Firstly, there is a plea that FEAP was the plaintiff's agent. In the course of argument, counsel for the defendant conceded that the agency allegation added nothing to the counterclaim. It follows that on an application to amend the counterclaim, it would be expected that the allegation that FEAP was the plaintiff's agent would not be included.
Secondly, there is a plea of reliance which is conclusory. It cannot be allowed to stand without allegations of fact underpinning it. If the counterclaim is re-pleaded relying on ASIC, s 12DA on the basis that FEAP, in breach of its duty to give to the defendant the PDS, failed to supply the PDS, there will need to be a plea as to the defendant's state of mind concerning the merits of his investment and a plea that this state of mind was brought about by a failure to supply information, before a plea of reliance can follow to support the claim that the loss or damage followed from misleading conduct constituted by silence as to the doubtful viability of the project. If the counterclaim is re-pleaded relying on CA, s 1022B there will need to be a plea that the allegedly defective PDS was given to and read by the plaintiff before a plea of reliance can follow to support the claim that loss or damage resulted.
Thirdly, there is a plea concerning the financial position of FEAP. Correctly, in my view, counsel for the plaintiff pointed out that what is relevant to whether or not the PDS was defective is not the financial position of FEAP, but the financial position of the project. FEAP was the responsible entity for the project with the duties set out in CA, s 601FC and there is no plea indicating that the financial viability of the project was dependent upon the financial position of the responsible entity, being FEAP.
I now turn to the strike out grounds asserted by the plaintiff which I reject.
There is a plea that the plaintiff and FEAP were engaged "in a commercial enterprise … to sell investments and loans for investments in the project". Earlier in the counterclaim the allegations underpinning this conclusory plea are set out. In particular there is an allegation that FEAP caused the plaintiff to come into existence as a corporation for the purpose of the plaintiff providing loans to be used for investment in the project. There is an allegation that the plaintiff held itself out as being part of the same group of companies, of which FEAP was a member. There is an allegation that loan applications were sent direct to FEAP for processing by FEAP. In light of these allegations, I cannot exclude the possibility that, with elaborated evidence and argument at a trial, the allegations would be sufficient to result in a conclusion for the purposes of CA, s 1022B(3)(b)(i) that the PDS was prepared by or on behalf of the plaintiff, perhaps jointly with FEAP. It follows that I reject the plaintiff's contention that the facts alleged could never result in a finding that the plaintiff is a liable person in the event that the PDS is found to have been given or sent to the defendant (if he so pleads) and that it was defective.
There is a complaint that there is no plea in connection with the ASIC, s 12DA claim which contains allegations which, if proven, could result in a conclusion that the plaintiff had a duty to provide information to the defendant about the investment. In my view, the pleaded facts about the connection between the plaintiff and FEAP may be sufficient to found a conclusion that the plaintiff did have a duty to disclose to the defendant the risks associated with the investment.

There is a plea that it was apparent to FEAP in the beginning of 2008 that the present and forecast revenue stream for the project would not be sufficient to sustain it. Counsel for the plaintiff submitted:
"The fundamental difficulty with the defendant's reliance on the 2008 Financial Position is that it is alleged that at the beginning of 2008 FEAP knew that the Project had not generated and would not generate adequate investment to meet the Project's ongoing expenditure. At the beginning of 2008, the Project had not even begun to take investments – the offer to invest opened on 26 March 2008 and closed on 30 June 2009. Thus the entire premise of the 2008 Financial Position pleading is flawed."
The matter raised by the plaintiff is a matter for trial to be considered when all the evidence is in. It is not a matter that can be resolved at the pleading stage with the certainty required to justify the striking out of the plea as being frivolous or vexatious.
This just leaves the defendant's application under CA, s 444E(3), for leave to bring the counterclaim and the defendant's application, under CA, s 1335, for security for costs.
Because the counterclaim will be struck out, it follows that the defendant's application pursuant to CA, s 444E(3) for leave to proceed with the counterclaim must be dismissed. Another application for leave can be made if amendment of the counterclaim is pursued and succeeds.
The success of the defendant's application for security for costs is dependent upon the defendant having a defence which might succeed with the defendant being awarded costs. At the moment there is no counterclaim. The plaintiff's application for summary judgment, in respect of the matters pleaded by way of defence independently of the counterclaim, is yet to be determined. Security for costs should not be ordered until it appears that the defendant has a viable defence. The application will be dismissed. Another application for security for costs can be made in the event that the plaintiff's application for summary judgment does not succeed.
The orders are as follows:
1         Unless amended, the defendant's counterclaim is struck out.
2         The plaintiff's application for leave to proceed with the counterclaim is dismissed.
3         The plaintiff's application for security for costs is dismissed.
At the request of either of the parties, the hearing will be resumed to consider any consequential applications for costs.