Great Southern Finance Pty Ltd (in liq) v Rhodes

[2014] WASC 431

GREAT SOUTHERN FINANCE PTY LTD (In liq) -v- RHODES [2014] WASC 431

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2014] WASC 431
Case No:	CIV:1549/2011	Heard:	14 NOVEMBER 2014
Coram:	BEECH J	Delivered:	18/11/14
No of pages:	21	Judgment Part:	1 of 1
Result:	Paragraphs of defence struck out with leave to replead
Category:	B
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Parties:	GREAT SOUTHERN FINANCE PTY LTD (In liq) CAMERON ARTHUR RHODES JOHN CARLTON YOUNG
Catchwords:	Practice and procedure Pleadings Strike out application Claim for breach of directors' duties Defendant relying on statutory business judgment rule Need to identify in the defence the decision(s) constituting the business judgment Defendant seeking to be relieved from liability under s 1317S or s 1318 Corporations Act 2001 (Cth) Need to identify in the defence the circumstances relied on
Legislation:	Corporations Act 2001 (Cth), s 180(2), s 1317S, s 1318
Case References:	Agar v Hyde (2000) 201 CLR 552 Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 81 ACSR 563 Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 196 FCR 430 Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 Banque Commerciale SA (in liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82 Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1 DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170 EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296 Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171 Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Library No 6414, 25 August 1986) Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd [No 3] [2014] WASC 162 Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620 SGB Jones Pty Ltd v Invion Ltd [2013] QCA 306 SMEC Australia Pty Ltd v Valentine Falls Estate Pty Ltd [2011] WASCA 138 Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

IN CIVIL

CITATION : GREAT SOUTHERN FINANCE PTY LTD (In liq) -v- RHODES [2014] WASC 431 CORAM : BEECH J HEARD : 14 NOVEMBER 2014 DELIVERED : 18 NOVEMBER 2014 FILE NO/S : CIV 1549 of 2011 BETWEEN : GREAT SOUTHERN FINANCE PTY LTD (In liq)

Plaintiff

AND

CAMERON ARTHUR RHODES
Second Defendant

JOHN CARLTON YOUNG
Third Defendant

Catchwords:

Practice and procedure - Pleadings - Strike out application - Claim for breach of directors' duties - Defendant relying on statutory business judgment rule - Need to identify in the defence the decision(s) constituting the business judgment - Defendant seeking to be relieved from liability under s 1317S or s 1318 Corporations Act 2001 (Cth) - Need to identify in the defence the circumstances relied on

Legislation:

Corporations Act 2001 (Cth), s 180(2), s 1317S, s 1318

Result:

Paragraphs of defence struck out with leave to replead

Category: B

Representation:

Counsel:

Plaintiff : Mr M C J Hoffman QC & Mr R W Douglas
Second Defendant : Mr G R Rich SC & Ms J Taylor
Third Defendant : No appearance

Solicitors:

Plaintiff : Lipman Karas
Second Defendant : Arnold Bloch Leibler
Third Defendant : No appearance

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

Agar v Hyde (2000) 201 CLR 552
Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 81 ACSR 563
Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 196 FCR 430
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1
Banque Commerciale SA (in liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279
Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82
Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256
Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356
Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1
DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296
Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171
Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Library No 6414, 25 August 1986)
Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd [No 3] [2014] WASC 162
Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620
SGB Jones Pty Ltd v Invion Ltd [2013] QCA 306
SMEC Australia Pty Ltd v Valentine Falls Estate Pty Ltd [2011] WASCA 138
Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507

BEECH J:

Strike-out application

1 The plaintiff (GSF) applied to strike out three paragraphs of the defence of the second defendant, Mr Rhodes. At the hearing of the application, I struck out two of those paragraphs, with leave to replead. These are my reasons for doing so.

2 It is convenient to begin with a broad overview of GSF's claims.

Outline of GSF's case

3 By way of broad overview, GSF claims that the defendant directors breached their duties in approving or causing to be approved certain uncreditworthy loans by GSF. The loans were in two categories: the Nancy Keep Loans and the Other Uncreditworthy Loans. The Nancy Keep Loans are said to have been uncreditworthy because the loan applications were deficient or incomplete and/or alternatively because previous Keep Loans were in arrears. The Other Uncreditworthy Loans were said to be uncreditworthy because of deficiencies in the applications.

Uncontroversial background facts: the parties

4 Great Southern Ltd (GSL) was a listed public company which carried on the business of operating managed investment schemes (MIS) in forestry, horticulture and cattle through its wholly owned subsidiaries for the purpose of generating profits from the sale of tax effective interests in those MIS.1

5 GSF is a wholly owned subsidiary of GSL. GSF's business was to provide finance to investors in the group's MIS, manage the loans made to the investors and sell loans through securitisation agreements with third parties.2

6 GSF had no employees of its own and was provided with management services by GSL. The directors of GSF were executives employed by GSL.3

7 Great Southern Managers Australia Ltd (GSMAL) was a wholly owned subsidiary of GSL. GSMAL was the responsible entity for all the MIS of the group.4

8 The second defendant, Mr Rhodes, was a director of GSF from 10 April 2001 to 17 July 2009. He was the general manager of GSL and its subsidiaries from 5 April 1999 to 28 February 2008, and was managing director of GSL from 29 February 2008 until 16 May 2009.5

9 The third defendant, Mr Young, was an executive director of GSF from 29 June 1988 until he retired on 28 February 2008. Up to his retirement, Mr Young was the managing director of GSL and the group. After he retired on 28 February 2008, Mr Young remained a non-executive director of GSL, and was a non-executive director at GSF until 4 July 2008.6

Duties

10 GSF pleads7 that the defendants owed the following duties to GSF:

(1) a duty under s 180 of the Corporations Act 2001 (Cth) to exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation's circumstances and occupied the office held by, and had the same responsibilities within the corporation as, each of the respective directors;

(2) a duty under s 181 to exercise their powers and discharge their duties as executive directors of GSF in good faith and in the best interests of the corporation and for a proper purpose; and

(3) a duty under s 182 not to use their positions improperly to gain an advantage for themselves or someone else or cause detriment to GSF.

11 GSF also pleads8 that as directors of GSF, and at all times fiduciaries, Rhodes and Young owed duties to GSF:

(1) to act at all times in good faith and for its benefit; and

(2) to act with the care, skill and diligence that would be exercised by a reasonably diligent person with his skill and experience and with the general knowledge, skill and experience that might be expected of a person carrying out the functions carried out by them in relation to GSF.

12 Finally, GSF pleads9 that Rhodes and Young owed duties of care in tort to GSF to act with the skill, care and diligence that would be exercised by a reasonably diligent person with his knowledge of GSF and with the knowledge, skill and experience that might be expected of a person carrying out the functions carried out by him in relation to GSF.

Credit policies and Acceptance Procedures

13 GSF securitised many of its loans pursuant to a loan sale and servicing deed (the LSSD). Under the LSSD, loans must have been originated in accordance with GSF's credit policy.

14 The loans the subject of these proceedings were not securitised under the LSSD. It is common ground that they did not meet the loan eligibility criteria of the LSSD.

15 GSF pleads that the only credit policies of GSF were those annexed to the LSSD. GSF alleges that it applied an acceptance procedure for finance applications (the GSF Acceptance Procedure) under which all or almost all finance applications were approved by GSF when the MIS application was accepted by GSMAL, irrespective of whether the finance applications were approved under Navision or otherwise satisfied the criteria set out in GSF's credit policy from time to time.

16 GSF's case is that by reason of the GSF Acceptance Procedure, GSF made loans to member borrowers in respect of which, at the time that GSF advanced funds pursuant to the loan deed:

(a) GSF did not conduct any or alternatively any sufficient credit analysis, whether by reference to GSF's credit policy or otherwise;

(b) the borrowers had not demonstrated a capacity to repay the loans made by GSF.10

17 Further, GSF pleads that as the only directors of GSF, and as the executive directors, Rhodes and Young caused or permitted GSF to employ the GSF Acceptance Procedure, and did not inform the board of GSL of it, formally or at all.11

The loans the subject of GSF's claims

18 A substantial part of GSF's claims relate to loans referred to as the Nancy Keep Loan applications. Claims are made in respect of those loans as made in 2004, 2005, 2006 (and, it seems, 2007). Broadly summarised, GSF claims that for one or more of the reasons set out in par 53 of the statement of claim and particularised in sch A, the Keep Loan applications were not creditworthy.

19 Further, in relation to the Keep Loan applications in 2005, 2006 and 2007, GSF pleads that a number of loans that had, at relevant times, already been advanced, were in arrears.

20 GSF pleads that, as the sole directors and as executive directors of GSF, Rhodes and Young knew or ought to have known of the pleaded facts relating to the Keep Loan applications.

21 The other part of GSF's claim relates to 144 loans detailed in sch B referred to as the Other Uncreditworthy Loans. The applications for those loans are said to be deficient and not creditworthy for some or all of the reasons set out in par 107 and in sch B of the statement of claim.

Breaches of duty concerning the GSF loan book

22 GSF pleads that Rhodes and Young breached their duties as directors of GSF in the following respects:

109.1 in failing to ensure that proper and consistent credit policies for loan approvals were established and implemented;

109.2 by approving themselves or causing or permitting to be approved loan applications where no, or no adequate, information as to the credit history and antecedence of the borrowers has been obtained and considered through the employment of the GSF Acceptance Procedure;

109.3 by approving themselves, or causing or permitting to be approved pursuant to the GSF Acceptance Procedure, the following loan applications that were, on their face, based on information provided by the borrowers (or purported borrowers) which on any objective analysis was such that the member-borrower could not afford to make payments in accordance with the terms of the loan:


109.3.1 the 2005 Keep Loan Applications totalling approximately $5,501,770;

109.3.2 the 2006 Keep Loan Applications totalling approximately $22,438,120; and

109.3.3 the Other Uncreditworthy Loans totalling approximately $31,443,485.58;


109.4 by approving the 2007 Keep Loan Applications totalling $13.5 million, notwithstanding their knowledge that the Nancy Keep related borrowers had breached the terms of their respective loan agreements which fell substantially into arrears;

109.5 by failing to ensure that proper policies and procedures were in place and consistently implemented in respect of the documentation of loans entered into by GSF and that any exceptions were appropriately reported to GSF and such loans not made and, if made, properly provided for, accounted for and disclosed;

109.6 by failing or failing adequately to monitor or cause to be monitored the performance of the loans and to otherwise take steps to enforce, or alternatively, obtain sufficient or appropriate additional security for repayment of loans having regard to the value of the security held by GSF, namely the respective member-borrowers' interests in the MIS schemes promptly or at all; and

109.7 by failing to convene, conduct and record any meetings of the Board of GSF or any formal meetings between themselves as directors of GSF and executives responsible for the loan book to consider the state of affairs of the loan book and to take any step identified in the foregoing sub-paragraphs.

The paragraphs of the defences sought to be struck out

23 GSF applies to strike out pars 118, 119 and 121 of Mr Rhodes' defence. Those paragraphs are in the following terms:

118 In further answer to the allegations in the Statement of Claim, Rhodes relies on the following matters:

(a) the Group's principal business was the operation of forestry, horticulture and cattle MIS schemes through its wholly owned subsidiaries, for the purpose of generating profits from the sale of tax effective interests in those MIS;

(b) to effect the above, the Group's structure included that:


(i) GSMAL was the RE of each MIS operated by the Group;

(ii) GSF provided finance to persons wishing to invest in MIS operated by the Group;

(iii) GSS was the holder of an Australian Financial Services Licence (AFSL);


(c) in respect of each loan made prior to 30 June 2008, GSF did not provide funds to the investor, but instead caused an adjustment in the intercompany loan balances within the Group in respect of the price of the investment in GSMAL, making funds available to GSMAL to conduct the business of each MIS;

(d) in respect of each loan made post 30 June 2008, GSF did not provide funds to the investor, but instead received cash from GSL which was equivalent to the loans made by GSF and transferred that cash to GSMAL on or around the closing date of each MIS;

(e) the Group, through GSS, authorised certain accountants and financial planners to act as authorised representatives under GSS' AFSL (Authorised Representatives);

(f) GSMAL's practice was to accept applications to invest in its MIS if they were received through an Authorised Representative, or an accountant or financial planner who held their own AFSL;

(g) the market in which the Group operated was for the provision of tax effective investments to investors;

(h) each MIS was subject to a due diligence process, that included modelling of predicted future values of each MIS;

(i) from about 1994 the Group's commercial strategy within that market included that it processed investor's applications on an urgent basis before the end of each financial year, so as to ensure that investors obtained the desired tax outcome of their investment, and to generally accept all Finance Applications;

(j) the commercial success of the Group's principal business was to a significant degree dependent on the above strategy;

(k) the above strategy was typical of the Group's competitors in that market;

(l) the terms upon which GSF provided finance to investors included that:


(i) the loans were full recourse;

(ii) the funds were secured over the investor's interest in the relevant scheme;

(iii) with respect to principal and interest loans, interest was payable at rates that were above the then prevailing commercial interest rates;.


(m) the loans complied with the relevant product rulings issued by the ATO;

(n) the cash outlay by the Group to operate its MIS was a small proportion of the amount of the loans;

(o) for each year during the period 2003 to 2007, GSF was solvent and recorded an after tax profit;

(p) between 1 July 2004 and 30 September 2008, the Group sold interests in MIS totalling approximately $1.553 billion. Of this amount, GSF lent approximately 90%, being approximately $1.398 billion. Over the same period, the Group recognised expenses in respect of bad and doubtful receivables in respect to monies owing by investors totalling $65.419 million representing approximately 4.2% of total sales, and approximately 4.7% of total loans written;

(q) a significant proportion of the loans advanced were securitised or otherwise sold;

(r) the auditors of the Group did not raise any concern in relation the loans advanced or the policies and procedures of GSF;

(s) the board of directors of GSL regularly received reports on the operation of GSF's business, and were aware of the above matters;

(t) the constitution of GSF has at all material times authorised the directors of GSF to act in the best interests of GSL, and Rhodes relies on section 1322 of the Corporations Act or section 1322 of the Corporations Law to the extent necessary.


119 Insofar as Rhodes was involved in formulating, monitoring or implementing GSF's loan acceptance procedures or lending practices, and insofar as he engaged in conduct or made decisions with respect to the loans the subject of these proceedings, Rhodes behaved as he did because he made business judgments that were:

(a) made in good faith and for a proper purpose;

(b) not in relation to matters in which he had a material personal interest;

(c) made after he informed himself about the subject matters of those judgments to the extent he reasonably believed appropriate;

(d) judgments which he rationally believed were in the best interests of each of GSF, GSL and the Group.


…

121 In further or alternative answer to the whole of the Statement of Claim, if it appears to this Honourable Court that Rhodes is or may be liable as alleged by the Plaintiffs (which liability is denied), the Court ought to relieve Rhodes from any such liability, pursuant to either or both of:


(i) s 1317S of the Corporations Act;

(ii) s 1318 of the Corporations Act,

on the basis that Rhodes acted honestly and, having regard to all the circumstances of the case, ought fairly to be excused.

GSF's application

24 GSF seeks orders that pars 118, 119 and 121 of Mr Rhodes' further amended defence dated 24 October 2014 be struck out on the grounds that those paragraphs:

(a) are vague and embarrassing and disclose no reasonable defence;

(b) may prejudice, embarrass or delay the fair trial of the action; or

(c) are otherwise an abuse of process.

Strike-out applications: general principles

25 The relevant principles are not in doubt on this application.

26 The caution with which a pleading will be struck out on the ground that it does not disclose a reasonable cause of action is well known.12 The court must feel a high degree of assurance before summarily dismissing a claim.13 While the court may determine a difficult question of law on such an application, it would usually be appropriate to leave the determination of such questions for trial.14

27 Unless the parties adopt a different approach in the conduct of the case, the pleadings define and delimit the issues for decision, provide the basis for decisions on relevance at trial, and ensure a fair trial by putting the other side on notice of the case that they must meet.15 A case cannot be decided outside of the pleadings unless the parties have deliberately chosen a different basis for the determination of their rights and liabilities.

28 A pleading must not plead allegations at too high a level of generality. A pleading must be sufficiently particular to conform with the object of informing the opposing party of the case it must meet.16

29 So long as a pleading fulfils its functions of identifying the issues, disclosing an arguable cause of action or defence as the case may be, and apprising the parties of the case that has to be met, it is unlikely to be in the interests of justice and conducive to efficient case management to strike out the pleading.17

30 The power to disallow an amendment is to be exercised so as best to ensure the attainment of the goal in O 1 r 4A and the objects in O 1 r 4B(1).

31 The considerations identified in Aon Risk Services Australia Ltd v Australian National University18 about the considerations relevant to the exercise of a discretionary power to allow or refuse amendment to a pleading apply in the context of an application to disallow an amendment under O 21 r 3.19

History of the action

32 There was a strategic conference on 27 March 2013. At that stage the defendants had filed defences. Counsel for each of the defendants indicated an intention to amend the defences. Orders were made for the filing of amended defences by the defendants. In the course of exchanges, I stated that the defendants should formulate their cases now, so as to identify the facts upon which each defendant relies to allege:

(1) that there was no breach of duty;

(2) whether s 180(2) of the Corporations Act applies; and

(3) in reliance on s 1317S or s 1318.20

33 The court stated its expectation that the defendants would, in the short term, ensure that their case was fully articulated in these respects. There was nothing to suggest, in what was said at the strategic conference, that this approach was not accepted by counsel for Mr Rhodes.

34 Mr Rhodes filed an amended defence in May 2013. In correspondence, GSF expressed a number of concerns about the form of the defence, including the complaints now made about pars 118, 119 and 121. There were no further amendments made until September 2014.

35 At a directions hearing on 26 June 2014, counsel for Mr Rhodes appeared to indicate that further amendments would be made to the defence within about the next four weeks.21

36 Mr Rhodes filed further amended defences on 19 September 2014 and again on 24 October 2014.

37 This action is listed for trial in February and March 2015.

38 All parties have filed and served their primary witness statements. GSF is shortly due to file its witness statements in reply.

The disposition of the application to strike out paragraphs of Mr Rhodes' defence

39 GSF complains that par 118 pleads 20 facts said to be 'in answer to the statement of claim'. The complaint is that these facts give rise to 'insinuations',22 but do not spell out a 'defence' or defences sufficiently clearly or fully.

40 I am not persuaded that these complaints sustain a striking out of par 118. It is clear from its terms that par 118 pleads facts and circumstances upon which Mr Rhodes relies in defence of the claims made against him. They are not said to be, individually or together, a distinct defence. These pleaded facts and circumstances are part of the circumstances in which questions of breach of duty must be considered.

41 GSF submits that the uncertainty as to the defences raised by the facts pleaded in par 118 mean that it is pregnant with an unacceptable multitude of possibilities. GSF points to the statement in Forrest v Australian Securities and Investments Commission,23 that while pleas in the alternative are permissible, proper pleading does not extend to 'planting a forest of forensic contingencies and waiting until final address or perhaps even an appeal hearing to map a path through it'. In my view, those observations of French CJ, Gummow, Hayne and Kiefel JJ were made in a different context and for a different purpose than arises in relation to par 118 of Mr Rhodes' defence.

42 In Forrest v ASIC, the way in which the applicant had pleaded its statement of claim meant that there were hundreds if not thousands of alternative and cumulative combinations of allegations of misleading and deceptive conduct. In the present case, Mr Rhodes articulates in his defence a number of facts and circumstances to which he invites attention in the determination of whether he breached his duties. Whether a director breached his duties is a fact sensitive evaluative judgment requiring attention to all of the circumstances. In my view, there is nothing wrong with a party who has alleged to have breached his duty identifying a number of circumstances upon which he will rely in asserting that there was no breach. To the contrary, articulation of the defendant's case in that respect is conducive to the attainment of the objects of pleading.

43 Further, it should be noticed that the substantial majority of par 118 has been in its current form since May 2013. Recent amendments have only added three sub-paragraphs, namely pars (c), (d) and (h). It is difficult to see any particular problems arising from those paragraphs. The balance of par 118 has been the subject of reply by GSF.24 Moreover, presumably par 118 has informed GSF's witness statements, which have been filed and served.

44 For these reasons, I decline to strike out par 118.

45 Paragraph 119 of Mr Rhodes' defence invokes the business judgment rule in s 180(2) of the Corporations Act. That section provides as follows:

A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

46 It can be seen that the statutory business judgment rule in s 180(2) applies if and only if the director makes a business judgment. A business judgment is defined in s 180(3) to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Thus, s 180(2) can be invoked only by a director who has made a decision. That would not apply to a director who did not turn his or her mind to a question.25 Where a director has made a decision that is a business judgment, attention must be given to the requirements of pars (a), (b), (c) and (d) of s 180(2) as they relate to that decision (or decisions).

47 The authorities on s 180(2) have held that the onus of proof lies on the director who relies on s 180(2) to establish the requirements of pars (a) - (d).26

48 In my view, regardless of where the onus lies, in order to give attention to whether the requirements of pars (a) - (d) have been satisfied, it is a necessary first step to identify the decision(s) constituting the relevant business judgment(s). Paragraph 119 fails to do so.

49 Paragraph 119 is pleaded on a conditional basis. It does not plead any specific or identifiable business judgment. It invokes the statutory business judgment rule 'insofar as Rhodes was involved in formulating, monitoring or implementing GSF's loan acceptance procedures or lending practices, and insofar as he engaged in conduct or made decisions with respect to the loans the subject of these proceedings'.

50 In his defence, Mr Rhodes denies or does not admit that:

(a) he caused or permitted GSF to employ the GSF Acceptance Procedure;27

(b) he approved the relevant Keep Loan applications;28 and

(c) he knew or should have known of the making of the relevant Keep Loans.29

51 I am unable to discern anywhere in Mr Rhodes' defence in which he positively pleads that he did formulate, monitor or implement GSF's loan acceptance procedures or lending practices, or make decisions with respect to the loans the subject of these proceedings.

52 Mr Rhodes submits that GSF should have no difficulty in understanding the case he has to meet. Mr Rhodes refers to the contents of his witness statement, identifying numerous paragraphs in which 'business judgments' were made; and also referring to a number of documents evidencing directors' meetings and other meetings, and associated papers. If, as appears to be the case, Mr Rhodes contends that all of these relate to business judgments to which s 180(2) applies or is capable of applying, I do not accept that contention.30

53 On the face of it, it is decisions made by Mr Rhodes that are alleged by GSF to constitute a breach of his duty of reasonable care and skill that are the potential subject-matter of a plea based on s 180(2). Some of the paragraphs in Mr Rhodes witness statement may be of that character.31 The position should be made clear by an appropriate pleading.

54 Mr Rhodes points to the character of the allegations of breach made by GSF against Mr Rhodes in par 109 of the statement of claim. Many of those allegations assert omissions to do things adequately over a period of years. They require consideration of the defendants' state of mind, conduct and commercial judgments on an almost continuous basis over a lengthy period.

55 In large measure, I accept what Mr Rhodes says about the nature of the allegations made by GSF against him. However, not all allegations of breach of duty are necessarily susceptible of an answer by reference to the statutory business judgment rule in s 180(2). For example, a failure by a director to give something adequate, or any, consideration may involve a breach of duty, but unless the director made a decision, there would be no business judgment made and thus no room for invoking s 180(2).

56 In the circumstances, it seems to me to be conducive to properly identifying the issues, to apprising GSF of the case that it must meet, and to the efficient and just preparation, hearing and determination of the action for Mr Rhodes to identify in his pleading any decision he made in respect of which he seeks to rely on the business judgment rule. That will enable attention to be given to the question of whether the requirements in pars (a) - (d) of s 180(2) are established in relation to any such decision(s). Any such pleading should also identify the material facts relied on by Mr Rhodes in asserting that the requirements of pars (a) - (d) are satisfied.

57 For these reasons, I struck out par 119 of Mr Rhodes' defence, with leave to replead.

58 In par 121, Mr Rhodes invokes s 1317S and s 1318 of the Corporations Act. He pleads that he acted honestly and, having regard to all the circumstances, he ought fairly to be excused of any liability.

59 Sections 1317S and 1318 provide as follows:

1317S Relief from liability for contravention of civil penalty provision

(1) In this section:

'eligible proceedings':


(a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and

(b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA or 1317HB).


(2) If:

(a) eligible proceedings are brought against a person; and

(b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:


(i) the person has acted honestly; and

(ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person's appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.


...

(7) Nothing in this section limits, or is limited by, section 1318.

1318 Power to grant relief

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

60 It is for a defendant who invokes s 1317S or s 1318 to persuade the court that he or she should be relieved from any liability. That requires the court to be satisfied of three things:

(1) that the defendant acted honestly;

(2) of the value judgment that, having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention, negligence, default or breach of duty (as the case may be); and

(3) that as a matter of discretion the court ought exercise its power to relieve the person from any liability.32

61 GSF complains that Mr Rhodes does not identify the facts and circumstances on which he relies.

62 Mr Rhodes submits that:

(1) apart from pleading and proving that he acted honestly, it is wrong to assume that a defendant invoking the sections must plead and prove additional facts - he or she might rely only on the circumstances proved by the plaintiff;

(2) a defendant relying on these sections is entitled to rely on 'all the circumstances of the case' (the statutory language), and is not obliged to limit himself to a pleaded subset of them;

(3) some relevant circumstances are, by their nature, not susceptible to or suitable for pleading in a defence, for instance, the degree to which a director's conduct fell short of the required standards; and

(4) GSF knows the case relied on by Mr Rhodes in seeking relief under s 1317S and s 1318. The reference to all the circumstances includes the facts and circumstances pleaded in the defence, those referred to in Mr Rhodes' witness statement and the documents referred to in it, and, to the extent they are proved, the facts and circumstances pleaded in the statement of claim.

63 As to Mr Rhodes' first proposition, I agree that it would be open to a defendant to prove that he acted honestly, and that in the circumstances proved by the plaintiff, the defendant should be relieved of any liability. That possibility does not seem to control or to detract from the need for a defendant to identify, by his or her pleading, the case to be made at trial. A defendant who intended to run the case just outlined would plead that he acted honestly and identify the circumstances relied on for relief under the statutory provision as the circumstances pleaded in the statement of claim.

64 It is common cause that in deciding whether to give relief under these sections, the court must have regard to all the circumstances of the case. GSF says that that does not detract from, but underlines, the need for a party invoking the section to identify the circumstances relied upon. I accept GSF's submission, and thus do not accept Mr Rhodes' second proposition. The breadth of what is potentially relevant makes it necessary for Mr Rhodes to identify what he relies upon, in order that GSF is fairly apprised of the case it must meet.

65 While I accept Mr Rhodes' third proposition, I do not think that it is of controlling significance. At trial, Mr Rhodes will inevitably point to some particular matters in support of his claim for relief under these sections. Those matters should be identified by pleading or particulars. That will not preclude Mr Rhodes from making submissions about the obviously relevant circumstance of the extent to which he had fallen short of discharging his duties.

66 I do not accept Mr Rhodes' fourth proposition. I am not persuaded that the case to be made by Mr Rhodes on relief under s 1317S and 1318 is sufficiently revealed to GSF or to the court, by the statement that 'all the circumstances' includes those referred to in:

(a) the defence;

(b) Mr Rhodes' witness statement;

(c) the documents referred to in the witness statement; and

(d) to the extent proved, the statement of claim.

67 Fairness to GSF in knowing the case it must meet, and the proper identification of the issues at trial, seem to me to call for some greater specificity on the part of Mr Rhodes in identifying his case.

68 GSF submits that in SGB Jones Pty Ltd v Invion Ltd 33 the Queensland Court of Appeal held that it is necessary to identify in a pleading each of the circumstances of the case relied on by a defendant who seeks to invoke these statutory powers. In SGB Jones v Invion, the appellants had amended their defence so as to invoke s 1317S and s 1318. Paragraph 66A pleaded that the appellants had acted honestly and in all the circumstances ought fairly to be excused. The particulars to par 66A identified that the claim for excusal relied on 'the legal advice', an expression defined earlier in the pleading, and 'all of the facts, matters and circumstances pleaded herein'.34 In the passage relied upon by GSF, Philippides J (with whom Holmes and Muir JJA agreed):35

However, there are obvious difficulties in relying on the present pleading in terms of the case which the appellants presently contend they intend to pursue at trial. As the respondent submitted, there is no allegation that the facts and circumstances pleaded in paras 18B to 18D led to the belief pleaded in para 18 A. Nor does para 66A(c) identify any of those matters as particulars of the 'circumstances of the case' relevant to the issue of the s 1317S or s 1318 excuse. At best, para 66A(c) seeks to achieve this in an oblique and circuitous manner by incorporating all the paragraphs of the defence without discrimination and without regard to their relevance. Clearly, the amended defence as it stands is inadequate to the task of pleading the case which the appellants contend they intend to take to trial.

69 I am not persuaded that Philippides J was laying down a universal and absolute rule about pleading a claim to relief under s 1317 or s 1318. It is clear from earlier parts of her Honour's reasons that the defence in that case did not encompass or articulate fundamental elements of the case the appellants wished to advance at trial.36 The observations as to the inadequacy of the plea in par 66A(c), incorporating the matters pleaded in the defence as being relied on, should be understood in that light. Nevertheless, the court's characterisation of the technique adopted in par 66A(c) as oblique and circuitous, without discrimination and without regard for relevance, should be noticed.

70 The process of marshalling the circumstances on which he relies is one that will necessarily be undertaken by Mr Rhodes in preparation for trial and at the trial of the action. It is not unduly burdensome to require it to be done now, by way of pleading and particulars. That can be done by reference to specific paragraphs of the defence or his witness statement, or otherwise. Doing so now, by way of pleading, advances the object of ensuring fairness to GSF, in knowing the case that it must meet. It is also conducive to the proper identification of the issues at trial, and to the efficient and just preparation, hearing and determination of the trial.

71 For these reasons, I struck out par 121, with leave to replead.

Conclusion

72 For the reasons given, I struck out pars 119 and 121, with leave to replead.

______________________________________

1 Statement of Agreed Facts (SAF) [1].
2 SAF [2.5] - [2.6].
3 SAF [2.7] - [2.8].
4 SAF [3].
5 SAF [5].
6 SAF [6].
7 SC [6], [9].
8 SC [7], [10].
9 SC [8], [11].
10 SC [43].
11 SC [44] - [45].
12Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Library No 6414, 25 August 1986) 6 - 7; Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd [No 3] [2014] WASC 162 [44].
13Agar v Hyde (2000) 201 CLR 552 [57]; Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 [46].
14Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507, 514 - 515; Casella v Hewitt [2008] WASCA 13; (2008) 36 WAR 1 [36]; SMEC Australia Pty Ltd v Valentine Falls Estate Pty Ltd [2011] WASCA 138 [20].
15EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 [124]; Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 [49] - [51]; Banque Commerciale SA (in liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279, 286 - 287.
16Kernel Holdings Pty Ltd v Rothmans of Pall Mall (Australia) Pty Ltd (1991) 217 ALR 171, 173; Betfair Pty Ltd v Racing New South Wales [49]; DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170 [32].
17Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82 [4] - [7].
18Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175.
19Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296 [54].
20 ts 22 - 23.
21 ts 101.
22 Plaintiff's submissions [20].
23Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 [27].
24 Reply 11 June 2013.
25Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 [7277] and authorities there cited.
26ASIC v Rich [7269]; Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 81 ACSR 563 [197].
27 Defence [44].
28 Defence [63], [72].
29 Defence [71], [80], [87].
30 See witness statement of Mr Rhodes [68] - [69], [85] - [88]. There are many other examples.
31 For example, witness statement of Mr Rhodes [227], [238], [241], [248], [270], [312] - [313], [347] - [349].
32Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620 [16], [49], [50]; Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 196 FCR 430 [84].
33SGB Jones Pty Ltd v Invion Ltd [2013] QCA 306.
34SGB Jones v Invion [14].
35SGB Jones v Invion [44].
36SGB Jones v Invion [15] - [19]; [41] - [43].