Hodges v Sandhurst Trustees Limited

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FEDERAL COURT OF AUSTRALIA

Hodges v Sandhurst Trustees Limited [2014] FCA 1223

Citation: Hodges v Sandhurst Trustees Limited [2014] FCA 1223
Parties: CHARLES ROBERT HODGES IN HIS CAPACITY AS TRUSTEE OF THE CHARLES HODGES SUPERANNUATION FUND v SANDHURST TRUSTEES LIMITED ACN 004 030 737
File number: NSD 453 of 2014
Judge: GLEESON J
Date of judgment: 14 November 2014
Catchwords: CORPORATIONS – application to strike out statement of claim in part – where plaintiff alleges multiple breaches of trustee’s duty under s 283DA(b)(ii) of Corporations Act 2001 (Cth) – where certain alleged breaches occurred before plaintiff acquired debentures – whether causal connection between breaches and loss sufficiently pleaded – application dismissed
Legislation: Corporations Act 2001 (Cth) ss 283DA, 283BB(a), 238F(1)(a)
Federal Court of Australia Act 1976 (Cth) Pt IVA
Federal Court Rules 2011 (Cth) r 16.21(1)
Cases cited: Charlie Carter Pty Ltd v SDAEA (WA) (1987) 13 FCR 413
Commonwealth v Cornwall (2007) 229 CLR 519
Empire Shipping Company Inc v Owners of the Ship Shin Kobe Maru (1991) 32 FCR 78
Fubilan Catering Services Ltd v Compass Group (Australia) Pty Ltd (No 2) [2004] FCA 1034
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Radisch v McDonald [2010] FCA 762
Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic (2007) 231 CLR 160
State of Queensland v Pioneer Concrete (Qld) Pty Ltd [1999] FCA 499; [1999] ATPR 41-691
Sutherland Shire Council v Heyman (1985) 157 CLR 424
TPC v Pioneer Concrete (1992) 52 FCR 164
Date of hearing: 20 October 2014
Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 59
Counsel for the Plaintiff: Mr Antony Martin SC with Mr Gregory Drew
Solicitor for the Plaintiff: Meridian Lawyers
Counsel for the Defendant: Mr Ian Pike SC with Mr Jonathon Dooley
Solicitor for the Defendant: Clyde & Co

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 453 of 2014
BETWEEN:

CHARLES ROBERT HODGES IN HIS CAPACITY AS TRUSTEE OF THE CHARLES HODGES SUPERANNUATION FUND
Plaintiff
AND:

SANDHURST TRUSTEES LIMITED ACN 004 030 737
Defendant

JUDGE:

GLEESON J

DATE OF ORDER:

14 NOVEMBER 2014

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.On or before 25 November 2014, the plaintiff provide particulars of the date or dates on which it is alleged, in paragraph 59 of the statement of claim, that a trustee exercising reasonable diligence in the position of the defendant would have promptly appointed a receiver and manager to LKM Capital Ltd (receivers and managers appointed).

2.The respondent’s amended interlocutory application dated 20 October 2014 be dismissed.

3.The parties contact the Associate to Justice Gleeson by 5 pm on 17 November 2014 to seek a date for further directions.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 453 of 2014
BETWEEN:

CHARLES ROBERT HODGES IN HIS CAPACITY AS TRUSTEE…

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Details
Case
[2014] FCA 1223
Decision Date

CaseChat Overview and Summary

Hodges v Sandhurst Trustees Limited was a case heard by the Federal Court of Australia concerning a dispute between the plaintiff, Mr Hodges, and the defendant, Sandhurst Trustees Limited, regarding alleged breaches of duty by the defendant under section 283DA(b)(ii) of the Corporations Act 2001 (Cth). Mr Hodges, a holder of debentures issued by LKM Capital Limited, claimed that Sandhurst Trustees Limited breached its duty to exercise reasonable diligence to ascertain whether LKM Capital had committed any breaches of the trust deed or Chapter 2L. The plaintiff alleged that such breaches caused loss and damage to him and other group members who held debentures from LKM Capital.

The central legal issue was whether the plaintiff had sufficiently pleaded the causal connection between the alleged breaches and the loss suffered. Specifically, Sandhurst argued that any loss suffered by Mr Hodges as a result of events occurring before he acquired his debentures in January 2005 must have crystallised at the time of acquisition. Sandhurst submitted that if the plaintiff’s claim relied on such events, it should compare his actual position to a hypothetical position where he did not obtain the debentures. However, the plaintiff's statement of claim did not provide such a case, rendering the pre-acquisition events irrelevant.

The Court considered the principles governing the sufficiency of pleadings and the requirement for particularity. It noted that while the power to strike out pleadings is discretionary and should be exercised sparingly, it could be appropriate if the pleadings failed to disclose a reasonable cause of action or did not sufficiently inform the defendant of the case against it. The Court found that the plaintiff's statement of claim, particularly in paragraph 59, lacked the necessary particularity to inform Sandhurst of the specific events and dates it was alleged a reasonably diligent trustee would have acted on. Consequently, the Court dismissed the amended interlocutory application and ordered the plaintiff to provide further particulars regarding the dates of the alleged breaches. The matter was to be listed for further directions.

Orders

Orders of the court

1. On or before 25 November 2014, the plaintiff provide particulars of the date or dates on which it is alleged, in paragraph 59 of the statement of claim, that a trustee exercising reasonable diligence in the position of the defendant would have promptly appointed a receiver and manager to LKM Capital Ltd (receivers and managers appointed).

2. The respondent’s amended interlocutory application dated 20 October 2014 be dismissed.

3. The parties contact the Associate to Justice Gleeson by 5 pm on 17 November 2014 to seek a date for further directions.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

In Charlie Carter Pty Ltd v SDAEA (WA) (1987) 13 FCR 413 at 417, French J said:In practice it may be difficult to distinguish between a “material fact” and a “particular”. Antecedent to that distinction, however, is the definition of the level of generality at which the material facts should be pleaded. In Ratcliffe v Evans [1892] 2 QB 524 the Court of Appeal comprising Lord Esher MR, Bowen and Fry LJJ said at 532:“ ... it is an ancient and established rule of pleading that the question of generality of pleading must depend upon the general subject-matter.”Whatever level of generality is adopted in a statement of claim it must, in my opinion, be consistent with the purpose of pleadings, namely to define the issues and thereby inform the parties in advance of the case they have to meet and so enable them to take steps to deal with it — Farrell (formerly McLaughlin) v Secretary of State for Defence [1980] 1 WLR 172 at 179-180 per Lord Edmund-Davies.There are certain levels of generality of pleading which, while they may bring in all facts necessary to establish a cause of action, are insufficient for the purpose of properly informing the defendant of the case it has to meet. In Bruce v Odhams Press Ltd [[1936] 1 KB 697] it was said to be insufficient merely to allege in general terms a cause of action. The cause of action must be alleged with particularity. Scott LJ at 705 gave the following example:“For example, it would not be sufficient for a plaintiff in an action of trespass to plead ‘the defendant trespassed on my lands and took away and converted to his own use two of my horses’ without stating particulars of the time and place when the trespass is alleged to have taken place. A plaintiff must state sufficient particulars of his alleged cause of action which will enable the defendant either to admit it or deny it or otherwise plead a defence to it.”The sufficiency of the pleading may be judged first by reference to the necessary condition that it disclose a reasonable cause of action and secondly, by reference to the requirement for sufficient particularity that the respondents know in advance the case they have to meet.BACKGROUND TO THE CLAIM The claim arises out of Sandhurst’s role, from 1 October 2001, as the trustee of a trust deed for debentures issued by LKM Capital Limited (receivers and managers appointed) (“LKM Capital”) under Chapter 2L of the Corporations Act (“trust deed”). Section 283DA(b)(ii) of the Corporations Act requires the trustee of a trust deed entered into under s 283AA of that Act to exercise reasonable diligence to ascertain whether the borrower (in this case, LKM Capital) has committed any breach of the provisions of the trust deed or Chapter 2L. Mr Hodges claims to have been a holder of debentures issued by LKM Capital since January 2005. The group members are 834 persons or entities who:(1)were a holder of debentures issued by LKM Capital as at 1 August 2008;(2)have suffered loss and damage by reason of the conduct of Sandhurst as pleaded in the statement of claim; and(3)have signed a relevant funding agreement with Litman Holdings Pty Ltd.

Evidence

Evidence Before The Court

Sandhurst relies on r 16.21(1)(e) or (f) of the Federal Court Rules 2011 (Cth) (“Rules”), by which a party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading, or is otherwise an abuse of the process of the Court. EVIDENCE Sandhurst relied on an affidavit of John Edmond, the solicitor for Sandhurst, made on 28 July 2014. Mr Hodges relied on two affidavits made by his solicitor, Douglas Raftesath on 8 September 2014.LEGAL PRINCIPLES The power to strike out pleadings or portions of pleadings is discretionary. It should be employed sparingly and only in a clear case: Radisch v McDonald [2010] FCA 762 at [20]. A court will be cautious in exercising its discretion to strike out a pleading “lest one deprive a party of a case which it ought to be able to bring”: TPC v Pioneer Concrete (1992) 52 FCR 164 at 175. An application to strike out a statement of claim on the ground that it does not disclose a reasonable cause of action involves establishing that the applicant’s case is so untenable that it cannot possibly succeed: Empire Shipping Company Inc v Owners of the Ship Shin Kobe Maru (1991) 32 FCR 78. There will be cases in which the power to strike out pleadings will not be exercised notwithstanding a failure to plead all material facts. Such restraint will be appropriate where deficiencies can be overcome by ordering the provision of particulars or the furnishing of affidavits: State of Queensland v Pioneer Concrete (Qld) Pty Ltd [1999] FCA 499 at [18]; [1999] ATPR 41-691 at 42,828-9. In Charlie Carter Pty Ltd v SDAEA (WA) (1987) 13 FCR 413 at 417, French J said:In practice it may be difficult to distinguish between a “material fact” and a “particular”. Antecedent to that distinction, however, is the definition of the level of generality at which the material facts should be pleaded. In Ratcliffe v Evans [1892] 2 QB 524 the Court of Appeal comprising Lord Esher MR, Bowen and Fry LJJ said at 532:“ ... it is an ancient and established rule of pleading that the question of generality of pleading must depend upon the general subject-matter.”Whatever level of generality is adopted in a statement of claim it must, in my opinion, be consistent with the purpose of pleadings, namely to define the issues and thereby inform the parties in advance of the case they have to meet and so enable them to take steps to deal with it — Farrell (formerly McLaughlin) v Secretary of State for Defence [1980] 1 WLR 172 at 179-180 per Lord Edmund-Davies.There are certain levels of generality of pleading which, while they may bring in all facts necessary to establish a cause of action, are insufficient for the purpose of properly informing the defendant of the case it has to meet. In Bruce v Odhams Press Ltd [[1936] 1 KB 697] it was said to be insufficient merely to allege in general terms a cause of action. The cause of action must be alleged with particularity. Scott LJ at 705 gave the following example:“For example, it would not be sufficient for a plaintiff in an action of trespass to plead ‘the defendant trespassed on my lands and took away and converted to his own use two of my horses’ without stating particulars of the time and place when the trespass is alleged to have taken place. A plaintiff must state sufficient particulars of his alleged cause of action which will enable the defendant either to admit it or deny it or otherwise plead a defence to it.”The sufficiency of the pleading may be judged first by reference to the necessary condition that it disclose a reasonable cause of action and secondly, by reference to the requirement for sufficient particularity that the respondents know in advance the case they have to meet.BACKGROUND TO THE CLAIM

Decision

Reasons for decision

If the evidence does not sufficiently inform Sandhurst of the case against it, then it may be appropriate to require further explanation from Mr Hodges before Sandhurst is required to serve its evidence.CONCLUSION The plaintiff should supply further particulars of paragraph 59 of the statement of claim. The amended interlocutory application should be dismissed with costs. The matter should be listed for directions.

Ratio Decidendi

Legal Principle Established

The plaintiff’s case, as revealed by the particulars to paragraph 61 of the statement of claim, is that the plaintiff and the group members suffered loss because the assets of LKM Capital were realised for an amount significantly less than the amount they should have been realised for if Sandhurst had not contravened s 283DA(b)(ii).CONSIDERATIONAlleged deficiencies of the statement of claim Ultimately, Sandhurst complained about the statement of claim in two respects. Both complaints concerned the allegations of “historical events” which I took to refer at least to events pre-dating Mr Hodge’s acquisition of debentures in January 2005. Sandhurst contended that these historical events are irrelevant to the pleaded claim and, if they remain, have the potential to substantially prolong and increase the cost of the proceedings. First, Sandhurst argued that any loss suffered by Mr Hodges as a result of events occurring prior to his acquisition of debentures must have crystallised at the time of acquisition. In written submissions, Sandhurst submitted:Mr Hodges obtained debentures in January 2005. Had receivers and managers been appointed before January 2005 as a consequence of actions taken by a trustee exercising reasonable diligence, Mr Hodges would not have been able to obtain debentures. His loss, in those circumstances, would (broadly speaking) require a comparison of his actual position to the hypothetical position where he did not obtain debentures, and any damages payable to him would be the amount of any difference in those two positions (see, eg Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic (2007) 231 CLR 160 at 225 [175] per Hayne J, Gummow J agreeing at 189 [46], Heydon J agreeing at 255 [261] and Crennan J agreeing at 255 [265] [(“Sons of Gwalia”)]).However, that case is not pleaded in the [statement of claim]. In the absence of such a case, events which are alleged to have occurred prior to Mr Hodges obtaining debentures cannot be relevant or have a bearing on the proceeding. The particular passage from Sons of Gwalia on which Mr Pike SC relied is as follows:[175] The claims which Mr Margaretic makes under the [Corporations Act] that are founded on a breach of the continuous disclosure requirements, and the claims he makes under that and other Acts which are founded on allegations of misleading or deceptive conduct, are claims for damages. But had Mr Margaretic known what he now says are the relevant facts before SOG appointed administrators (assuming for the purposes of argument that his allegations are true) he would have had complete causes of action against SOG for identical relief under the various statutory provisions upon which he now relies. And the claims he could then have made would not have been contingent or future claims; they would have been present claims for damages representing the difference between what he had outlaid in buying the shares and the true value of what he bought as determined by a properly informed market. The appointment of administrators so soon after Mr Margaretic bought his shares reveals that the shares he bought would have been judged by a properly informed market to be worthless when he bought them and accordingly, he suffered loss when he bought the shares.