Liquorland (Australia) Pty Ltd v Anghie (No 5)
[2003] VSC 282
•1 August 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6974 of 2001
| LIQUORLAND (AUSTRALIA) PTY LTD (ACN 007 512 414) and AUSTRALIAN LIQUOR GROUP LTD (ACN 089 094 557) | Plaintiffs |
| v | |
| MICHAEL LEE ANGHIE and others and ROGER CHRISTIAN STEINEPREIS and others | Defendants Third Parties |
AND BETWEEN:
| MICHAEL LEE ANGHIE and OTHERS | Plaintiffs by Counterclaim |
| v | |
| LIQUORLAND (AUSTRALIA) PTY LTD | Defendants by Counterclaim |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28 March, 4, 10 April and 13 June 2003 | |
DATE OF JUDGMENT: | 1 August 2003 | |
CASE MAY BE CITED AS: | Liquorland (Australia) Pty Ltd v Anghie (No. 5) | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 282 | First Revision 5/8/03 |
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Practice and Procedure – pleading – third party statement of claim – strike out application – whether claim futile – whether third party claim arises in the event that plaintiffs successful – whether accountants retained by company owe duty of care to directors and shareholders – whether accountant’s misleading and deceptive advice is “in trade or commerce” – reliance – discretion.
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APPEARANCES: | Counsel | Solicitors |
| For the first and thirdnamed Defendants (Anghie and Higgs) | Mr M.R. Pearce | Norton Gledhill |
| For the secondnamed Defendant (Oakley) | Mr R.M. Garratt QC | Browne & Co |
| For the fourthnamed Defendant | Mr D. Crennan | Minter Ellison |
| For the fifth and sixthnamed Defendants (Murphy and Murphy Investments) | Mr A.M. Thomas | Wisewoulds |
| For the seventh and eighthnamed Defendants and eleventh and twelfthnamed third parties (Ernst & Young and Ernst & Young Corporate Finances) | Mr C.C. Macaulay | Ebsworth & Ebsworth |
| For the fifth to tenthnamed Third Parties (Hall Chadwick) | Mr J.H. Karkar QC | Connery & Partners |
HIS HONOUR:
This litigation arises out of the 2001 takeover of the secondnamed plaintiff, Australian Liquor Group Ltd (“ALG”), by the firstnamed plaintiff, Liquorland (Australia) Pty Ltd (“Liquorland”). The plaintiffs sued the five directors of ALG at the time of the takeover (“the directors”). These are the firstnamed defendant Michael Lee Anghie[1], the secondnamed defendant Ross Graham Oakley, the thirdnamed defendant Malcolm Robert Higgs, the fourthnamed defendant Michael Francis Blake Pelly and the fifthnamed defendant Philip Murphy. Of the directors, each except Mr Oakley was, together with the sixthnamed defendant Philip Murphy Investments Pty Ltd (“Murphy Investments”), the holder of a substantial parcel of shares in ALG.
[1]This Mr Anghie is not to be confused with the eighthnamed third party, Maurice Lee Anghie, who was at the relevant time a member of the firm Hall Chadwick. In this judgment references to “Anghie” are to the firstnamed defendant.
In broad terms, Liquorland alleges in its statement of claim[2] that the financial position of ALG was, at the time of the takeover, misstated or inadequately disclosed so that the price Liquorland paid for the shares which it purchased was excessive.
[2]Fourth amended statement of claim filed on 15 May 2003 (“plaintiffs’ statement of claim”).
The defendants have joined a number of third parties to the proceeding. These third party claims are complicated and I shall summarise them as follows.
The defendants Anghie and Higgs have joined:
(a)The first to fourthnamed third parties, Roger Christian Steinepreis, David Arthur Paganin, Mark Phillip Scudamore Foster and Jonathan Heath Stuart Murray who were at the relevant time members of the firm of solicitors, Steinepreis Paganin, retained by ALG and the directors to advise them on matters connected with any acquisition of shares in ALG by Liquorland.
(b)The fifth to tenthnamed third parties, Rave Ravendran, Kimberley Andrew Strickland, Keith Robert Cook, Maurice Lee Anghie, Terrence Charles Posma and Christopher Michael Williamson who were at the time members of the firm of accountants, Hall Chadwick, who carried on practice as such in Western Australia. Hall Chadwick was the auditor of ALG and was retained by it in 2001 to carry out certain accounting reviews. So much appears from the third party statement of claim[3] to which I shall return.
(c)The thirteenthnamed third party, Craig Watkins, who was at all relevant times a director and general manager of Liquorland. It is said that Mr Watkins was privy to certain information regarding the true financial position of ALG at the time of the takeover.
[3]Third party statement of claim filed on 18 February 2003.
The defendant Oakley[4] has joined the eleventh and twelfthnamed third parties, Ernst & Young (“EY”), and Ernst & Young Corporate Finance Pty Ltd (“EYCF”). I shall refer to these parties collectively as the EY parties unless it be necessary to distinguish between them. EY was a firm of accountants and EYCF a corporate adviser who made available to ALG the defendant Anghie to act as its director and secretary. So much appears from his third party statement of claim.
[4]Second amended third party statement of claim filed 8 April 2003.
The defendant Pelly[5] has joined:
(a) The fifth to tenthnamed third parties, the members of the firm Hall Chadwick.
(b) The EY parties.
(c) Mr Watkins.
[5]Third party statement of claim filed 5 December 2002.
The defendants Murphy and Murphy Investments[6] have joined the fifth to tenthnamed third parties, the members of the firm Hall Chadwick.
[6]Third party statement of claim filed 14 March 2003.
Before the court are a number of applications brought by some of these third parties to strike out the claims made against them by the directors and Murphy Investments:
· The application by Hall Chadwick to strike out the third party claims made against them by Anghie and Higgs, by Pelly and by Murphy and Murphy Investments is brought by summons filed on 24 February 2003.
· The application by the EY parties to strike out the third party claims made against them by Oakley, Pelly, Murphy and Murphy Investments is brought by amended summons filed on 26 March 2003.
After argument in these applications was concluded, the plaintiffs successfully applied to join the EY parties as defendants and on 15 May 2003 they amended their statement of claim accordingly. In this pleading they also made further amendments to which I shall refer. This shift in position by the plaintiffs has had consequences to these applications to which the plaintiffs are not parties:
· The application by the EY parties is no longer pressed since the EY parties are now involved in the proceeding as defendants.
· The defendants Oakley, Pelly, Murphy and Murphy Investments propose to bring their former third party claims against the EY parties as claims between defendants. These claims have not been filed.
· The further amendments to the plaintiffs’ statement of claim have had the consequence of undermining some of the arguments upon which were based the applications to strike out the third party statements of claim.
Having considered the implications of the plaintiffs’ May amendments and Hall Chadwick having pleaded to the plaintiffs’ fourth amended statement of claim, I was told on 13 June that the EY parties were not pursuing their strike out applications and that Hall Chadwick wished to pursue theirs on the basis of the pleadings as now amended. Counsel for Hall Chadwick and their adversaries asked me to determine the Hall Chadwick strike out applications on the pleadings as they now stand but on the basis of the submissions previously presented. This I now do.
As strike out applications, I approach them on the basis that the third party claims in question should not be struck out unless they are plainly hopeless and, if they are only bad in form, I should permit the pleader to replead. In undertaking this task I accept as provable the allegations made in the pleadings in question and will draw from the pleaded facts all inferences which might be available to the pleading party.[7]
[7]General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129, per Barwick CJ.
The Plaintiffs’ Claims
In order to understand the submissions put on behalf of Hall Chadwick, it is necessary to analyse in a little detail the claims made against the defendants. The chronology of the takeover as appears in the plaintiffs’ statement of claim was as follows:
17 April 2001 – Liquorland acquired 8M fully paid shares in ALG, representing an 18% interest.
27 April 2001 – Coles Myer Ltd publicly announced that its wholly owned subsidiary, Liquorland, intended to make a cash offer for all of the shares in ALG.
1 May 2001 – Liquorland lodged its bidder’s statement with the ASIC pursuant to s. 636 of the Corporations Law (“the Law”).
4 May 2001 – ALG lodged with ASIC its Target’s Statement pursuant to s. 638.
14 May 2001 – Liquorland made a formal conditional offer to purchase all of the ALG shares for $1.20 cash per share.
17 May 2001 – ALG was made aware of its accounting deficiencies following receipt of Hall Chadwick’s closing report.
1 June 2001 – ALG was aware of further deficiencies in the accounting systems following the tabling of a further report by Hall Chadwick at its board meeting of that date.
19 June 2001 – at 3.00 pm Liquorland declared its offer unconditional. This offer was accepted by the defendants other than Oakley.
18 July 2001 – Liquorland paid the offer price to all accepting shareholders except for the defendants and Christine Oakley.
The claims of the plaintiffs are contained in a much amended and, perhaps as a consequence of this, bewilderingly complex document. It is happily sufficient for my present purposes merely to outline its broad features. The defendants fall into three groups: the directors of ALG who were also, except Mr Oakley, shareholders in ALG; Murphy Investments who was a shareholder in ALG; and, latterly, the EY parties.
The first broad allegation is that ALG made certain statements prior to the commencement of the takeover with respect to its financial position. The first statement was made at a meeting at the Westin Hotel in Sydney on 13 April 2001[8] and the second at a meeting at the office of Ernst & Young in Melbourne on 19 April[9]. These statements are said to have been misleading and deceptive representations made in contravention of s. 9 of the Fair Trading Act 1999 (Vic)[10]. Liquorland contends that, as persons involved in the contraventions, the defendants Anghie and Higgs are liable for its loss suffered by acting in reliance upon these statements[11].
[8]Plaintiffs’ statement of claim para 9A.
[9]Plaintiffs’ statement of claim para 11.
[10]Plaintiffs’ statement of claim para 24J.
[11]Plaintiffs’ statement of claim para 24L.
The second broad allegation is that ALG’s Target’s Statement contained false information in contravention of s. 638(1)[12] upon which Liquorland relied to its detriment in offering an excessive amount for the ALG shares. Against the directors it is put first that each of them is liable for this pursuant to s. 670B as a director of the target or as a person involved in the contravention[13]. In each case it is a defence that the director did not know of the falsity of the statement in question. Second, it is put that the false information was misleading and deceptive conduct of ALG in contravention of s. 995(2) or s. 9 of the Fair Trading Act. Again, it is put that the directors are liable for this as persons involved[14].
[12]All references to sections in this judgment are references to the Corporations Law unless otherwise indicated.
[13]Section 79.
[14]Plaintiffs’ statement of claim para 24A.
The third allegation is that the Target’s Statement contained significant omissions which led Liquorland to offer an excessive amount for the ALG shares. Again, this is put against the directors, first, as a contravention by ALG of s. 638 leading to liability on their part under s. 670B. This claim also involves a mental element, for a target is not obliged to include in the Target’s Statement a fact which is not known to it[15]. The liability of the directors for this contravention arises from the fact that they were directors, alternatively that they were persons involved in the contravention. Second, it is put as misleading and deceptive conduct by ALG contrary to s. 995 and s. 9 of the Fair Trading Act in which contravention the directors were involved.
[15]Section 638(1)(b).
The fourth broad allegation is that ALG failed to prepare a supplementary Target’s Statement when it realised that the Target’s Statement contained relevant inaccuracies and omissions. This is put as a contravention of s. 644, alternatively as misleading and deceptive conduct in contravention of s. 995 and s. 9 of the Fair Trading Act. The directors are said to be liable for these contraventions as persons involved.
The fifth allegation is[16] that ALG contravened the continuing disclosure obligations under s. 1001A(2) and the ASX Listing Rule 3.1 inasmuch as it negligently failed to disclose to ASX information not generally available and which a reasonable person would expect to have a material effect on the price or value of its securities. The claim against the directors is that they are liable for this as persons involved.
[16]Plaintiffs’ statement of claim paras 26-33.
The final allegation is that of breach of the insider trading provisions of s. 1002G[17]. It is alleged by ALG as well as by Liquorland that the directors, other than Oakley, and Murphy Investments entered into bid contracts for sale of their shares to Liquorland in breach of these provisions. The allegation is that these directors and Murphy Investments possessed information as to the true position of ALG which they knew or ought to have known was not generally available and that, if it were available, it might have a material effect upon the price or value of the shares of ALG. In these circumstances, it is alleged that these directors and Murphy Investments contravened s. 1002G(2) when they agreed to sell their shares in ALG to Liquorland. Liquorland, therefore, claims to recover from each of these directors and Murphy Investments its loss, namely the difference between the price paid for the shares and their value had the information been generally available[18]. ALG also seeks these sums from these directors pursuant to s. 1013(5) of the Law[19]. Other relief is also claimed as a consequence of these contraventions of the insider trading provisions[20].
[17]Plaintiffs’ statement of claim para 39.
[18]Plaintiffs’ statement of claim para 40.
[19]Plaintiffs’ statement of claim para 42.
[20]Plaintiffs’ statement of claim paras 43, 44 and 44A.
It will be seen that in many of these claims the allegations against the directors is that they are liable for the contraventions of ALG, and perhaps for the contraventions of other directors, as persons involved. The provisions with respect to this accessorial liability, insofar as they have been the subject of statutory definition in the law[21] have been construed to require guilty knowledge on the part of the accessory[22]. It was submitted that in the present circumstances this guilty knowledge involved a knowledge on the part of the director in question of the true financial position of ALG at the time that the inaccurate or insufficient information was given.
[21]Section 79.
[22]The equivalent s. 75B(1) of the Trade Practices Act 1974 was so construed in Yorke v Lucas (1985) 158 CLR 661 at 670.
For the purposes of these applications it was contended on behalf of Hall Chadwick that each of these claims made against the defendants was predicated upon their actual possession of knowledge of the true position with respect to the matters which were inaccurately stated or omitted from the Target’s Statement. The plaintiffs’ claims, it is said, did not depend upon constructive or imputed knowledge or a negligent ignorance of these matters.
The Third Party Claims against Hall Chadwick
In their third party statements of claim, the directors, other than Mr Oakley, and Murphy Investments make a number of claims against Hall Chadwick if and insofar as the plaintiffs’ claims against the directors are successful[23]. These statements of claim are in similar terms[24] and, for present purposes, I treat the third party claims as identical[25] except, of course, for those made by Murphy Investments.
[23]Anghie and Higgs Amended third party statement of claim filed 18 February 2003, Pelly third party statement of claim filed 5 December 2002, Murphy amended third party statement of claim filed 14 March 2003.
[24]A significant dissimilarity is the omission from the Pelly third party statement of claim of an allegation equivalent to that contained in para 40 of the other third party statements of claim.
[25]The paragraph numbers of the Pelly third party statement of claim vary from those of the other third party statements of claim.
Again, I set out a chronology of the facts relevant to these claims as they appear in the third party statements of claim:
November 2000: Hall Chadwick appointed auditor of ALG.
29 January 2001: ALG retained Hall Chadwick to conduct an independent review of ALG’s Appendix 4B financial report for the half year ended 31 December 2000 and to provide an Independent review report.
17 March 2001: Hall Chadwick provided the independent review report to the members of ALG.
18 or 19 March 2001: ALG lodged with ASX its Appendix 4B Report.
10 April 2001: ALG retained Hall Chadwick to undertake a systems review, that is, a review of ALG’s accounting systems and to report on these.
27 April 2001: Coles Myer Ltd publicly announced that its wholly owned subsidiary, Liquorland, intended to make a cash offer for all of the shares of ALG.
1 May 2001: Liquorland lodged its bidder’s statement with ASIC pursuant to s. 636.
4 May 2001: ALG lodged with ASIC its Target’s Statement pursuant to s. 638 of the Law.
14 May 2001: Liquorland made a formal conditional offer to purchase all of the ALG shares for $1.20 cash per share.
17 May 2001: Hall Chadwick provided to the ALG Audit Committee a closing report on its independent review of the Appendix 4B Report.
19 June 2001: Liquorland offer became unconditional.
31 July 2001: Hall Chadwick provided to ALG, now a wholly owned subsidiary of Liquorland, its systems review report.
It will be recalled that the allegations of the plaintiffs against the directors are essentially that the Target’s Statement contained inaccuracies and omissions which were known to the directors and, further, that ALG and its directors did not correct these deficiencies when they became aware of the true situation before the Liquorland offer became unconditional.
The essential allegation by the directors against Hall Chadwick is that, in its independent review report of 17 March 2001, Hall Chadwick concluded that, based on the independent review, they were not aware of any matter that made them believe that the Appendix 4B report was not in accordance with
(a) the Corporations Law, including:
(i)giving a true and fair view of the consolidated entity’s financial position as at 31 December 2000 and of its performance for the half-year ended 31 December 2000; and
(ii)complying with Accounting Standard AASB 1029: Half-Year Accounts and Consolidated Accounts and the Corporations Regulations; and
(b)other mandatory professional reporting requirements and ASX Listing Rules as they relate to Appendix 4B[26].
These conclusions are alleged to be incorrect, and negligently so[27]. They are referred to in the pleading and in the judgment as the independent review statements. Further, it is said that, by May or early June 2001 in the course of preparing the system’s review report, Hall Chadwick became aware of certain deficiencies in ALG’s accounting systems but did not bring them to the attention of ALG or its directors[28].
[26]Third party statements of claim para 7. Pelly third party statement of claim para 6.
[27]Third party statements of claim paras 44, 47. Pelly third party statement of claim paras 42, 45.
[28]Third party statements of claim para 51. Pelly third party statement of claim para 49.
By 17 May 2001, in its closing report following the independent review, Hall Chadwick had identified and reported on a number of adverse matters of an accounting an auditing nature[29]. In their statement of claim, the plaintiffs allege that a further report by Hall Chadwick critical of ALG’s accounting systems was before the board of ALG at its meeting of 1 June 2001[30] and that this was one of the sources of information for ALG to be aware that its target’s statement contained the alleged inaccuracies and omissions. By 31 July 2001, some six weeks after the Liquorland offer became unconditional, Hall Chadwick delivered its systems review report which was more critical of the ALG accounting systems and practices[31]. No attempt, however, was made before me, to reconcile the criticisms contained in the systems review report with the specific complaints made by the plaintiffs in this proceeding.
[29]Third party statements of claim para 16. Pelly third party statement of claim para 15.
[30]Plaintiffs’ statement of claim para 30(d).
[31]Third party statements of claim para 22. Pelly third party statement of claim para 21.
The third party statements of claim appear to bypass this closing report and the June report; the allegation is that the falsely optimistic picture painted by Hall Chadwick in its 17 March independent review report led ALG to file a defective Appendix 4B Report the following day and, also, led to ALG and the directors failing to comply with “their obligations under the Corporations Law and the ASX Listing Rules to make disclosure about ALG’s financial position”[32]. It is not in terms pleaded that this false picture in the March report led to the inaccuracies and omissions in the target’s statement of 4 May 2001 which the plaintiffs allege or that it caused ALG not to correct the target’s statement before the Liquorland offer became unconditional on 19 June 2001. It may be that this is implied in the third party statement of claim or, perhaps, that the March report misled the shareholders, of whom Liquorland was one, as to the accounting and financial position of ALG. While it is regrettable that it should be necessary to resort to inference upon such an important matter, I shall assume, in favour of the pleading that what is put is that, if the independent review had been properly conducted and if the independent review report of March 2001 had been properly prepared, ALG and its Directors would have lodged with ASIC a different target’s statement containing none of the inaccuracies and omissions of which the plaintiffs’ complained.
[32]Third party statements of claim para 54(d), (f). Pelly third party statement of claim para 52(d)(f).
Finally, it is alleged that Hall Chadwick failed to make its systems review report more timeously, in any event before the Liquorland bid became unconditional on 19 June[33] and failed, prior to that date, to bring to the attention of ALG or its directors the matters of criticism which were later included in the systems review report[34].
[33]Third party statements of claim para 49. Pelly third party statement of claim para 47.
[34]Third party statements of claim para 51. Pelly third party statement of claim para 49.
These factual allegations are said to give rise to a number of causes of action in the directors against the Hall Chadwick parties.
(i)A breach of a common law duty owed to ALG to take reasonable care to ensure the correctness and accuracy of the independent review report statements[35].
(ii)A breach of a common law duty owed to the directors to take reasonable care to ensure the correctness and accuracy of independent review report statements[36].
(iii)A breach of an implied contractual duty owed to ALG to carry out the independent review and to prepare the independent review report with due care and skill[37].
(iv)A breach of a common law duty owed to ALG to exercise due care and skill in conducting the independent review and in preparing the independent review report[38].
(v)A breach of an implied contractual duty owed to ALG to exercise due care and skill in conducting the systems review[39].
(vi)A breach of a common law duty owed to ALG to exercise due care and skill in conducting the systems review[40].
(vii)Insofar as the breaches by Hall Chadwick of the common law duties and contractual duties owed to ALG referred to in paragraphs (i), (iii), (iv), (v), (vi) and (vii) caused ALG to commit contraventions of the law as a result of which the directors are liable to compensate Liquorland, it is claimed that Hall Chadwick owed to those directors a common law duty of care. Accordingly, it is said that Hall Chadwick breached this duty in its conduct of the independent review and in preparing the independent review report and in conducting the systems review[41].
(viii)A contravention of s. 10 of the Fair Trading Act 1989 (WA) inasmuch as the statements contained in the independent review report constituted misleading and deceptive conduct upon which ALG and the directors relied to their detriment[42].
(ix)A claim for contribution pursuant to 23B of the Wrongs Act 1958[43] on the basis that the damage alleged in paragraph 42 of the plaintiffs’ statement of claim[44] to have been suffered by ALG is the same damage as that which would have been suffered by it as a result of the breaches and contraventions by Hall Chadwick which I have summarised in (i), (iii), (iv), (v) and (vi) and (viii) above[45]. This is the amount which ALG claims to be entitled pursuant to s. 1005(1) and s. 1013(5) to recover from the directors, other than Oakley, and from Murphy Investments.
[35]Third party statements of claim para 33, 47(c). Pelly third party statement of claim para 32. No breach of this duty is in terms alleged.
[36]Third party statements of claim paras 33, 47(c). Pelly third party statement of claim paras 32, 45(c). I overlook an evident typographical error in the Murphy third party statement of claim para 47(c).
[37]Third party statements of claim para 34, 47(b). Pelly third party statement of claim paras 33, 45(b).
[38]Third party statements of claim para 35, 47(a). Pelly third party statement of claim paras 34, 45(a).
[39]Third party statements of claim para 36.
[40]Third party statements of claim para 37.
[41]Third party statements of claim paras 42, 47(c). Pelly third party statement of claim paras 40, 45(c), 49(c). Again I pass over the evident typographical error in the Murphy third party statement of claim para 47(c).
[42]Third party statements of claim para 53.
[43]Third party statements of claim para 59. Pelly third party statement of claim para 57.
[44]See [19] above.
[45]Third party statements of claim para 58. Pelly third party statement of claim para 56.
In the third party statement of claim filed on behalf of Murphy and Murphy Investments, causes of action are also alleged by Murphy Investments against Hall Chadwick parties in similar terms.
(x)In terms similar to that summarised in (iv) and (v) of the preceding paragraph, it is alleged that Hall Chadwick owed to Murphy Investments a common law duty to exercise due care and skill in conducting the independent review, in preparing the independent review report and in conducting the systems review[46]. Breaches of this duty are alleged in paragraphs 45 and 51(c) of the third party statement of claim. The consequential loss alleged is the exposure of Murphy Investments to the action by Liquorland and ALG for damages and for the costs of defending that action[47]. It should be noted in this respect that the only claims made by the plaintiffs against Murphy Investments arise out of its contraventions of the insider trading provisions of the law. Relief of various kinds is sought as a consequence of these contraventions of which most[48], if not all, are not claims for damages.
(xi)In terms similar to that summarised in (ix) of the preceding paragraph, Murphy Investments seeks contribution pursuant to s. 23B of the Wrongs Act 1958[49].
[46]Murphy third party statement of claim para 42.
[47]Murphy third party statement of claim para 56.
[48]The possible exception is the claim made by Liquorland pursuant to s. 1005(1) and by ALG pursuant to s. 1013(5) in paragraph 4 of the plaintiffs’ statement of claim.
[49]Plaintiffs’ statement of claim paras 40, 42, 43, 44, and 44A.
The Hall Chadwick Strike Out Contentions
The applications of Hall Chadwick depended upon four contentions which I shall consider in turn.
Want of Causal Connection
This submission fastened upon the requirement that the directors’ claims against Hall Chadwick must arise only in the event that one or more of the claims of the plaintiffs against them are successful. What was advanced on behalf of Hall Chadwick was that all of the claims of the plaintiffs against the directors depended upon the plaintiffs establishing that the directors were aware of the true financial position of ALG at the time of the representations, false statements, and material omissions and, indeed, until the takeover offer became unconditional on 19 June 2001. It was put that, if these claims were made out against the directors, the finding of their state of mind would be fatal to their claims against Hall Chadwick, which claims are essentially a complaint that Hall Chadwick failed to disclose to the directors the true state of affairs. If, on the other hand, the plaintiffs failed to prove the knowledge of the directors then, the directors would avoid liability and consequent loss so that their claim over against Hall Chadwick would be futile.
Counsel for the defendants Anghie and Higgs in argument on 4 April 2003 did not press the submission that the plaintiffs’ claims, as pleaded, did not require proof of the knowledge of the defendants. In making this concession, counsel raised a practical difficulty which an application such as the present must address. If I were persuaded that, properly construed, the plaintiffs’ statement of claim required proof of this knowledge in order to establish each of their causes of action and struck out or dismissed the third party claims on that basis, what might be the situation if the plaintiffs at some future date amended their pleading to allege a culpable want of knowledge of the directors? The plaintiffs are not parties to this application and, accordingly, take no position which might prevent them from amending in the future. On the other hand, the permitting of such an amendment in the future may adversely and incurably affect the rights of the defendants against Hall Chadwick who, in the supposed situation, would be no longer party to the proceeding. Accepting, as I must, that this application must be dealt with on the basis of the case as presently pleaded, I nevertheless proceed with caution in order to minimise the risk of prejudice of this kind.
As things have already evolved, subsequent amendments to the plaintiffs’ third statement of claim upon which the argument was based and the concession made, have some bearing on the point presently under consideration. These amendments went beyond those necessary to add the EY parties as defendants. I mention by way of example the introduction of a new allegation of pre-takeover representations said to have been made by the defendants Anghie and Higgs on 13 April 2001[50] and 19 April 2001[51], and the reliance by the plaintiffs upon ss. 670A(2) and s. 765 with respect to future matters[52]. In each of these new pleas, the requirement of actual knowledge of the actors is not present. In these circumstances, I cannot be satisfied that the plaintiffs must inevitably fail against the directors if they are unable to prove actual knowledge on their part. Given that Hall Chadwick must remain a party to meet these allegations, I would be loath to strike out the other allegations against it.
[50]Plaintiffs’ fourth statement of claim para 9A.
[51]Plaintiffs’ fourth statement of claim para 11.
[52]See for example the plaintiffs’ fourth statement of claim paras 22, 34 and 37A.
I should add for completeness that I am not persuaded that the two further submissions advanced on behalf of the directors are without substance. The first was that the plaintiffs’ pleaded claim based on a contravention of the continuing disclosure provisions of s. 1001A(2) might succeed without proof of actual knowledge. The allegation is one of negligent non-disclosure of matters which the directors knew or ought to have known[53]. The second submission depended upon disconformities between the matters which the directors were said in the plaintiffs’ statement of claim to have known and not disclosed or misstated, and the matters which the directors allege in their third party statements of claim that Hall Chadwick failed to disclose to them and which would have led them to abort the takeover process.
[53]Plaintiffs’ fourth statement of claim para 30B.
I therefore reject the first contention of Hall Chadwick.
No Duty of Care
On behalf of Hall Chadwick, it was submitted that the third party statements of claim do not allege facts which give rise to the common law duties of care which are pleaded to be owing to the directors and to Murphy Investments. No attack was mounted with respect to the duties owed to ALG. I was told by counsel that the attack on the pleading was directed to the substance rather than to the form. It is convenient first to deal with the duties alleged against the directors.
The facts asserted as giving rise to these duties are pleaded in paragraphs 26 to 32 of the third party statements of claim[54] insofar as they concern the independent review statements. In essence these facts are the statutory obligation of the directors to prepare and lodge the Appendix 4B Report which must comply with applicable standards and which should be verified by them, and their statutory obligation of continuous disclosure to ASX. It is further alleged as a fact that the directors might be personally liable to third parties in the event of a breach of these requirements. It is then said that Hall Chadwick knew or should have known of these requirements. Then follows paragraph 32[55]:
[54]Pelly third party statement of claim paras 25-31.
[55]Pelly third party statement of claim para 31.
“32.Accordingly, it was reasonably foreseeable to Hall Chadwick that :
…
(b)[The directors] would reasonably rely on the independent review Statements in discharging their duties as directors of ALG, in particular in relation to the Appendix 4B Report and their general obligations of disclosure of ALG’s financial position;
(c)ALG and [the directors] could suffer loss and damage in acting in reliance on the independent review Statements if those statements were incorrect.”
I was referred to cases such as Esanda Finance Corporation Ltd v Peat Marwick Hungerfords[56] in support of the proposition that the liability for economic loss suffered by reason of misstatements is now confined within narrow limits. What those limits are may be a matter for full argument at trial in the light of the facts as they emerge. It was put on behalf of Hall Chadwick, and accepted by counsel for the directors, that reasonable foreseeability of the risk of harm to a third party is insufficient without more to impose liability upon an auditor in making a report to a client company. Nevertheless, it was put by counsel in support of the third party statements of claim that the directors in this case may well be in a special position given their statutory role in preparing and submitting the Appendix 4B Report. He submitted that the court would not strike out an allegation that Hall Chadwick owed a common law duty of care to ALG in providing information for such a report. It was, he contended, a small step to admit such a plea by those natural persons through whom ALG must and did act and who were by statute equally liable for erroneous statements in such a report. I will not reject such an argument as lacking sufficient prospect of success to warrant the striking out of the pleading.
[56](1997) 188 CLR 241.
The facts with respect to the conduct of the independent review and the preparation of the independent review report and the conduct of the systems review are set out in paragraphs 38 to 41 of the third party statements of claim[57].
[57]This pleading does not contain an equivalent of paragraph 40 of the other third party statements of claim.
In paragraph 38, it is said that, by statute, the directors might be personally liable in various circumstances for the acts of ALG while they were directors of that company. The statutory provisions referred to are the following:
(a)Section 79 and s. 670B(1) Item 11 and Fair Trading Act 1999 (Vic) s. 159. These impose accessorial liability upon a person involved in a contravention by another person, perhaps ALG in this case.
(b)670B(1) Item 7. Again, the director is here liable for the incorrect statements made by the company unless the director proves that he did not know the statement was misleading and deceptive or that there was an omission from the statement or that they placed reasonable reliance upon information obtained from another.
(c)Section 1002G(2), 1005(1). These provisions relate to the trading in shares by an insider. They do not attach to directors as such. They do not impose any liability upon the directors for the acts of ALG; liability is imposed for their own acts.
(d)Section 1013(5). This provision likewise forms part of the insider trading regime. As pleaded, it is said that this section permits ALG itself to recover from the insiders the profit which they made from their insider sale of ALG shares. It is difficult to see here a circumstance in which the insider, be they a director or not, is personally liable for any act of ALG.
Next it is said in paragraph 39 that, by virtue of s. 180 and the general law, the directors were obliged to be actively involved in the affairs of ALG. Section 180 is the provision which obliges directors to exercise their powers and discharge their duties with care and diligence.
In paragraph 40 the defendants Anghie, Higgs and Murphy, but not Pelly, allege that they were in fact actively involved in ALG’s affairs.
In paragraph 41[58] it is alleged that Hall Chadwick knew or ought to have known these things.
[58]Pelly third party statement of claim para 39.
This plea is significantly different from that with respect to the negligent independent review statements. What is put is simply that Hall Chadwick owed to the directors a duty of care in conducting the independent review and in preparing the independent review report. There is a similar duty alleged with respect to Hall Chadwick’s conduct of the systems review. The only allegation that Hall Chadwick foresaw or ought to have foreseen the risk of harm to the directors from its conduct is that contained in paragraph 41(a)[59]. The risk there identified is that of personal liability for the acts of ALG, not for their own acts. It is not said that these acts were or were likely to be affected by the negligent conduct of the independent review or the systems review.
[59]Pelly third party statement of claim para 39(a).
Nor is very much more light shed on this plea by an examination of the other parts of the pleading. These show that the independent review was commissioned on 29 January 2001 and that the work was done and the report delivered by 17 March 2001, well before the takeover was commenced. The allegations of breach with respect to the independent review are those of deficient methodology, presumably leading to errors in the content of the report[60]. In paragraph 46(e)[61], it is said that the criticisms of ALG’s accounts or accounting procedures were made by Hall Chadwick much later in their closing report delivered on 17 May and that these were based on work done by Hall Chadwick in the course of the independent review. The closing report was delivered after ALG had lodged its Target’s Statement but before the Liquorland takeover offer had become unconditional. Accordingly, it is said that the basis for these criticisms ought to have been disclosed to ALG and to its directors earlier than 19 June 2001 when the offer became unconditional.
[60]Third party statements of claim para 46(a)(b)(c)(d) and (f). Pelly third party statement of claim para 44(a)(b)(c)(d) and (f).
[61]Pelly third party statement of claim para 44(e).
The Systems Review led to the Hall Chadwick system review report delivered on 31 July 2001 which was critical of ALG’s accounting systems. The allegations of Hall Chadwick’s breach with respect to the conduct of this review is that the criticisms made in this report were not brought to the attention of ALG and its directors sooner and, in any event, before the takeover bid became unconditional[62]. No criticism is addressed to the content of this report.
[62]Third party statements of claim para 49. Pelly third party statement of claim para 47.
I return, in the light of this, to the facts said to give rise to the duties of care. I remind myself that the duties are said to be owed, not to ALG, but to the directors. I must confess that I have great difficulty in understanding how the pleaded facts give rise to the duties alleged, as a matter of logic or as a matter of law. I am mindful of the great uncertainty which presently besets the law of negligence in the case of economic loss. I am mindful too that I should act only where I am satisfied that the plea is futile in the sense discussed in the strike out cases. Nor have I overlooked the fact that the parties wish this application be dealt with on the substance rather than the form of the plea. Finally, I am mindful of the practical advice offered by Kirby P in Wickstead v Browne[63]. Even so, I can see no prospect that the facts alleged could support the duty. I will therefore strike out paragraphs 38 to 42 and those other parts of the pleading which depend upon them.
[63](1992) 30 NSWLR 1 at [5].
I turn finally, and briefly, to the allegations of the duty of care owed to Murphy Investments. In paragraphs 26 to 32 of the Murphy third party statement of claim are to be found the factual bases for the duty alleged in paragraph 33 with respect to the erroneous independent review statements. It is sufficient that I note that Murphy Investments’ interest is that of a shareholder only. There is nothing alleged other than the bald statement of foreseeability of loss or damage to Murphy Investments in paragraph 32(c). I will strike out the plea in paragraph 33 insofar as it concerns Murphy Investments.
The position with respect to the conduct of the independent review and the systems review and the preparation of the independent review report is no better than that for the directors. It is even worse, because none of the facts alleged in paragraphs 38 to 41 involve Murphy Investments. Paragraphs 38 to 42, insofar as they concern Murphy Investments and those paragraphs dependent upon these will be struck out.
Misleading and Deceptive Conduct Claims
These claims by the defendants against Hall Chadwick are said to arise under the Fair Trading Act 1989 (WA) s. 10. The points taken on behalf of Hall Chadwick are that the misleading and deceptive independent review statements were not provided in trade or commerce and, further that no reliance is or can reasonably be pleaded.
In Trade or Commerce
The first submission is based on a dictum of the High Court in Concrete Constructions (NSW) Pty Ltd v Nelson[64] to the effect that the conduct in question must itself bear a trading or commercial character; it is not sufficient that it has been engaged in or against a commercial or trading background. This dictum has been applied in circumstances closer to the present by von Doussa J in Chapman v Luminis Pty Ltd (No 5)[65]. In that case, his Honour dismissed a claim against a law professor for a misleading statement in a report notwithstanding that she was professionally engaged to prepare her report and was paid for it. His Honour did so on the basis that the professor was carrying out a statutory function and not one “which is itself an aspect or element of activities or transactions which bear a trading or commercial character”[66]. This result followed notwithstanding that the professor was herself engaged in commerce in providing the report and did so for reward.
[64](1990) 169 CLR 594.
[65][2001] FCA 1106.
[66][2001] FCA 1106 at [178].
Counsel for the defendants marshalled a number of cases which stood for or suggested that it was not correct to draw from the Concrete Construction’s case and those which have followed it a general proposition that the product of a professional retainer to provide advice or analysis or opinion is not itself subject to the prohibition against misleading and deceptive conduct. He contended further that the expanded definition of “trade or commerce” to be found in the Fair Trading Act (WA) provided a further reason for this conclusion.
It is not for me on a strike out application to resolve these interesting questions. It is sufficient that I conclude, as I do, that the plea is not hopeless on the first basis advanced.
Reliance
In paragraph 54 of the third party statements of claim[67] the directors allege reliance. They assert that, if Hall Chadwick had not engaged in misleading and deceptive conduct by making the independent review statements of 17 March 2001, then a number of acts and events would or would not have happened. These acts and events include the conduct of ALG and of the directors with respect to their statutory obligations and also that Liquorland would not have made its takeover offer of 14 May 2001. The unstated inference to be drawn from this is that the acts and events which did in fact happen or not happen were due to or done or not done in reliance on the accuracy of the statements in the report. To my mind, this reliance must be specifically pleaded. Authorities such as Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd[68] require this. It is particularly important in the present case where various contraventions are alleged by the plaintiffs against the directors at different times and at times when a volume of material relating to the accounts of ALG may well have been available to them. Moreover, it may be that different directors had different information at different times. The third party statements of claim must plead and the directors must prove that particular misleading and deceptive statements being contraventions of the Fair Trading Act were relied upon by them when they acted in a particular way to their detriment.
[67]Pelly third party statement of claim para 52.
[68](1987) 14 FCR 215 at 222, per French J.
It follows from this that paragraphs 52, 53 and 54(c)[69] cannot stand in their present form. I will strike them out.
[69]Pelly third party statement of claim paras 50, 51 and 52(c).
Contribution Claim
The directors and Murphy Investments in paragraphs 58 and 59 of the third party statements of claim[70] seek from Hall Chadwick contribution pursuant to s. 23B of the Wrongs Act 1958. This cause of action requires them to plead and prove:
(a)ALG suffered damage by the wrongful act of the directors and Murphy Investments; and
(b)ALG suffered damage by the wrongful act of Hall Chadwick; and
(c)The damage in each case was the same damage.
Two contentions were advanced on behalf of Hall Chadwick in support of a submission that this claim was hopeless and should therefore be struck out.
[70]Pelly third party statement of claim paras 56 and 57.
First, it was said that the claim of ALG[71] made pursuant to s. 1013(5) is not a claim in respect of damage suffered by it. The entitlement in the company to bring an action against an insider seller of the company’s shares is expressed to be in addition to an action under s. 1013(4) by a person who suffers loss by reason of the insider sales. The circumstances in which such an action may be brought by the company in a case such as the present is where the insider seller sells the shares for a sum in excess of the value of the shares had the inside information been generally available. The amount recoverable by the company is this excess.
[71]Plaintiffs’ statements of claim para 42.
It was submitted on behalf of Hall Chadwick that the company, ALG in this case, suffers no loss by the insider sale. The amount recoverable appears to be calculated by Parliament to represent an attempt to have the insider seller disgorge its improper profit rather than a compensatory device. I agree.
Counsel for the directors responded by drawing attention to the drafting of s. 1013(5). The company is permitted to sue for the excess “by action under section 1005”. This latter section is concerned with the recovery of losses by persons who suffer damage by the insider transaction. In this way, it was put, Parliament was imputing this damage to the company. I am not at all confident that in this way it is possible to deem a claim which is not concerned with damage to ALG, to be a claim in respect of damage to ALG. The question, however, is whether it is hopeless in the strike out sense.
The second contention is that the damage in each case is not the same damage. On the one hand, there is damage imputed to ALG by s. 1013(5); on the other is the damage in fact suffered by ALG by reason of the various breaches and contraventions by Hall Chadwick which are pleaded in the third party statements of claim. This actual damage is said in paragraph 57 of the third party statements[72] of claim to be that alleged in the particulars given under paragraph 42 of the plaintiffs’ statement of claim. These particulars merely repeat those given under paragraph 40 of the same pleading. Paragraph 40 asserts an entitlement in Liquorland to recover pursuant to s. 1005(1) and s. 1013(5). It may that this latter reference should be to s. 1013(4). The particulars of the amount sought appear to contain a calculation of the amount recoverable under s. 1013. Presumably, this represents also the actual loss said to have been suffered by Liquorland and to be recoverable under s. 1005(1). The amount claimed by the directors against Hall Chadwick is the same amount as that imputed to ALG and claimed against the insiders under s. 1013(5). The question therefore is whether, notwithstanding that the damages in each case are the same, the damage in each case is the same.
[72]Pelly third party statement of claim para 55.
I would prefer not to express a view on these matters since I am not satisfied that I should exercise my discretion to strike out this claim in any event. The parties must participate at trial and the factual issues raised by this cause of action are not likely to consume much extra time or expense. In my view the preferable course is to leave these matters for full argument in the light of the facts as they will emerge.
Conclusion
The following paragraphs of the third party statements of claim will be struck out with leave to the parties to replead if they be so advised.
(a)Anghie and Higgs third party statement of claim paragraphs 38-42 and those dependent upon these, and paragraphs 52, 53 and 54(c).
(b)Pelly third party statement of claim paragraphs 37-40 and those dependent upon these, and paragraphs 50, 51 and 52(c).
(c)Murphy third party statement of claim paragraphs 33, 38-42 and those dependent upon these, and paragraphs 52, 53 and 54(c).
I will hear counsel as to the precise orders to be made to give effect to these conclusions and as to costs.
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