Mills v Sheahan - [2007] SASC 365

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
MILLS & ORS v SHEAHAN
[2007] SASC 365
Judgment of The Full Court
(The Honourable Justice Debelle, The Honourable Justice Sulan and The Honourable Justice Layton)
16 October 2007
TORTS - NEGLIGENCE - ESSENTIALS OF ACTION FOR NEGLIGENCE - DUTY OF CARE
PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS
First and second plaintiffs directors of third plaintiff - third plaintiff appointed trustee of trust - assets of trustee company transferred to third plaintiff - trust deed contained provision by which trustee was indemnified out of the trust assets for liabilities incurred on behalf of the trust company - defendant appointed liquidator of trustee company - plaintiffs allege that defendant sold assets for less than their value - plaintiffs claim defendant owed a duty of care to avoid causing pure economic loss and that defendant acted in breach of that duty - whether liquidator or trustee in bankruptcy owes duty of care to persons liable to make up shortfall when exercising powers to realise assets of insolvent company or bankrupt - relevant principles - whether statement of claim disclosed no reasonable cause of action - whether judge erred in striking out statement of claim - appeal allowed.
Bankrupcy Act 1966 (Cth) s 19(1)(k), s 134(1)(a), s 134(4); Corporations Act 2001(Cth) s 9, s 180(1), s 180(2), s 180(3), s 181, s 420A, s 477(2)(c); Corporations Law s 232(1), s 232(2), s 232(4), referred to.
Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad" (1976) 136 CLR 529; Egan v Commonwealth Minister for Transport (1976) 14 SASR 445; Perre v Apand Pty Ltd (1998) 198 CLR 180; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515, applied.
Adsett v Berlouis (1992) 37 FCR 201; Buttle v Saunders [1950] 2 All ER 193; Gray v Bridgestone Australia Ltd (1986) 10 ACLR 677; Hill v Van Erp (1997) 188 CLR 159; Leon v York-O-Matic Ltd [1966] 1 WLR 1450; Mannigel v Aitken (1983) 77 FLR 406; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485; Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Williams v Frayne (1937) 58 CLR 710, discussed.
Alliance Acceptance Co Ltd v Graham (1974) 10 SASR 220; Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195; Bryan v Maloney (1995) 182 CLR 609; Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654; Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550; Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 491; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; ex parte Lloyd; re Peters (1882) 47 LT 64; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540; Halech v South Australia (2006) 93 SASR 427; Hughes v Holbrook [2002] FCA 920; Jaensch v Coffey (1984) 155 CLR 549; Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570; Re Alafaci (1976) 9 ALR 262; Re Brogden [1888] All ER 927; Re Driller (1972) 21 FLR 159; Re Hawkesford (1937) 10 ABC 26; Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102; Re Ladyman (1981) 38 ALR 631; Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; Re Teller Home Furnishers Pty Ltd (in liq) [1967] VR 313; Re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151; Re Wyvern Developments Ltd [1974] 2 All ER 535; Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (2005) 239 LSJS 105; Sutherland Shire Council v Heyman (1985) 157 CLR 424; Sullivan v Moody (2001) 207 CLR 562; Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd (1996) 65 FCR 234; Tame v New South Wales (2002) 211 CLR 317; Ultramares Corporation v Touche (1931) 225 NY 170; Wakim v HIH Casualty and General Insurance Ltd (2001) 111 FCR 58; William Charlick Ltd v Smith [1922] SASR 364, considered.

MILLS & ORS v SHEAHAN
[2007] SASC 365
Full Court: Debelle, Sulan and Layton JJ

DEBELLE J. This is an application for leave to appeal from an order striking out the plaintiffs’ statement of claim.
The detailed facts are recited in the reasons of Sulan J. Those facts can be reduced to the following. Rothmore Farms Pty Ltd (“RFPL”) was trustee of the Jillian Cooper Trust (“the trust”). The trust conducted a farming operation. The trust deed contained a provision by which the trustee was entitled to be indemnified out of the trust assets for liabilities incurred on behalf of the trust. RFPL had borrowed money from the Commonwealth Bank of Australia and from the Commonwealth Development Bank (“the Banks”). RFPL could not service its loans. In order to put the assets of the trust beyond the reach of the Banks, the assets of the trust were transferred from RFPL to Belgravia Pty Ltd (“Belgravia”) on 10 February 1993. Belgravia was appointed trustee of the Jillian Cooper Trust in place of RFPL.
Belgravia is one of the plaintiffs. The other two plaintiffs were at all material times directors of Belgravia. Upon the transfer of the assets of the trust to Belgravia, those assets were subject to a lien in favour of RFPL. The reasons for that conclusion are set out later.
On 14 September 1998 RFPL was placed in provisional liquidation and the defendant John Sheahan (“Sheahan”) was appointed provisional liquidator. On 26 March 1999, orders were made to wind up RFPL and Sheahan was appointed liquidator. On 4 June 1999, an order was made in the Federal Court of Australia declaring that RFPL was entitled to be indemnified out of the assets of the Jillian Cooper Trust to the extent of its indebtedness to the Banks. On 10 September 1999, Sheahan as liquidator of RFPL, sold its plant and equipment to Mr W J Fountain for $620,000. The plaintiffs allege that the plant and equipment was sold for an amount substantially less than market value.
The farming operations of the trust were conducted on land owned by members of the Cooper family and a company called Rothmore Pty Ltd. Three members of the Cooper family acted as guarantors of the loans by the Banks to RFPL. After RFPL had defaulted on the loan, the Banks enforced the guarantees. This led to sequestration orders being made against three members of the Cooper family. Sheahan was appointed trustee in bankruptcy of the estate of each. As trustee in bankruptcy, Sheahan obtained orders enabling partition and sale of the land. The land was sold in two parts. Mr W J Fountain purchased one part. The plaintiffs allege that the land was sold for substantially less than market value.
The plaintiffs allege that Sheahan owed them a duty of care in tort to take reasonable care to sell the land and the plant and equipment for their true value. They allege that, at all times, Sheahan knew that the amount recovered from the sale of the assets would affect the amount of the indemnity and so affect the equitable compensation sought against the plaintiffs.
The damages which the plaintiffs seek to recover are damages in negligence for economic loss. They will not be able to recover unless they establish at least that the risk of loss or damage to them was reasonably foreseeable. For purposes of this application, Sheahan has conceded that it was foreseeable that there was a risk of loss or damage to the plaintiffs if the assets were sold at less than their true value. Sheahan, however, denies that he was subject to a duty of care to the plaintiffs. Sheahan applied for an order striking out the plaintiffs’ statement of claim on the ground that it disclosed no reasonable cause of action. Besanko J upheld that application and struck out the plaintiffs’ claim. The plaintiff has applied for leave to appeal against the orders of Besanko J. The application for leave to appeal was considered initially by a Full Court which by order dated 20 July 2006 referred the application to another Full Court for full argument as on the hearing of an appeal.
The Power to Strike Out a Claim
Before examining the question whether Sheahan is subject to a duty of care to the plaintiffs, it is relevant to note the circumstances in which the court will exercise its power to strike out a statement of claim on the ground that it discloses no reasonable cause of action. That power is not to be exercised except in a plain and obvious case: William Charlick Ltd v Smith [1922] SASR 364 at 367. It will not be exercised unless “the case of the plaintiff is so clearly untenable that it cannot possibly succeed”: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130 per Barwick CJ; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 271 per McHugh J, at 293 per Gummow J. It is a power to be sparingly exercised: General Steel at 129; Esanda Finance Corporation Ltd v Peat Marwick Hungerfords at 271. The question whether a duty of care exists is to be determined on the facts as pleaded in the plaintiffs’ statement of claim.
A Liquidator’s Duty of Care
When determining whether Sheahan owes a duty of care to the plaintiffs, it is necessary to decide, among other things, whether such a duty is consistent with the duties which must be exercised respectively by a liquidator or a trustee in bankruptcy. It is convenient first to note briefly the relevant aspects of those duties.
A liquidator has a common law duty to exercise a high standard of care and diligence in the performance of his duties and a liquidator who acts wrongly will be liable for the loss incurred: Re Windsor Steam Coal Co (1901)Ltd [1929] 1 Ch 151 at 165; Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102 at 125. It is a duty commensurate with the fact that the liquidator is a professional person who is being well paid for his services: Re Windsor Steam Coal Co (supra).
A liquidator is also subject to a statutory duty to exercise reasonable care. A liquidator is defined by s 9 of the Corporations Act to be an officer of a corporation. Section 180(1) imposes the following duty on an officer of a corporation:
Care and diligence – directors and other officers A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances: and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
That duty is subject to the business judgment rule described in s 180(2) and (3). The duty prescribed by s 180(1) can fairly be summarised as a duty to act with reasonable care and diligence. It is similar to the duty of care owed by other professional persons providing services for reward: Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd (1996) 65 FCR 234 at 244. When Sheahan was appointed provisional liquidator in 1998 and liquidator in 1999, the relevant legislation was the Corporations Law. The statutory duty to exercise reasonable care and diligence was expressed in the same terms in s 232(4) of the Corporations Law. Section 232(1) of the Law defined an officer of a corporation to include a liquidator. A duty to act honestly was provided in s 232(2). The existence of this duty of care on the part of the liquidator is consistent with the existence of the duty of care on the receiver or controller of a corporation provided in s 420A of the Corporations Act.
A liquidator must act with knowledge and skill commensurate with the power and responsibilities that a liquidator is required to perform: Gray v Bridgestone Australia Ltd (1986) 10 ACLR 677 at 679 where Cox J said, speaking of the standard of care required of a liquidator:
His knowledge and skill must be commensurate with the powers and responsibilities that a liquidator is required to perform. In exercising any judgment or discretion he must act reasonably. What is reasonable will depend upon the circumstances.
Those views are entirely consistent with the views expressed in Re Windsor Steam and Re Home and Colonial Insurance. To like effect are the remarks of Lindgren J in Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485 at 499:
In my view, a liquidator must exhibit care (including diligence) and skill to an extent that is reasonable in all the circumstances. “All the circumstances” will include the facts that a liquidator is a person practising a profession, that a liquidator holds himself or herself out as having special qualifications, training and experience pertinent to the liquidator’s role and function, and that a liquidator is paid for liquidation work. “All the circumstances” will also include the fact that some decisions and courses of action which a liquidator is called upon to consider will be of a business or commercial character, as to which competent liquidators acting with due care, but always without the benefit of hindsight, may have differences in opinion.
When considering whether the liquidator has acted in breach of the duty to act with reasonable care and diligence, it must also be noted that a liquidator is able to obtain the advice of solicitors and counsel or to apply to the court for directions when in doubt or difficulty: Re Home and Colonial Insurance (supra).
One of the duties of a liquidator is to liquidate the assets of the company being wound up so that the proceeds can be applied to discharge the liabilities to creditors with any surplus being distributed to shareholders. As is noted in Macpherson’s Law of Company Liquidation at 8.2100, that is “the whole object of winding up”. The power to sell property of the corporation is provided in s 477(2)(c) of the Act. There is no reason in principle why the liquidator should not be subject to the duty of care and the duty to act in good faith imposed by s 180 and s 181 of the Corporations Act when selling assets of the company.
In Leon v York-O-Matic Ltd [1966] 1 WLR 1450 it was held that the liquidator has a wide discretion when selling assets and will be liable only if the liquidator has not acted as a reasonable liquidator would act. In that case, the court was asked to intervene in respect of a contract of sale entered into by a liquidator in a winding up. Plowman J said:
[H]ere, as I have said, there is no question of fraud, and, having considered all the evidence, which is fairly voluminous and lengthy, I am not satisfied that the liquidator here did not exercise his discretion bona fide; nor am I satisfied that he acted in a way in which no reasonable liquidator could have acted.
That approach was approved and applied by Gowans J in Re Teller Home Furnishers Pty Ltd (in liq) [1967] VR 313 at 318. In Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 at 231 Street CJ in Eq said those two decisions placed a heavy burden on an applicant challenging a decision of a liquidator but qualified the test. He said:
I would have some reservations as to the universality of a test expressed in these terms, particularly in circumstances such as those with which the court was concerned in Hall v Forrest. It is, of course, clear enough that the court does not simply sit on appeal from decisions of a liquidator. A party challenging a decision may well bear an onus varying in inverse proportion to the importance of the decision sought to be called in question. But whether the decision be important, or trifling, the course of the winding up machinery imposes upon the liquidator the responsibility for making it, and he is recognized as having both the qualifications and the access to the multiplicity of information which may be necessary in order to make the commercial decisions in the winding up. I note the slight divergence between Jessel M.R.’s words that the court will not interfere unless the trustee acts in a manner in which “no reasonable man would so act,” and Plowman J’s words that he was not satisfied that the liquidator had acted in a way in which “no reasonable liquidator could have acted.” At the risk of descending to semantics, my own inclination would be to prefer the word “should” to either “would” or “could” in those phrases.
Ultimately every challenge must probably come back to some more broadly-stated question, such as whether the liquidator’s action has such importance, and can be seen to have such defects, as to justify the court exercising its supervisory power.
It is an interesting question whether the principles expressed by Street CJ continue to operate unqualified by the fact that, since that decision, the Corporations Act has imposed upon liquidators the statutory duty to exercise a reasonable care and diligence as is now expressed in s 180 of the Corporations Act. Consideration will have to be given to the question whether the business judgment rule provided by s 180(2) and (3) is an alternative means of expressing that principle. It is unnecessary to determine that question on this application. It is sufficient to note that the liquidator is subject to a duty to exercise reasonable care and diligence and that the comments in Leon v York-O-Matic go more to the standard of care than the question whether a duty of care exists.
The duty to exercise reasonable care and diligence is owed to the creditors and shareholders of a corporation. The question on this application is whether a liquidator also owes a duty of care to third parties in the position of the plaintiffs. That question is to be determined by consideration of the principles by which it is decided whether a party is liable for economic loss it has caused. Before dealing with that question, I consider the duty of a trustee in bankruptcy.
The Duty of Care of Trustee in Bankruptcy
A trustee in bankruptcy is subject to the duties which govern trustees generally except to the extent that those duties have been modified by the Bankruptcy Act 1966 or other legislation: Re Ladyman (1981) 38 ALR 631 at 643; Adsett v Berlouis (1992) 37 FCR 201 at 209. A trustee in bankruptcy has the same liabilities as an ordinary trustee under the general law. He must act diligently and prudently in regard to the business of the trust, exercising the same diligence and prudence as an ordinary prudent man of business would exercise in conducting his own affairs: Re Alafaci (1976) 9 ALR 262 at 284.
The standard of care expected of trustees in the exercise of their duties was examined by Smithers J in Mannigel v Aitken (1983) 77 FLR 406 at 408 to 409:
In the case of bankruptcy the Trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors and if there be any surplus for the benefit of the bankrupt. It is clear that the minimum standard required of the Trustee is that he shall handle the assets with a view to achieving the maximum return from the assets to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt. Obviously a great deal of discretion and judgment is required to be exercised by the Trustee. It was said by Rogerson J in Re Ladyman (1981) 55 FLR 383 at 394-396 that the standard of conduct required of the Trustee will ordinarily be the standard required of a professional man and perhaps higher. The learned judge referred to “the high standard of conduct required of trustees”.
In Re Brogden [1888] All ER 927 Lord Justice Fry said at p 935:
“A Trustee undoubtedly has a discretion as to the mode and manner, and very often as to the time in which or at which, he shall carry his duty into effect. But his discretion is never an absolute one. It is always limited by – the dominant duty – the guiding duty of recovering, securing and duly applying the trust fund; and no Trustee can claim any right of discretion which does not agree with that paramount obligation.”
Where an order is sought that the Trustee be removed and to make good the losses suffered by the estate, it must be established that the Trustee has been guilty of a breach of duty to act “diligently and prudently in regard to the business of the Trust”. See Riley J in Re Alafaci (supra) at 285.
According to Halsbury’s Laws of England (3^rd ed) Vol 38, p 967, a trustee must take all reasonable and proper measures to obtain possession of the trust property and to get in all debts and funds due to the trust estate, and to preserve it, and to secure it from loss. He must take reasonable precautions to see the property is not stolen or lost by default. The Trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs. But beyond this he is not bound to adopt further precautions. It was said by their Honours Dixon CJ, McTiernan and Windeyer JJ in Elder’s Trustee and Executor Co Ltd v Higgins (1963) 113 CLR 426 that:
“We are not to judge what the Trustee then did or failed to do by the light of later events … The duty of the Trustee was to exercise due diligence, care and prudence in the conduct of the business, bearing in mind the need to preserve the capital of the Testator’s estate … The argument that the Trustee having, it was said, exercised a discretion, its conduct is now unchallengeable is sufficiently answered by a passage from the judgment of Fry LJ in Re Brogden (supra) … Whether or not one calls [the trustee’s action] an exercise of discretion, the question remains was it the act of a prudent Trustee.”
It is not the role of the court to decide whether the path chosen by the Trustee led to the realisation of the greatest value for the assets of the estate. The court is in a different position from that of the Trustee. The court can examine the facts with hindsight and with the benefit of the evidence on oath of the relevant debtors and creditors and witnesses called in their support. The Trustee is required to act diligently and prudently in the exercise of his discretion in deciding matters as they arise in the course of administration of the estate. He may be constrained to act by reference to the knowledge which he has of the circumstances balancing the benefit of further inquiry against further delay and the further expense to the estate, to the creditors and possibly to the debtor if there is a surplus in the estate.
Mannigel v Aitken has been approved by the Full Court of the Federal Court in Adsett v Berlouis at 208 and in Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 560. It was applied by Einfeld J in Wakim v HIH Casualty and General Insurance Ltd (2001) 111 FCR 58 at [53] and by R.D. Nicolson J in Hughes v Holbrook [2002] FCA 920 at [16]. In the exercise of his powers a trustee will have to exercise a great deal of discretion and judgment but, as Smithers J noted above applying Re Brogden [1888] All ER 927, that discretion is subject to the dominant duty of recovering, securing and duly applying the trust fund. If a trustee is in doubt or difficulty, he can apply to the court for directions: s 134(4) of the Bankruptcy Act and Re Driller (1972) 21 FLR 159.

The trustee in bankruptcy has power to realise the assets of the bankrupt: s 134(1)(a) of the Bankruptcy Act. The exercise of that power is subject to a duty to obtain the best possible price: Buttle v Saunders [1950] 2 All ER 193 at 195 where Wynn-Parry J said:
It is true that persons who are not in the position of trustees are entitled, if they so desire, to accept a lesser price than that which they might obtain on the sale of property, and not infrequently a vendor, who has gone some lengths in negotiating with a prospective purchaser, decides to close the deal with that purchaser, notwithstanding that he is presented with a higher offer. It redounds to the credit of a man who acts like that in such circumstances. Trustees, however, are not vested with such complete freedom. They have an overriding duty to obtain the best price which they can for their beneficiaries. It would, however, be an unfortunate simplification of the problem if one were to take the view that the mere production of an increased offer at any stage, however late in the negotiations, should throw on the trustees a duty to accept the higher offer and resile from the existing offer. For myself, I think that trustees have such a discretion in the matter as will allow them to act with proper prudence. I can see no reason why trustees should not pray in aid the common-sense rule underlying the old proverb: “A bird in the hand is worth two in the bush.” I can imagine cases where trustees could properly refuse a higher offer and proceed with a lower offer. Each case must, of necessity, depend on its own facts.
That decision was followed and applied in Re Wyvern Developments Ltd [1974] 2 All ER 535. The trustee is bound also to perform his functions in a commercially sound way: s 19(1)(k) of the Bankruptcy Act.
In Re Hawkesford (1937) 10 ABC 26, it was held that a trustee in bankruptcy selling a bankrupt’s land is bound to act in a manner similar to that of a mortgagee. The fact that a trustee in bankruptcy is a trustee may mean that the duty is more onerous than was there stated: cf Mason J in Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 491 at 503 to 504.
In ex parte Lloyd; re Peters (1882) 47 LT 64 at 65, Jessel MR, speaking for the Court of Appeal, said that the court would not interfere with a decision of the trustee in bankruptcy in relation to a sale of property of the bankrupt “unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.” Those remarks must be understood against the background of the particular facts of that case in which a creditor sought to challenge the decision of the trustee in bankruptcy not to sell a reversionary interest of the bankrupt. In addition, those views were expressed when the bankruptcy legislation was expressed in different terms. I do not believe, therefore, that the remarks of Jessel MR qualify the general duty of the trustee in bankruptcy nor the obligations to obtain the best possible price. If they do, his views have been qualified by later authority and, in particular, by Buttle v Saunders. The comments apply more to the standard of care than to the question whether a duty exists.
A Duty of Care to these Plaintiffs?
The question for this Court is whether, when exercising the powers to realise the assets of an insolvent company or bankrupt, a liquidator or trustee in bankruptcy owes a duty of care, not only to creditors and shareholders in the case of an insolvent company or creditors and the bankrupt in the case of personal bankruptcy, but also to third persons who are liable to the liquidator or trustee to make up any shortfall. Those persons might be guarantors or persons who have provided an indemnity such as RFPL. That question must be determined by reference to the principles by which it is determined whether a duty of care exists for economic loss suffered by a plaintiff.
Sheahan has conceded that, for the purpose of this application, the risk of loss or damage to the plaintiffs was foreseeable. However, in an action seeking to recover damages for economic loss, it is necessary for a plaintiff to establish more than that the negligence of the defendant was a cause of the plaintiff’s loss and that the loss was reasonably foreseeable: Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at [21].
In Woolcock Street at [22] to [24] Gleeson CJ, Gummow, Hayne and Heydon JJ identified some of the factors relevant to the determination of the question whether damages for economic loss were recoverable. They included vulnerability and knowledge of the risk and its magnitude. In that same case, at [74] McHugh J applied five principles that he had identified in Perre v Apand Pty Ltd (1998) 198 CLR 180 that were “relevant in determining whether a duty of care exists in all cases of liability for pure economic loss”. They were principles concerned with reasonable foreseeability of loss, indeterminacy of liability, autonomy of the individual, vulnerability to risk, and knowledge of the risk and its magnitude. Other policies and principles may guide and even determine the outcome of the case but the principles concerning those five categories must always be considered: Perre v Apand (op cit); Woolcock Street at [75] per McHugh J. I propose, therefore, to consider the question whether a duty of care exists against the categories identified by McHugh J as that will include all of the categories identified by the majority in Woolcock Street.
It is unnecessary to consider reasonable foreseeability of loss as that has been conceded by Sheahan.
Knowledge of the Risk and its Magnitude
In Woolcock Street at [87] McHugh J referred to the fact that the case for imposing a duty of care is strengthened if the defendant knew of the risk and its magnitude. He said:
The case for imposing a duty is always strengthened if the defendant actually knew of the risk. It is strengthened further if the defendant knew the magnitude of the risk. The significance of the defendant’s knowledge of the risk and its magnitude will depend on the facts of each case.
In the present case, it has been pleaded that Sheahan knew of the risk and its magnitude. He was aware that the price for which he sold the assets directly affected the liability of the plaintiffs to indemnify.
Vulnerability
The vulnerability of the plaintiff is an important requirement: Perre v Apand; Woolcock Street at [23]. In Woolcock Street at [80], McHugh J described it as a critical issue. In this context, vulnerability means more than that the plaintiff is likely to suffer damage if reasonable care is not taken. It is to be understood as a reference to the plaintiff’s inability to protect himself from the consequences of the defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of the loss on the defendant: Woolcock Street at [23]. In this case the plaintiffs were vulnerable in the sense defined in Woolcock Street because RFPL was by reason of its lien able to look to Belgravia for an indemnity in respect of the liabilities incurred in conducting the farming operations. The amount of that indemnity was directly affected by the amount recovered from the sale of the land and the plant and equipment. The plaintiffs were not able to protect themselves from the economic consequences of the sale by Sheahan of those assets. Their liability to indemnify was entirely dependant upon what Sheahan obtained for those assets. They were vulnerable in the sense that they had no ability to ensure that Sheahan would take care to secure the best price reasonably obtainable in all the circumstances.
Proximity
The doctrine of proximity no longer governs the law of negligence in this country. It provides limited guidance but it is no longer the formula by which to determine whether a duty of care exists: Sullivan v Moody (2001) 207 CLR 562 at [48]; Woolcock Street at [18] and the cases there noted in footnote [80]. Nevertheless, it is necessary to determine whether there is a sufficiently close relationship to give rise to a duty of care for breach of which a pure economic loss might be recovered: Woolcock Street at [22]. In Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529, Stephen J identified what he called “salient features” which combined to constitute a sufficiently close relationship to give rise to a duty of care owed to Caltex for which it might recover its purely economic loss. Chief among those was the defendant’s knowledge that the property damaged, a set of pipelines, was of the kind inherently likely, when damaged, to cause economic loss: Caltex Oil at 576; Woolcock Street at [22]. Effectively, that is knowledge of the risk and its magnitude. Another salient feature was the defendant’s knowledge or means of knowledge of certain charts which led to the obvious inference that the pipeline was used to carry refined products from its refinery in the plaintiff’s terminal. Stephen J held that these and other factors clearly demonstrated a sufficiently close relationship to entitle the plaintiff to recover its reasonably foreseeable economic loss.
Apart from the fact that Sheahan has, for the purposes of this application, admitted that the loss was reasonably foreseeable, there was a real proximity between Sheahan and the plaintiffs since Sheahan knew that the amount recovered from the sale of the assets would directly affect the amount payable by the plaintiffs. To the extent that proximity is relevant, there was a sufficient proximity or a sufficiently close relationship to entitle the plaintiffs to recover their reasonably foreseeable economic loss, that is to say, to establish a duty of care to ensure that the defendant did not cause economic loss to the plaintiff.
Indeterminacy of Liability
A factor which may militate against imposing a duty to take reasonable care to protect another from economic loss is that the law is concerned to avoid what Chief Judge Cardozo called the imposition of liability “in an indeterminate amount for an indeterminate time to an indeterminate class”: Ultramares Corporation v Touche (1931) 225 NY 170 at 179. That concern has been reiterated in decisions of the High Court: see, for example, Bryan v Maloney (1995) 182 CLR 609 at 618 and 632, Perre v Apand at [32], [106]-[107], [243] and [329], Woolcock Street at [21] and [77]. Indeterminacy of liability is a factor that will ordinarily defeat a claim that the defendant owed a duty of care to persons such as the plaintiff: Woolcock Street at [77] per McHugh J. Concern about indeterminacy most frequently arises when the defendant could not determine how many claims might be brought against it or what the general nature of the claims might be: Perre v Apand at [106] per McHugh who added at [107]:
However, it is not the size or number of claims that is decisive in determining whether potential liability is so indeterminate that no duty of care is owed. Liability is indeterminate only when it cannot be realistically calculated. If both the likely number of claims and the nature of them can be reasonably calculated, it cannot be said that imposing a duty on the defendant will render that person liable “in an indeterminate amount for an indeterminate time to an indeterminate class”.
In the present case there is no prospect of an indeterminate liability. The liability is confined to the plaintiffs as the persons liable to indemnify RFPL. It is to be contrasted with the wider liability which a liquidator has in any event to creditors and shareholders of a company, especially in the case of a large publicly listed corporation. The potential liability is limited to the amount of the shortfall to the three plaintiffs in circumstances where Sheahan was fully aware of their liability to indemnify.
Individual Autonomy
In a competitive world where one person’s economic gain is commonly another’s loss, a duty to take reasonable care to avoid causing mere economic loss to another, as distinct from physical injury to another’s personal property, may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage: Bryan v Maloney at 618 affirming Jaensch v Coffey (1984) 155 CLR 549; Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 503. McHugh J has described this as individual autonomy: Hill v Van Erp (1997) 188 CLR 159 at 211; Perre v Apand at 114-117; Woolcock Street at [78] where he said:
[78]In Hill v Van Erp, I pointed out that “Anglo-Australian law has never accepted the proposition that a person owes a duty of care to another person merely because the first person knows that his or her careless act may cause economic loss to the latter person”. Speaking generally, a person owes no duty to prevent economic loss to another person even though the first person intends to cause economic loss to that other person. This particular immunity from liability reflects the common law’s concern with the autonomy of the individual and its desire to give effect to the choices of the individual by not burdening his or her freedom of action. Thus, as long as a person is legitimately protecting or pursuing his or her commercial interests, the common law does not require that person to be concerned with the effect of his or her conduct on the economic interests of other persons.
[79]Questions concerning the autonomy of individuals do not seem relevant in the context of claims for damages for pure economic loss arising out of the defective design or construction of a building. Those involved in the building are already under a duty to the first owner to avoid physical injury to the owner’s person and property. Consequently, imposing a duty to avoid economic loss to the first or a subsequent owner is not inconsistent with the pursuit of the legitimate interests of those who design or construct the building.
The question of individual autonomy is not relevant in this case because a liquidator or a trustee in bankruptcy, when exercising the power to realise assets, is subject in each case to a duty to creditors to exercise reasonable care and diligence. The liquidator or trustee in bankruptcy has clear obligations when realising assets and those obligations are not inconsistent with a duty to a person liable to indemnify. This is an instance where there is a coincidence of the interests of creditors and the interests of the person liable to indemnify: Hill v Van Erp at 167 per Brennan CJ and at 187 per Dawson J. Expressed another way, the duties are entirely compatible.
Inconsistent Duties
Another relevant factor is whether the imposition of a duty of care would be compatible with other duties which the defendant owed: Sullivan v Moody at [55]. As already noted, the duty to take care to secure a fair price is entirely consistent with the duties of a liquidator and of a trustee in bankruptcy when realising assets. The duties are entirely compatible. The duty which the plaintiffs seek to enforce is a duty to secure the best price reasonably obtainable in the circumstances for the assets which have been sold. If the liquidator or trustee in bankruptcy has discharged that duty, there is no impairment to the rights of creditors.
A related issue to the last is whether to impose the duty for which the plaintiffs contend would be inconsistent with existing principles of law or equity or with the scheme of the Corporations Act or Bankruptcy Act: Sullivan v Moody at [30]; Tame v New South Wales (2002) 211 CLR 317 at [28]; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 at [78]. For the reasons just expressed, it is not inconsistent with the duties owed by a liquidator to creditors and shareholders or by a trustee in bankruptcy to creditors and the bankrupt. There is a coincidence of the interests of the creditors and of the interests of the person liable to indemnify: Hill v Van Erp (supra). It does not cut across any aspect of the scheme of either the Corporations Act or the Bankruptcy Act. Expressed another way, the duties are entirely compatible.
The conclusion that a duty of care to the plaintiffs exists is consistent with the principle that a subsequent mortgagee can set aside a sale by mortgagee where there has been a failure to enter into a truly independent bargain or to obtain a higher price known to be available: Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 227 to 228; Alliance Acceptance Co Ltd v Graham (1974) 10 SASR 220. It is consistent also with the principle that, if a creditor sacrifices or impairs a security or by his neglect or default has allowed it to be lost or diminished, the surety is entitled in equity to be credited with a deficiency in reduction of his liability: Williams v Frayne (1937) 58 CLR 710 at 738 and see the cases collected in Rowlatt on Principal and Surety (4^th ed) chapter 9; see also Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 675 per Brennan J. It is consistent also with the principle that a controller appointed under s 420A of the Corporations Act has an equitable duty to a guarantor to act in good faith when exercising a power of sale of property: Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570.
A Duty of Care Exists
For these reasons, Sheahan owed a duty of care to the plaintiffs.
Besanko J gave the following reasons for denying of duty of care:
I do not think that this is a case of known reliance or dependence in the relevant sense. Nor is it a case where the defendant has chosen to assume responsibility for the protection or safeguarding of the plaintiffs’ interests. Nor is it a case in which the plaintiffs were vulnerable in terms of the defendant’s acts or omissions. In a general sense, they were vulnerable because the defendant’s acts or omissions might in the circumstances affect the amount recovered from them. However, I do not think that that is vulnerability in the relevant sense, because the main and direct cause of the position they found themselves in was their own wrongdoing in relation to RFPL.
The expression “in the relevant sense” in the first sentence appears to be a reference to the negligent misstatement cases where the plaintiff alleged that the defendant knew that the plaintiff would rely on the accuracy of the information provided. That is, I think, an irrelevant circumstance in this case. Sheahan knew that the amount which the plaintiffs were liable to pay on the indemnity depended on the price secured respectively for the farm, plant and equipment and for the land. The question whether that was an assumption of responsibility does not of itself determine the question whether a duty of care exists. If responsibility was assumed, plainly a duty of care exists. If it was not, the question whether a duty of care exists is determined by other factors.
I respectfully disagree with the finding that the plaintiffs were not vulnerable. Plainly they were vulnerable in a financial sense. The conclusion that the plaintiffs were vulnerable because of their own wrongdoing is grounded on the fact that it had been held in earlier proceedings the plaintiffs had committed a breach of fiduciary duty in transferring the assets of the Jillian Cooper Trust from RFPL to Belgravia. That is not a reason for concluding that the plaintiffs were not vulnerable to the actions of Sheahan in selling the land and the farm, plant and equipment.
As a trading trust, RFPL was liable for any debts incurred in the course of its business: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. The trust deed entitled RFPL to be indemnified out of the trust assets. Apart from that entitlement to indemnity, RFPL was entitled to be indemnified against those liabilities from the trust assets and for the purpose of enforcing the indemnity RFPL possessed a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire. The charge operated in respect of all of the assets of the trust and ranked over any interest in those assets held by the beneficiaries of the trust: Vacuum Oil Co Pty Ltd v Wiltshire. The principles in Vacuum Oil Co Pty Ltd v Wiltshire were affirmed in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367. To this extent, the trustee has an equitable lien over the trust property: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 109 per King CJ. As Perry J remarked in Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (2005) 239 LSJS 105 at [76]:
It follows that when Belgravia acquired legal ownership of the Trust assets, it did so subject to the equitable lien or charge over those assets in favour of Rothmore Farms to the extent of Rothmore Farms’ indebtedness to the banks.
In that quotation “Rothmore Farms” means RFPL. It follows that at all material times the assets owned by Belgravia were subject to that lien or charge. The amount to be enforced against Belgravia on the lien which RFPL held was directly affected by the amount recovered on the sale of the land and of the plant and equipment. In other words, by reason of the lien Belgravia was liable to make up the shortfall. That was the lien that Sheahan intended to enforce and did enforce in Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (supra). Expressed another way, Sheahan had a duty of care to RFPL to take reasonable care to sell for the best price reasonably obtainable in all the circumstances. As RFPL had a lien or charge over the assets held by Belgravia, that duty extended also to Belgravia. It would be wholly unrealistic if Sheahan had a duty of care to RFPL but not to Belgravia in the circumstances. When selling the land and plant and equipment, Sheahan would have been aware that RFPL had recourse to the trust assets and as those assets had been transferred to Belgravia he could, as liquidator of RFPL, enforce that indemnity against Belgravia. As the plaintiffs have pleaded in paragraphs 32.3 and 32.4 in their statement of claim, Sheahan knew that the proceeds of sale of the land and of the plant and equipment would affect the amount of the indemnity and would affect the amount of equitable compensation or damages recovered from the plaintiffs.

In short, Sheahan had complete control over the assets. When selling the land, for example, he was in a position to obtain the best price reasonably obtainable. A duty of care to the plaintiffs was entirely compatible with the duty of Sheahan either as liquidator or as trustee in bankruptcy. For the reasons already expressed there was a close relationship between Sheahan and the plaintiffs. He was aware of the effect upon their potential liability of a failure to take reasonable care to sell the farm, plant and equipment and the land for the best price reasonably obtainable in all the circumstances. It follows that he owed a duty of care to the plaintiffs to ensure that he sold the farm, plant and equipment and the land for the best price reasonable obtainable in all the circumstances.
Sheahan seeks to avoid any liability by contending that he could have had recourse to the plaintiffs directly instead of selling the land and the farm equipment. The contention must be dismissed given that he elected to pursue a remedy which had a direct financial effect upon the plaintiffs. Having elected to sell the land and farm equipment, he was under a duty to sell them for the best price reasonably obtainable in all the circumstances.
For these reasons, I would allow the application for leave to appeal and the appeal. I would set aside the orders of Besanko J and in lieu thereof dismiss the application of Sheahan to strike out the statement of claim.
SULAN J: This application for leave to appeal arises from a decision of a Judge, in which several of the plaintiffs’ causes of action were struck out on the basis that they were not arguable in law. The application before this Court was heard, and is to be determined, as if it were an appeal. I shall refer to the appellants as the plaintiffs and the respondent as the defendant.
Robert Mills (“Mills”) and Noelene Cooper (“Cooper”), the first and second plaintiffs respectively, were the directors and members of the third plaintiff, Belgravia Pty Limited (“Belgravia”).
The defendant, John Sheahan (“Sheahan”), was the liquidator of two companies, and was also the trustee in bankruptcy for three individuals. Through a complex series of transactions, the plaintiffs became associated with the companies of which the defendant was liquidator.
The plaintiffs, for reasons I will explain later, became liable as a consequence of a judgment entered in the Federal Court for losses suffered by the companies of which the defendant was liquidator. However, the amount of the judgment debt was, in effect, contingent on the shortfall between what the companies owed, and the value of the assets that the liquidator was able to realise.
The plaintiffs assert that the defendant sold the assets of the companies at significantly less than their value. As a consequence of this, the quantum for which the plaintiffs are liable is greater than it would have been if the assets had been sold at what the plaintiffs claim was their true value. The plaintiffs therefore claim that they have incurred loss due to the liquidator’s sale of the companies’ assets at less than their true value.
The plaintiffs in their Further Amended Statement of Claim, filed on 13 December 2005 (which I shall refer to as “the statement of claim”), sought damages for a breach of duty of care. In essence, it was their claim that the defendant owed them a duty to avoid pure economic loss due in large part to the position of vulnerability in which the plaintiffs were said to be. The plaintiffs asserted that the existence of such a duty was not inconsistent with other duties that the defendant had as either liquidator or trustee in bankruptcy.
Before considering the applicable law, it is necessary to set out the business structure and transactions from which the dispute arose.
Business structure
The present case arises in the context of a complex corporate structure. The Cooper family, the members of which I will identify later, were engaged in the business of farming. During the relevant time periods, various members of the Cooper family established several companies and a trust for the purpose of running the business and holding the assets of the business. It is necessary to set out this structure in some detail. It is convenient to start with the two companies of which the defendant, Sheahan, was liquidator.
The defendant was the liquidator of Rothmore Farms Pty Limited (“RFPL”) and Rothmore Pty Limited (“Rothmore”). RFPL was, pursuant to a deed of 6 October 1981, the trustee of the Jill Cooper Family Trust (“the Trust”).
RFPL had the following directors:
-Jillian Helen Cooper (referred to as Jillian Helen Marshall in the reasons of the Judge) (“JHM”);
-Richard John Cooper (“RJC”);
-Simon Vincent Cooper (“SVC”); and
-Andrew Charles Cooper (“ACC”).
The directors were also members of RFPL. Between 6 October 1981 and 10 February 1993, RFPL owned and ran the farming business and owned the plant and equipment, as well as some other assets associated with the farming business.
The other company was Rothmore. Rothmore owned part of the land on which the farming business was conducted. At all material times, Rothmore had the following members:
-JHM (who owned 7 shares);
-RJC (who owned 1 share);
-SVC (who owned 1 share); and
-ACC (who owned 1 share).
The identities of the members of Rothmore, and the proportion of shares that each member owned, was identical for Rothmore and RFPL. This Court does not have before it information as to the identity of the directors of Rothmore.
As stated above, RFPL was the trustee company for the Trust. The trust deed indemnified RFPL against the liabilities it incurred as trustee; this indemnity was provided by the trust assets. The beneficiaries of the Trust included:
-JHM;
-RJC;
-SVC;
-ACC; and
-Martin James Cooper (“MJC”).
JHM is the mother of the four other beneficiaries listed above. Other family members were also beneficiaries of the Trust.
The farming business of RFPL took place on land known as Rothmore Farm (“the Land”). The Land was situated on several titles. It is convenient to divide the Land into two parts for the purpose of considering the ownership.
The First Part of the Land comprised three certificates of title and three crown leases. At all material times, until on or about 20 April 1999, the First Part of the Land was registered as one undivided moiety to JHM for life, and then for RJC, SVC, ACC and MJC, and as a second undivided moiety to JHM absolutely.
The Second Part of the Land comprised one certificate of title and one crown lease. At all material times, until on or about 20 April 1999, the Second Part of the Land was registered as one undivided moiety to Rothmore, and as a second undivided moiety to JHM for life and then for RJC, SVC, ACC and MJC.
The final company associated with the Cooper family’s farming business was Belgravia Pty Ltd (“Belgravia”), the third plaintiff. Belgravia was incorporated on 9 February 1993. At all material times, Mills and Cooper were the sole directors and shareholders of Belgravia. I will describe Belgravia’s involvement in the business structure in the course of relating the facts which gave rise to the present dispute.
Events giving rise to dispute
RFPL had been the trustee of the Trust since 1981. Between June 1985 and April 1993, the Commonwealth Development Bank of Australia and the Commonwealth Bank of Australia (collectively “the Bank”) provided advances to RFPL. As security for the advances, several charges were registered over the assets of RFPL. JHM, RJC, SVC and Rothmore granted mortgages to the Bank, secured against their respective interests in the Land. In addition, JHM, RJC, SVC and Rothmore also provided a guarantee. Each guarantee was dated 1 September 1986.
Belgravia, the third plaintiff, was incorporated on 9 February 1993. On or about 10 February 1993, Belgravia was appointed as the trustee of the Trust, and RFPL was removed as the trustee of the Trust. At the same time, all of the Trust assets were transferred to Belgravia from RFPL, which had, prior to that time, been the sole trustee of RFPL.
This transaction, and the events which followed, were later to become the subject of what I will refer to as the Belgravia proceedings. It was through the actions of Belgravia following the transfer of the assets of the Trust that the plaintiffs in the present action came to be involved in the liquidation of RFPL. I shall therefore describe the conduct of Belgravia, and the nature of the Belgravia proceedings, in greater detail later in this judgment.
On 20 February 1995, the Bank initiated proceedings in the Supreme Court against JHM, RJC, SVC and Rothmore. These proceedings sought to enforce the guarantees that each had provided. Judgment was entered against each guarantor on 22 August 1997.
On 20 April 1998, sequestration orders were made in relation to the estates of JHM, RJC and SVC. On this date, the defendant was appointed trustee in bankruptcy of the estates of JHM, RJC and SVC. As a consequence of this appointment, the defendant became the owner of nine of the ten shares in Rothmore.
On or about 14 September 1998, RFPL was placed in provisional liquidation. The defendant was appointed provisional liquidator of RFPL and then later its liquidator on 16 June 1999.
On or about 14 September 1998, the Bank lodged a proof of debt with the defendant in relation to the provisional liquidation of RFPL. The sum claimed by the Bank was $2,154,143.44.
The debt owed to the bank was, as a consequence of the guarantees given to the Bank, owed jointly and severally by Rothmore, RFPL and the bankrupt estates of JHM, RJC and SVC. For each of these parties, the bank debt was, at all material times, the most substantial debt they owed.
On 7 September 1998, the defendant, in his capacity as trustee in bankruptcy for JHM, RJC and SVC commenced proceedings in the Federal Court of Australia seeking orders for the partition and, additionally or alternatively, the sale of the Land, pursuant to sections 69 and 70 of the Law of Property Act 1925 (“the partition or sale proceedings”). The proceedings were against Cooper, Janet Ethel Cooper, MCJ, ACC and Rothmore. Orders were made for the sale of the land on 1 December 1998 and varied on 8 March 1999. Mansfield J of the Federal Court also made orders setting out the percentage of the proceeds of the sale to which Rothmore (which was in the control of the defendant by the time of the sale) and the bankrupt estates of JHM, RJC and SVC were entitled.
On 26 March 1999, Rothmore was placed into liquidation. The defendant was appointed as the liquidator.
The defendant, pursuant to the orders of 1 December 1998, sold part of the Land on 1 April 1999 and the remainder of the Land on 21 April 1999. The 1 April transaction involved the sale of two titles in the First Part of the Land to Tiparra Pty Limited for $120,000. The 21 April transaction entailed the sale of the remaining parts of the Land to W J Fountain Pty Limited for $1,500,000. The total sum realised from the sale of the Land was therefore $1,620,000. The defendant, in his capacity as liquidator of Rothmore and trustee in bankruptcy for JHM, RJC and SVC, received 91.89% of the proceeds of the sale of the land.
On or about 6 May 1999, the defendant took possession of the plant and equipment situated on the Land.
In his capacity as liquidator of RFPL, the defendant sold the plant and equipment on 10 September 1999. The items were sold to William John Fountain for the sum of $620,000.
The sale of the Land and the plant and equipment situated on the Land therefore realised $2,240,000.
At this point, I note that it was the sale of the Land on 1 April and 21 April 1999, pursuant to the Federal Court order in the partition or sale proceedings and the sale of the plant and equipment on or about 10 September 1999 that is the subject of the present dispute. I will address the plaintiffs’ claims regarding the sale of the Land and the sale of the plant and equipment later in these reasons.
The Belgravia Proceedings
On 14 September 1998, the defendant, in his capacity as liquidator of RFPL, caused RFPL to commence proceedings in the Federal Court against the three plaintiffs (“the Belgravia proceedings”). The defendant sought orders including the award of tortious damages and equitable compensation. It is convenient at this point to describe the events that gave rise to these proceedings.
As I have stated above, Belgravia had become the trustee of the Trust on or about 10 February 1993. After acquiring the assets of the Trust, Belgravia continued to operate the farming business.
By resolution of 19 May 1998, the directors of Belgravia – Mills and Cooper – varied the Trust Deed to make 19 May 1998 the vesting day of the Trust. The Trust was vested in Andrew Cooper. In proceedings before the Federal Court, it was accepted by RFPL that the vesting of the whole of the Trust assets in Andrew Cooper was within the power of Belgravia as trustee.
Andrew Cooper conducted the farming business in his own name until 7 August 1998. In addition to the farming business, an engineering business was also conducted on the property. This business had been operating from about 1990, and was carried on by RFPL, then Belgravia and finally Andrew Cooper.
On 7 August 1998, Andrew Cooper entered into a Memorandum of Agreement with Tennyson Turner (“Turner”), who later became a party in the Belgravia proceedings. The Agreement provided for the sale of opals by Turner to Andrew Cooper. The Agreement provided that $10,000 was payable forthwith, $79,000 was payable on or before 10 August 1998, and the balance of $611,000 was to be satisfied by Andrew Cooper transferring to Turner the farming and engineering plant, machinery, equipment and works in progress, as well as assigning to Turner the grain payments to Andrew Cooper
On 4 June 1999, Mansfield J of the Federal Court made the following orders in the Belgravia proceedings:
1 A declaration that RFPL was entitled to be indemnified from the assets of the Jill Cooper Family Trust to the extent of its current indebtedness, including accumulated interest, to the Bank.
2 A declaration that RFPL had an equitable charge or lien over the assets from time to time of the Jill Cooper Family Trust to the full extent of its entitlement to indemnity, which equitable charge or lien was enforceable against certain third parties (including Belgravia) who from time to time held title to the assets of the Jill Cooper Family Trust.
3 An order for an account an inquiry to be held for the purposes of identifying all and every of the assets of the Jill Cooper Family Trust, and all moneys either paid or received in relation to the conduct of the farming business using these assets.
On 26 August 1999, RFPL commenced proceedings in the Supreme Court being the continuation of the Belgravia proceedings, pursuant to the Federal Courts (State Jurisdiction) Act 1999. Thereafter the Belgravia proceedings continued in the Supreme Court.
On 2 November 2001 Judge Bowen Pain of the Supreme Court made an order pursuant to the 4 June 1999 orders made in the Federal Court that the value of the assets of the Trust and the net proceeds of moneys received in relation to the conduct of the farming business was $1,189,989. Consequently, the value of the right of indemnity of RFPL was, following from the orders of Mansfield J of the Federal Court, $1,189,989.
As a consequence of the 4 June 1999 orders made in the Federal Court, the defendant recovered property that was part of the Trust assets. The value of the recovered property was $53,511.73.
On 21 November 2002, Perry J in the Supreme Court granted leave to RFPL to vary the Orders of 4 June 1999. The Orders were varied to enable RFPL to proceed with its action against Mills and Cooper in which RFPL sought equitable compensation and/or damages for knowing participation in a breach of fiduciary duty, damages in tort for conspiracy, and damages in tort for unlawful interference with economic interests. RFPL then sought damages in the Belgravia proceedings against Mills, Cooper and Belgravia to the value of the right of indemnity ($1,189,989), less the recoveries made by the defendant ($53,511.73), adjusted to include pre-judgment interest.
On 30 March 2005, Perry J entered judgment for RFPL for the sum of $1,575,265.15. This judgment was on the basis that the plaintiffs had breached their fiduciary duty. Consequently, it was unnecessary for Perry J to determine whether Mills, Cooper and Belgravia were also liable on the basis of a conspiracy or unlawful interference with economic interests.
On 26 August 2005, RFPL, Mills, Cooper and Belgravia executed a deed pursuant to which Mills agreed to pay RFPL the sum of $316,000 in full and final settlement of the judgment debt. RFPL agreed, upon payment, to release, discharge and hold harmless Mills, Cooper and Belgravia from the balance of the judgment sum of $1,575,265.15.
JHM, RJC and SVC were discharged from bankruptcy on 8 August 2001.
The pleadings in this action
In 2004, the plaintiffs commenced this action in the Supreme Court. On 6 February 2006, the defendant issued a notice for specific directions. The defendant sought an order that the plaintiffs’ claim be struck out as disclosing no reasonable cause of action. Additionally, or in the alternative, the defendant sought an order dismissing the plaintiffs’ claim as disclosing no cause of action known to law.
On 2 June 2006, the Judge found that the causes of action pleaded by the plaintiffs’ in their Further Amended Statement of Claim were not arguable, and the statement of claim was consequently struck out. The plaintiffs have appealed to this Court against that decision.
Judgment from which the appeal lies
The Judge observed that although the sale price of the land and plant affected the quantum of RFPL’s claim against the plaintiffs, this was not because the plaintiffs were directly liable for the bank debt. Rather, they were liable to RFPL and the quantum of the plaintiffs’ liability was referable to RFPL’s loss, which was in turn referable to RFPL’s right of indemnity for the bank debt.
The Judge recounted the formulations adopted in Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad”,[1] Perre v Apand Pty Ltd[2] and Woolcock Street Investments Pty Ltd v CDG Pty Ltd.[3] His Honour then applied the principles on which those cases were decided to the present case. He considered that there was no reliance or dependence in the relevant sense, nor had the defendant assumed responsibility for protecting the plaintiffs’ interests. The Judge considered that although the plaintiffs were vulnerable in the general sense that they were affected by the defendant’s conduct of the liquidation, there was no vulnerability in the relevant sense as it was the plaintiffs’ own wrongdoing which had resulted in their position. The Judge was of the opinion that these factors militated against the existence of a duty of care owed by the defendant to the plaintiffs.
[1] (1976) 136 CLR 529.
[2] (1999) 198 CLR 180.
[3] (2004) 216 CLR 515.
The Judge then addressed the cases in which the court has refused to impose a duty of care which would be inconsistent or incompatible with other duties owed by a defendant. He cited Sullivan v Moody[4] and Halech v South Australia[5] as examples of cases in which courts had refused to impose on a defendant a duty inconsistent with other duties. He noted that a trustee in bankruptcy owes both common law and statutory duties to the bankrupt and his or her creditors, and that in exercising his or her powers, the trustee in bankruptcy must have regard to the public welfare. The Judge also noted the fiduciary duties owed by a liquidator to the company in liquidation, its creditors and members, and the statutory duties imposed by the Corporations Act.
[4] (2001) 207 CLR 562.
[5] (2006) 93 SASR 427.

The Judge considered that it would be inconsistent with these duties to impose on a liquidator or trustee in bankruptcy a duty to a judgment debtor or potential judgment debtor. Further, he considered that the imposition of a duty would inhibit the exercise of the existing powers, duties and functions of a liquidator or trustee in bankruptcy, having regard to the diverse interests which must already be taken into account and the necessity to act in an efficient and commercial manner.
The Judge concluded that as a consequence of his findings on the existence of a duty and on the conflict of any such duty with duties already owed, it was not arguable that the defendant owed a duty of care to the plaintiffs.
He also found against the first plaintiff in relation to a claim to recover contribution from the defendant. That aspect of the decision is not the subject of this appeal.
The arguments of the plaintiffs an defendant
The plaintiffs’ claim is that the defendant sold the assets of the estates – most notably, the land – for significant undervalue. The plaintiffs further claim that, had the assets been sold for their true value, there would have been no liability by the plaintiffs to the estates, and there would in fact have been a surplus.
The plaintiffs assert that the defendant owed them a duty in tort to take reasonable care to sell the assets for the true value. This has been characterised as a duty to avoid pure economic loss. The plaintiffs claim that the defendant owed them a duty in his capacity as trustee in bankruptcy with respect to the sale of the land, and in his capacity as liquidator of RFPL with respect to the sale of the plant and equipment. The plaintiffs’ claim is that the defendant has breached his duty to them by realising the assets at a significant undervalue. The land was sold for $1.62 million and the plant and equipment for $620,000. The plaintiffs claim that the defendant acted on a single valuation of $1,329,337, dated 1 June 1998. However, two valuations of the land were provided to the defendant by JHM, RJC, SVC and Cooper between sale and settlement which estimated the value at $3,000,000 and $4,500,000, and the Bank was in possession of two valuations from 1985 for $2,806,800 and $2,466,500.
The plaintiffs have placed emphasis on what they claim is a position of vulnerability on their part. This vulnerability was said to come about in the sense described in Woolcock.[6] In particular, they assert that vulnerability encompasses the plaintiffs’ reliance on the defendant and the control exercised by the defendant. The plaintiffs contend that, even if it was their own conduct which caused them to assume a position of vulnerability, this was not to the point because vulnerability did not require “clean hands”.
[6] Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515, [23].
On the question of inconsistency of duties, the plaintiffs claim that the duty owed to them is concurrent with the other duties of the defendant. The plaintiffs refer to Sullivan v Moody,[7] for the proposition that the proposed duty of care must be irreconcilable or conflicting with the existing duties to be dismissed. The plaintiffs contend that the Judge failed to identify with specificity the potential conflict, and say that in any event, the existence of the other duties would affect only the scope of the duty or the standard of care. As the proposed duty is one of taking reasonable care, the plaintiffs claim that this does not preclude the defendant from deciding to sell quickly or for a lesser value – whether this was reasonable would be a question of fact to be determined at trial.
[7] (2001) 207 CLR 562, 582.
The defendant accepts that it was reasonably foreseeable that if Sheahan failed to exercise reasonable care in realising the assets, the plaintiffs would suffer loss in the sense that they would be exposed to a larger judgment sum. However, the defendant responds by asserting, first, that reasonable foreseeability is insufficient to establish a duty to avoid pure economic loss, and that nothing more is pleaded. Secondly, the defendant claims that there are several factors which militate against the imposition of a duty of care, including the existence of potentially incompatible statutory and common law duties owed by a trustee or liquidator. Finally, the defendant contends that to the extent that analogy with previous authority is possible, authority indicates there is not a duty of care.
Can there be a duty to a person in the position of the plaintiffs?
In my view, the relevant question for consideration is not whether a duty of care would necessarily be established in the circumstances of the present case. The relevant question is whether it can be said that the plaintiffs’ claim discloses no reasonable cause of action such that a duty could be said, with certainty, not to exist.[8] As the Judge observed, this test places a heavy onus on the defendant to establish that the pleadings disclose no reasonable cause of action, or that the plaintiffs’ case is so untenable that it cannot succeed.
[8] Egan v Commonwealth Minister for Transport (1976) 14 SASR 445.
In cases of pure economic loss, it is well established that a mere foreseeability of loss by the plaintiff is insufficient to establish a duty of care on the part of the defendant. In Perre v Apand,[9] the High Court considered relevant whether the defendant’s actual foresight of the likelihood of harm, whether the activities which caused the loss were within the control of the defendant, whether the defendant knew or could have known of the existence of an ascertainable class of vulnerable persons who were unable to prevent themselves from harm, and whether the imposition of a duty would impair the defendant’s legitimate pursuit of his or her own commercial interests.
[9] (1999) 198 CLR 180.
However, the cases dealing with pure economic loss indicate that the existence of a duty of care will not necessarily rest on the same principles in each case.[10] The disparity between the tests for the existence of a duty is a consequence of the differing circumstances in which pure economic loss may arise. For example, in cases where the defendant is an adviser, the relationship between the plaintiff and defendant, and the knowledge of reliance, is significant.[11]
[10] See, eg, Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529, Perre v Apand Pty Ltd (1999) 198 CLR 180; Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515.
[11] See, eg, Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515, 530-1.
The defendant in this action claims that the plaintiffs have not pleaded anything more than mere foreseeability. I reject this submission. The plaintiffs have pleaded that the defendant knew that the proceeds of the sale of the assets would affect the quantum of the indemnity of RFPL, and that, accordingly, any variation in the proceeds of the sale of the assets would affect the quantum of the judgment debt owed by the plaintiffs. The plaintiffs have also pleaded that the defendant intended at all relevant times to sue the plaintiffs for the loss suffered by RFPL. In my view, it cannot be said that the plaintiffs’ pleadings contain nothing more than a bare assertion of reasonable foreseeability.
The plaintiffs developed these themes in their written outline. Adopting the formulation of Stephen J in Caltex, which was cited with approval by the majority in Woolcock, the plaintiffs claim that there are additional “salient features” of the circumstances which mean that the relationship between the plaintiffs and the defendant was sufficiently close for there to be a duty of care. These are:
1. the existing relationships between the plaintiffs, the bankrupts, RFPL and Rothmore, both generally and in the sense that all had or would have some responsibility in various ways for the bank debt;
2. the defendant’s intention to sue the plaintiffs for the loss suffered by RFPL (which ultimately materialised); and
3. the vulnerability of the plaintiffs to the defendant in relation to the sale of the assets, in that they had no control of his power of sale. I note at this point that it was not addressed by the parties whether the plaintiffs could have had some control of the power of sale via, for example, provisions of the Corporations Act.
During the course of argument, the parties addressed the question of the plaintiffs’ vulnerability. The plaintiffs asserted that they were in a position where they depended on the defendant to minimise the quantum of the judgment debt. They claimed that although the plaintiffs were in one sense responsible for the position in which they found themselves, this Court should not implement a “clean hands”-style requirement in relation to the existence of the duty. Further, this consideration would more appropriately go towards causation in the circumstances of the particular case rather than the existence of a duty of care.
In the present case, however, the only way in which the defendant could be said to have breached a duty to the plaintiff would be as a consequence of his having breached a duty to the company. It has generally been the case that courts are reluctant to interfere with a liquidator’s conduct of liquidation.
Nevertheless, this reluctance is merely one factor to be considered in determining the existence of a duty. By itself, it cannot preclude the plaintiffs from instituting proceedings.
The plaintiffs’ claim raises a question of duty for pure economic loss. It is well established that courts are reluctant to impose a duty to avoid such loss, but there are now exceptions to what was previously the general rule that no such duty can exist. Although it is recognised that there is no longer an absolute exclusion of recovery for pure economic loss, the circumstances in which recovery will be allowed have not been conclusively determined. As Gleeson CJ stated in Perre v Apand:
If there was once a bright line rule which absolutely prevented recognition of a duty of care in any case where the negligent conduct of one person caused financial loss to another, not associated with injury to the other’s person or property, and which assigned claims to recover such loss to the field of contract rather than tort, the line gave way in an area where there is a clear potential for carelessness to cause financial harm: negligent misstatements made to a person who, to the knowledge of the maker of the statement, relies upon the advice or information provided. However, there is no convincing reason why conveying advice or information should be treated as the solitary exception to an otherwise absolute exclusionary rule.
Once the exclusionary rule ceased to be a bright line rule, it lost one of its principal justifications. Nevertheless, the considerations underlying the rule remain cogent, even if they are no longer absolutely compelling. Courts have found difficulty in proposing an alternative general rule which makes better sense and which, at the same time, pays due regard to the problems earlier mentioned.
The acknowledgement by Australian courts – including the High Court in Perre v Apand – that this area of the law is developing and is not yet constrained by firm principles suggests that this Court should be reluctant to preclude a plaintiff from bringing an action in factual circumstances which are not closely analogous to those of previous authority.
No analogous cases were put to this Court to show that a duty of the kind claimed by the plaintiffs has been imposed on a liquidator by a court. It is clear that the factual circumstances differ from the leading cases which were presented during the course of argument. It is, however, not clear how the principles applicable in previous cases on pure economic loss would apply to the present case. Consequently, I consider that it is inappropriate for this Court to preclude the plaintiffs from bringing their case.
Conflict of duties
Central to the plaintiffs’ claim is an assertion that the defendant liquidator sold assets of RFPL at significantly less than their real value. It was submitted by the defendant before this Court that the imposition of a duty on a liquidator would be inconsistent with the other duties which a liquidator owes: principally, those to the company and to the creditors.
The plaintiffs in this case are not in the position of an ordinary creditor. Their financial liability has arisen from a Federal Court judgment, in which it was determined that the plaintiffs were required to indemnify the companies as a consequence of the plaintiffs’ breach of fiduciary duty.
It has been suggested that a liquidator’s duty to creditors is a duty to the group, rather than to each creditor individually.[12] Whether an individual in the position of the plaintiffs can recover is a novel question.
[12] McPherson’s Law of Company Liquidation, MGR Gronow (5^th ed, 2002), [8.400].
In my view, the fact that there are other parties to whom a liquidator owes a duty is not determinative of whether a duty exists towards the plaintiffs in the present case. As was stated in Sullivan:
The circumstance that a defendant owes a duty of care to a third party, or is subject to statutory obligations which constrain the manner in which powers or discretions may be exercised, does not of itself rule out the possibility that a duty of care is owed to the plaintiff. People may be subject to a number of duties, at least provided they are not irreconcilable… But if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists.[13]
[13] Sullivan v Moody (2001) 207 CLR 562, 582.
In the present case, the plaintiffs contended that there was no conflict between the duty that they claimed was owed to them by the liquidator, and the duties owed by the liquidator to the company and to the creditors. If it is found that the true value of the assets was less than the price at which the liquidator sold the assets, then it may well be that there is no conflict between the duties. However, that is a matter to be explored at trial.
Again, it should be observed that a conflict of duties may preclude the existence of a duty to a person in the position of the plaintiffs in the circumstances of a particular case. However, the existence of a conflict of duties, and the consequences of such a conflict, are matters to be explored at trial. The possibility of there being a conflict of duties should not, by itself, preclude the plaintiffs from bringing a claim.
There are numerous authorities that articulate the way in which a liquidator should reconcile conflicting duties. Further, the Corporations Act stipulates the order in which creditors can recover from the assets of a company, thus mitigating the possibility that a liquidator would be unable to reconcile duties. In my view, whether a duty can co-exist with the already onerous duties relating to creditors is a question which should arise following the determination of the facts at trial. It is not question to be dismissed on the pleadings.
The defendant’s outline of argument referred to the possibility of there being an argument regarding duty to mitigate loss. However, as this was not addressed by the parties in oral submissions I make no comment on its bearing on the present case.
The cases on inconsistency of duties to which this Court was referred, and to which the Judge referred, arose from different factual circumstances. For example, in Sullivan v Moody, the plaintiffs claimed that doctors who suspected that a child had been sexually abused owed a duty of care in examination, diagnosis and reporting to the person suspected of having sexually abused the child. The plaintiffs claimed damages for shock, distress, psychiatric illness and consequential personal and financial loss. The High Court upheld the decision of the Full Court of the Supreme Court of South Australia to dismiss an appeal against a decision to strike out the pleadings.
That case may be distinguished on several grounds. First, that was not a case of pure economic loss which, as I have explained, is an area of tort in which particular caution should be exercised. Secondly, the High Court noted that the Full Court’s decision “was influenced by the consideration that… in a case that had gone to trial, the Full Court of the Supreme Court of South Australia had dismissed a plaintiff’s appeal in circumstances that were conceded to be indistinguishable from those of Thompson and Sullivan”. There is no authority in the present case which is determinative of the existence of a duty of care. Thirdly, Sullivan arose in the context of a statutory scheme which necessitated the paramountcy of the interests of the child; to impose a duty towards those suspected of abusing children would have been irreconcilable with the statutory scheme. In my view, while the interests of a judgment debtor may not be coincident in all cases with other interests that a liquidator or trustee in bankruptcy is required to consider, it cannot be said that the interests are so opposed that the case should be dismissed on the pleadings.
Similarly, Halech v South Australia addressed the question of whether police officers owed a duty of care to avoid causing psychiatric injury in the conduct of their investigations. In that case, the plaintiff claimed that he had suffered loss as a consequence of the negligent mis-identification of the body of his mother by police officers who attended at the scene of the car accident in which she was killed. However, the role of police officers, the duties they owe and the potential for indeterminacy of liability if a tortious duty of care was imposed is in contrast to the circumstances of a liquidator or trustee in bankruptcy.
In my view, the decisions of Sullivan and Halech are of little assistance in the present case. Although it is clear that a duty will not be imposed where inconsistent and irreconcilable with other duties, it is also clear that whether there is such an inconsistency turns on the nature of the duties and the nature of the duty claimed.
I agree with the Judge’s comment that the case of Jovanovic and Others v Commonwealth Bank of Australia[14] is of little assistance. That case dealt with the duty owed by a mortgagee to a mortgagor or guarantor in exercising its power of sale. The parties in this case have not addressed the existence or extent of any similarity in the position of a mortgagee exercising a power of sale and a liquidator or trustee in bankruptcy realising assets.
[14] (2004) 87 SASR 570.
Since preparing my reasons I have had the opportunity to read the reasons of Debelle J. In my view, the question of whether the defendant, acting in his capacity of a liquidator or trustee in bankruptcy, owed a duty of care to one or more of the plaintiffs can only finally be determined at trial. In my opinion, it is reasonably arguable that the defendant owed a duty of care to the plaintiffs. It follows that the statement of claim discloses a reasonably arguable cause of action which, if established, entitles the plaintiffs to relief.
I would grant leave to appeal. I would order that the application of the defendant to strike out the plaintiffs’ statement of claim be dismissed.
The plaintiffs also seek an order that paragraphs 49 to 53 inclusive of the Further Amended Statement of Claim be struck out. The plaintiffs wish to abandon the cause of action pleaded in those paragraphs. I would strike out paragraphs 49 to 53 inclusive of the Further Amended Statement of Claim.
LAYTON J: I agree that leave to appeal should be allowed for the reasons given by Sulan J, and I agree with the orders which he proposes. I have also had the opportunity to read the reasons for decision of Debelle J, and whilst recognising their persuasiveness, I consider that is not necessary for the purposes of this decision for this Court to determine what will ultimately be an issue for the trial judge.