Nicholson Street Pty Ltd (ACN 069 104 089) (Receivers and Managers Appointed) (in Liquidation) v Paul James Lane
[2017] VSCA 271
•26 September 2017
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2017 0077
| NICHOLSON STREET PTY LTD (ACN 069 104 089) (RECEIVERS & MANAGERS APPOINTED) (IN LIQUIDATION) & ORS | Applicants |
| v | |
| PAUL JAMES LANE | Respondent |
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| JUDGES: | BEACH, HANSEN and COGHLAN JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 14 September 2017 |
| DATE OF ORDERS: | 14 September 2017 |
| DATE OF REASONS: | 26 September 2017 |
| MEDIUM NEUTRAL CITATION: | [2017] VSCA 271 |
| JUDGMENT APPEALED FROM: | [2017] VSC 307 (Judd J) |
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PRACTICE AND PROCEDURE – Amendment of statement of claim – Amendment refused and proceeding dismissed at first instance – Leave to appeal – Barnes v Addy – Knowing assistance – Leave to appeal granted – Appeal allowed – Leave to amend granted.
SUMMARY JUDGMENT – No real prospect of success on basis that if leave to amend refused, no further amendment possible – Proceeding dismissed at first instance – Civil Procedure Act 2010 (Vic) s 63 – Appeal – Leave to amend granted – Order of dismissal set aside.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr R D Strong | King & Wood Mallesons |
| For the Respondent | Mr M Connock QC with Mr J Graham | Maddocks |
BEACH JA
HANSEN JA
COGHLAN JA:
The applicants sought leave to appeal from orders made on 2 June 2017 by a judge in the Commercial Court by which leave to amend the statement of claim relating to the respondent was refused and, on the premise that the applicants could not better plead their case and pursuant to a summons filed by the respondent, the proceeding against the respondent was dismissed with costs.[1]
[1]Nicholson Street Pty Ltd v Letten & Anor [No 4] [2017] VSC 307 (‘Reasons’).
At the conclusion of argument on the application we granted leave to appeal, allowed the appeal and set aside the relevant orders, directed the filing and service of the proposed further amended statement of claim, dismissed the respondent’s application for summary judgment with costs, and ordered the respondent pay the costs of the application for leave and the appeal.
The following are our reasons for making those orders.
Overview
The proceeding arises out of the collapse of a number of unregistered managed investment schemes, the purpose of each of which was to acquire and develop a property, for which purpose funds were to be, and were, contributed by investors, and by way of financial accommodation obtained from a lender on the security of the property. Each project was constituted as a joint venture with a corporate trustee; the applicants were respectively the trustee of three joint ventures or managed investment schemes. The overall mastermind of the matter was Mark Ronald Letten who is the first defendant to the proceeding and who was a director and secretary of each applicant. The other defendant to the proceeding, and who is the respondent to the present application, was Paul James Lane. He also was a director of each applicant.
The Australian Securities & Investments Commission (‘ASIC’) took the matter to the Federal Court. On 25 February 2010, Gordon J made orders for the winding up of 21 of the managed investment schemes and for the appointment of receivers and managers over the property of each of the schemes and to a number of corporations, including the applicants, who were managers of those schemes.[2]
[2]ASIC v Letten [2010] FCA 140.
On 11 November 2010 Gordon J ordered that the net proceeds of sale of all the schemes be paid into a Common Fund, the net balance of which to be distributed rateably to members of the schemes and any other person who could establish a net proprietary claim on the fund.[3] In her judgment that led to the making of those orders her Honour said that:
Because of the way in which Mr Letten and companies associated with him (including the Corporate Defendants) conducted the Schemes, it is not possible to say now what are the net assets of any Scheme. There appear to have been so many inter-scheme transactions that it is not possible to say what assets were acquired by what scheme using whose money.[4]
And further, after considering individual schemes and how assets were held:
Each of the Schemes is a separate managed investment scheme in that it appears that investors contributed money as consideration to acquire rights to benefits produced by the acquisition of a particular identified asset or assets. However, the property of the Schemes was irretrievably commingled owing to the central treasury role played by LGHA and the manner in which the Schemes operated.
It was common ground that each of the Schemes was established as a trust or a number of trusts.[5]
[3]ASIC v Letten [No 7] (2010) 190 FCR 59.
[4]Ibid 70 [26].
[5]Ibid 109 [238]–[239].
On 13 May 2011 Gordon J ordered that the second and third applicants, and other corporations, be wound up and the receivers and managers be appointed liquidators.[6] Subsequently, on 4 November 2011, her Honour ordered that the first applicant, and other corporations, be wound up and the receivers and managers be appointed liquidators thereof.[7]
[6]ASIC v Letten [No 10] [2011] FCA 498.
[7]ASIC v Letten [No 15] [2011] FCA 1268.
On 26 June 2014, Gordon J gave directions to the receivers and managers that they were justified in deploying funds from the Common Fund in the institution and prosecution of a proposed proceeding by the present applicants as plaintiffs against Mr Letten and Mr Lane as defendants on the basis of knowing assistance in the applicants’ breaches of trust.[8]
[8]ASIC v Letten [No 20] [2012] 92 ACSR 630.
The subject proceeding was commenced in the Supreme Court by the applicants against Mr Letten and Mr Lane on 23 July 2014. The applicants plead their claim on the basis that as trustees they are liable to restore their respective trust funds of funds lost by reason of their breach of duty, and for that purpose seek compensation from Mr Letten and Mr Lane as having knowingly assisted in a dishonest and fraudulent design on the part of the applicants. That is, on the basis of the second limb in Barnes v Addy.[9] For this purpose, the applicants put their case on the basis of the fourth category of knowledge stated in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de L’Industrie en France SA, namely:
[K]nowledge of circumstances which would indicate the facts to an honest and reasonable man.[10]
[9]See Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89, 140 [111] (‘Farah’).
[10][1993] 1 WLR 509, 575–576, 582; see Farah (2007) 230 CLR 89, 163 [174].
The proceeding — a short history
Following the commencement of the proceeding, on 19 December 2014, the applicants filed an amended statement of claim. That was met with a summons to strike out the statement of claim in whole or in part. The applicants then filed a draft further amended statement of claim, as to which leave to amend was refused; the judge also stayed the proceeding until further order for reasons concerning the applicants’ standing to sue.[11] The Court of Appeal set aside the order staying the proceeding.[12] It remains to note that the judge refused two further applications to amend the statement of claim.[13]
[11]Nicholson Street Pty Ltd (Recs and Mgrs Apptd) (in Liq) v Letten [2015] VSC 583.
[12]Nicholson Street Pty Ltd (Recs and Mgrs Apptd) (in Liq) v Letten [2016] VSCA 157.
[13]Nicholson Street Pty Ltd (Recs and Mgrs Apptd) (in Liq) v Letten [No 2] [2016] VSC 678; Nicholson Street Pty Ltd (Recs and Mgrs Apptd) (in Liq) v Letten [No 3] [2017] VSC 62.
The present application for leave to amend was made by summons filed on 24 March 2017.
On 7 April 2017 the respondent filed a summons seeking an order that the proceeding against him be dismissed pursuant to s 63 of the Civil Procedure Act 2010, r 23.01 of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’), r 23.02 of the Rules, r 24.01 of the Rules and/or the inherent jurisdiction of the Court, and that he cease to be a party to the proceeding.
It is important to bear in mind that the amendments now in question concern only the case against Mr Lane. In other words, the propriety of the pleading against Mr Letten is not in issue, and by his orders the judge fixed the case against him for trial.
The amendment
While the amendment would constitute a further amended statement of claim, it is convenient for present proposes to simply refer to it as the amendment or the statement of claim. It is not necessary to refer to a prior iteration of the statement of claim. We mention that because at one point in the respondent’s argument it was suggested to be helpful, in understanding the present formulation, to look back at a prior formulation. With respect, there was no utility in doing that, the question concerned only the proposed further amended statement of claim.
The question on an application to amend is whether, futility aside, the pleading raises an arguable case. In this respect it is important to bear in mind the observation of Dawson J in Commonwealth v Verwayen that:
In granting leave to amend, a court is concerned with the raising of issues and not with their merits. Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial.[14]
[14](1990) 170 CLR 394, 456.
Further, no discretionary consideration, such as lateness of the application or irremediable prejudice was raised against the grant of the application. Indeed, neither defendant had filed a defence. The judge refused the application on the sole basis that the proposed amended statement of claim was defective as a pleading and that the claim based upon it must have failed.
Furthermore, it is to be borne in mind, as Edelman J observed in Nicholson v Morgan [No 3],[15] in the context of an application to strike out parts of a statement of claim in a knowing assistance case, that:
A strike out application will generally be an inappropriate forum to resolve questions of the extent of knowledge which a person is deemed to have about particular facts based on the various Baden categories. This will be an intensely fact specific exercise. A further obstacle to any submission that a pleading of knowledge should be struck out because the extent of knowledge pleaded is insufficient is the authorities, such as in the Full Federal Court decision in Grimaldi … which emphasise that the fact-intensive determinations of deemed knowledge involve a ‘zenith of complexity’ and are ‘bedevilled by an obsessive refinement of distinctions between degrees of knowledge and notice’.[16]
[15][2013] WASC 110.
[16]Ibid [78].
While the present is not a strike out application, it is analogous in the way in which the matter has developed.
With those introductory remarks, we now turn to the statement of claim (as proposed to be amended).
The statement of claim alleges, in summary, that:
(1)Each plaintiff was trustee of a particular trust (paragraphs 6, 8 and 10).
(2)Mr Letten was a director of each applicant and a director and secretary of three companies: LGH Administration Pty Ltd (‘LGHA’), LG Holdings Limited (‘LGHH’) and LGH Finance Pty Limited (‘LGHF’) (paragraph 2).
(3)Mr Lane was a director of each applicant, and LGHH and LGHF (paragraph 3).
(4)Mr Letten was the controlling mind and will of LGHA and directed its affairs (paragraphs 12 and 43), and the controlling mind and will of the plaintiffs with responsibility for the day to day management of their affairs (paragraph 43).
(5)Mr Letten and/or LGHA, LGHH and LGHF (collectively called the ‘LGH Group’) promoted and managed investment schemes (‘Letten Trusts’) whereby investors were invited to invest money in real estate investment joint ventures, the funds raised from investors together with borrowed monies to be pooled and used to acquire, hold and improve or develop real property in the name of a company managed and controlled by Mr Letten as trustee for the investors (paragraph 4); and the business and affairs of each plaintiff and the Letten Trust of which it was trustee was managed and controlled by the LGH Group (paragraph 11).
(6)The plaintiffs raised monies from investors for the purpose of the particular joint venture, namely to acquire, develop and sell a piece of land (paragraphs 5, 7 and 9).
(7)In the course of the LGH Group’s management and control of the business and affairs of each plaintiff and the Letten Trust of which it was trustee: LGHA maintained a practice of transferring money from each plaintiff’s bank account to bank accounts of LGHA or of trustees of other Letten Trusts, and a policy of maintaining a level of borrowing secured on each property held by a trustee of a Letten Trust of 65% of the value of the property and transferring the proceeds to its own bank accounts, thereby causing monies held by each plaintiff as trustee to be mixed with trust monies of other plaintiffs or the trustees of other Letten Trusts or LGHA’s own monies, and LGHA used money in the mixed fund thus created for its own purposes or for the purposes of other Letten Trusts, and failed to keep proper accounts of the transactions (paragraph 14).
(8)A like allegation was then made in relation to each plaintiff that it had, as trustee of the particular joint venture of which it was trustee, a duty to receive, hold and apply monies received (from investors or borrowed) solely for the joint venture purposes (paragraphs 15, 23 and 31).
(9)Several breaches are then alleged (in like terms in relation to each plaintiff), namely:
(a)failure to get in and secure investor funds which it knew had been collected by LGHA for investment in the particular joint venture (paragraphs 17, 25 and 33);
(b)borrowing money on the security of the subject land when it did not intend that the proceeds of such borrowings were to be used in carrying out the particular joint venture, and paid the whole of the proceeds of those borrowings to LGHA, thereby failing to retain the proceeds in its possession (paragraphs 19, 27 and 35);
(c)suffering or permitting trust monies collected by LGHA for investment in the joint venture or borrowed by the applicable plaintiff or otherwise held by it as trustee of the joint venture, to be received by LGHA and retained in a mixed fund together with the funds of the other plaintiffs, the trustees of other Letten Trusts, and LGHA’s own money when the particular plaintiff knew that:
(i)paying such amounts to LGHA or permitting it to retain them was not an application of those funds solely for the purposes of the particular joint venture;
(ii)further or in the alternative, that LGHA would not apply those monies solely for the purposes of the particular joint venture (paragraphs 21, 29 and 37).
Paragraph 22 then alleges that:
By its conduct as described in paragraphs 17, 19 and 21, the first plaintiff intentionally applied or permitted LGHA to apply monies subject to the trusts of the Nicholson St Joint Venture otherwise than solely for the Nicholson St JV Purposes knowing that in doing so it would deprive the investors in the Nicholson St Joint Venture of the benefit of the use of those monies for the Nicholson St JV Purposes. [Emphasis added.]
The like plea is made in relation to the second and third plaintiffs in paragraphs 30 and 38 respectively.
The statement of claim then proceeds with pleas concerning the case against Mr Letten (paragraphs 39 to 45 inclusive). Then follow, from paragraph 45A, pleas concerning the respondent.
Paragraph 45A alleges that the respondent had admitted facts set out in an annexure to the statement of claim, the admissions being contained in evidence given by him in an examination before a Deputy Registrar in the Federal Court. No objection is taken to this method of pleading the alleged admissions.
Paragraph 45B alleges that the respondent was the general manager of LGHA and LGHH and provided management consultancy services to the LGH Group, and that in those capacities he:
(a) was responsible for the preparation of applications for and negotiation of loan facilities with LGHA’s bankers, Westpac;
(b) was responsible for supervising the preparation and finalisation of the annual financial accounts of LGHA and each of the Letten Trusts;
(c) regularly communicated with Mr Letten about cash flow summaries, facility requests, joint venture arrangements, financial reporting and other financial information about LGHA and the Letten Trusts; and
(d) executed joint venture agreements with investors in a Letten Trust on behalf of the trustee.
Paragraph 45BA alleges that the policy referred to in paragraph 14 included that:
(e) where the value of properties held on behalf of the Letten Trusts increased, the LGH Group would seek to maintain a level of borrowings on each property held by the trustee in the Letten Trusts equal to 65% of the value of that property from time to time by drawing down additional borrowings secured on that property from the increased value with these funds utilised to develop the subject property [ie the property securing the loan] and any other properties within the LGH Group;
(f) excess cash from property related assets would be directed to other property-based assets requiring developmental capital.
Paragraph 45BB alleges that it was the practice within the LGH Group that the application for and negotiation of additional borrowings pursuant to the said policy:
(g) would be the responsibility of Mr Peter Bate where the additional borrowings were to be utilised for the development of the property securing the loan;
(h) would be the responsibility of the respondent where the funds were not required for the development of the property securing the loan.
Paragraph 45C alleges that in the course of the performance of his functions and duties as described in paragraphs 45B and 45BB(b), the respondent prepared applications for and negotiated borrowings of the plaintiffs.
Paragraph 45D alleges that in the course of the performance of his functions and duties as a director of the plaintiffs, the respondent executed on behalf of each plaintiff facility documentation for borrowings referred to in paragraphs 19, 27 and 35.
Paragraph 46 alleges that by reason of his conduct described in paragraphs 45C and 45D, the respondent assisted the plaintiffs in the breaches of trust alleged in paragraphs 19, 27 and 35.
Paragraph 47 then alleges that:
By reason of his position in the LGHA Group as described in paragraph 45B, and the performance of the functions described in paragraphs 45B(c), 45BB, 45C and 45D, Mr Lane had knowledge at the time of preparing applications for and negotiating each of the borrowings referred to in paragraph 45C and at the time of executing the facility documentation referred to in paragraph 45D that:
(a)the plaintiffs held the properties respectively registered in their names on behalf of investors who had been invited to invest and had invested money in a joint venture relating specifically to each property;
Particulars
The plaintiffs rely on Mr Lane’s admission of his knowledge of these facts in Admission 6 in Annexure 1A.
(b)the joint venture agreements signed by the plaintiffs included terms which;
(i)required the plaintiffs to open and maintain separate bank accounts and maintain all joint venture monies in those accounts;
(ii)expressly authorised the plaintiffs to borrow on the security of the land held by them only for the purposes of the joint venture managed by them;
Particulars
Mr Lane had this knowledge alleged by reason that he was familiar with the contents of the joint venture agreements usually established by the Letten Group and had executed a number of those agreements.
(c)it was the policy of the LGH Group that where the value of properties held on behalf of the Letten Trusts increased, it would seek to maintain a level of borrowings on each property equal to 65% of the value of that property from time to time by drawing down additional borrowings from increased value with these funds utilised to develop the subject property and any other properties within the LGH Group;
Particulars
The policy was described in a document entitled ‘LGH Group of Companies Overview of Operations and Vision’ which Mr Lane assisted to prepare and sent to Westpac in or about November 2006 …
The plaintiffs rely on Mr Lane’s admission that he participated in the preparation of this document in Admission 9 in Annexure 1A.
(d)the proceeds of each of the borrowings by the plaintiffs referred to in paragraph 45C were to be paid to LGHA.
Particulars
The plaintiffs rely on Mr Lane’s admission of this fact in Admission 7 in Annexure 1A.
(e)neither LGHA nor the relevant plaintiff intended to use the proceeds of each of the borrowings by the plaintiffs referred to in paragraph 45C above for the [the respective joint venture purposes];
Particulars
Mr Lane had knowledge of this fact by reason that:
(i)he knew of the policy referred to in paragraph 47(c);
(ii)he prepared the applications for and negotiated each of the borrowings;
(iii)he executed the facility documents relating to each of the borrowings (other than the borrowing referred to in paragraph 35A(i)-(iv));
(f)there were frequent transfers of money between the trustees of the Letten Trusts including the plaintiffs and LGHA which money was used by LGHA as it saw fit;
Particulars
The plaintiffs rely on Mr Lane’s admission of his knowledge of this fact in Admission 8 in Annexure 1A.
(g)Mr Letten controlled the transfers of money referred to in sub-paragraph (f);
(h)None of the [identified properties in respect of which paragraph 45D alleges that the third plaintiff borrowed money] were assets of the [joint venture of which the third plaintiff was trustee].
Finally, paragraph 48 alleges that the respondent assisted the plaintiffs respectively as alleged in paragraph 46 with knowledge of the matters specified in paragraph 47, being circumstances that would indicate to an honest and reasonable person that each breach of trust referred to in paragraphs 19, 27 and 35 was a dishonest and fraudulent design of the respective plaintiff as described in paragraphs 22, 30 and 38.
Judge’s reasons
The central concern of the judge was whether the amendments alleged that the respondent had a general understanding of an intention and purpose of the plaintiffs to deprive investors of the benefit of their investment.[17] The judge said that:
The plaintiffs plead their own intention and purpose in transferring funds to LGHA, without attributing such an intention or purpose to Mr Lane.[18]
[17]Reasons [11]–[13].
[18]Ibid [18].
The judge concluded as follows:
The plaintiffs might have, but do not, allege that Mr Lane knew of facts that, if established at trial, conveyed that investor funds transferred to LGHA would not benefit investors, or would be applied to projects from which they would derive no benefit. Such facts, if pleaded and established at trial, may be sufficient to support the necessary inference of knowledge of the plaintiffs’ dishonest and fraudulent design.
The plaintiffs submitted that they were not required to plead such facts. I reject that submission for three reasons. First, the facts as pleaded against Mr Lane are not, if established at trial, sufficient to make it obvious to an honest and reasonable person that the transfers to LGHA and the consequential investments were intended to deprive the investors of the benefit of their investments. The intentional and purposive deprivation of investors is the crucial element of the plaintiffs’ dishonest and fraudulent design.
Second, the character of the transfers by the plaintiffs, absent their intention and purpose, is capable of an innocent commercial explanation, involving the use of an ‘in house banker’. The plaintiffs must displace this reasonable hypothesis.
Third, the plaintiffs have chosen to introduce into their case an affirmative hypothesis consistent with innocence, by pleading Mr Lane’s explanation for conduct that might otherwise point to a breach of trust or fiduciary duty. Thus by the structure of their case, and the unusual pleading of Mr Lane’s explanation for the transfers, the plaintiffs have assumed a burden to establish that he was aware of facts which would contradict the claim that the borrowing and payments were made for the benefit of the investors.[19]
[19]Ibid [22]–[25].
Grounds
Leave to appeal was sought on four grounds. The fourth ground concerned costs and, in view of our orders, need not be referred to.
Grounds 1, 2 and 3 concern aspects of the reasoning in the judge’s conclusions quoted above. We deal with each in turn.
Ground 1
This ground contends that the judge:
(i) erred in identifying as the crucial element of the applicants’ dishonest and fraudulent design the intended and purposive deprivation of investors of the benefit of their investments; and
(j) ought to have found that the essential elements of the dishonest and fraudulent design pleaded by the applicants were, for each of their joint venture schemes:
(i) monies were raised from investors for a particular purpose — the acquisition development or redevelopment and sale of a specific property (JV Purpose);
(ii) the investors’ money and the property was received and held by the applicants each as trustee under obligations to apply and use it solely for the JV Purpose;
(iii) the applicants mortgaged the land and gave the proceeds to LGH Administration Pty Ltd (LGHA);
(iv) the applicants did not intend that those proceeds would be used for the JV Purpose;
(v) to the knowledge of the applicants:
1. paying those proceeds to LGHA was not an application of those funds solely for the JV Purpose;
2. LGHA would not apply those funds solely for the JV Purpose;
3. the investors would be deprived of the benefit of the use of those monies for the JV Purpose.
The submissions of counsel under this ground turned on a close reading of the statement of claim. While the respondent submitted that the judge was correct, the applicants submitted that the judge had not correctly understood the pleading against the respondent; in short, he had misidentified the matters that the applicants were required to plead against the respondent. This was to be seen as follows.
The ‘crucial element’ identified by the judge was (in the applicants’ written outline) constituted by:
(k) a failure to observe the difference between depriving the investors of ‘the benefit of their investments’ (being the formulation of the judge) and depriving the investors of ‘the benefit of the use of those monies for the JV Purpose’ (being the pleaded expression); and
(l) specifying the element that each applicant had the intention and purpose of depriving the investors, when the statement of claim simply alleged (in paragraphs 22, 30 and 38) that it knew that that would be the effect.
It should immediately be said that in oral submissions the first point seemed not to be pressed; that is understandable as the judge’s expression would seem to be simply a shortened expression of the pleading.
The critical paragraph in the statement of claim was 22, which does two things, namely — it pleads intentional conduct and knowledge of the consequence of that conduct. The applicants submitted that the plea of ‘knowing’ is not part of the intentional conduct, and that the case against the respondent will be conducted on that basis. Further, as we understood counsel, in paragraph 22 (and 30 and 38 relating to the second and third applicants) the reference to ‘otherwise than solely’ for the joint venture purpose is to be understood as referring to the ‘knowledge’ aspect and not the ‘intentional’ conduct aspect. It was submitted that the judge had read the pleading as meaning that the ‘knowing’ element was part of the ‘intentional’ conduct element. That is, what is pleaded as intended was applying or permitting LGHA to apply money with knowledge that the money was not to be used solely for the purpose of the joint venture and that the transfers of the money would have the effect of depriving the investors of the benefit of the use of the money for those purposes.
The balance of ground 1 sets out what the applicants contend the judge should have found were the essential elements of the dishonest and fraudulent design. All these matters are pleaded.
The case of knowing assistance against the respondent is centrally based upon his role in obtaining further borrowing on the security of the joint venture property, in the circumstances of his knowledge of the purpose of the trusts, the policy as to borrowing up to 65%, and the use of monies raised; see paragraphs 45A to 46. The pleading is that in acting as alleged, the respondent assisted the applicants with the knowledge alleged in paragraph 47, being circumstances that would indicate to an honest and reasonable person that the applicants’ breach of trust was a dishonest and fraudulent design of the applicants as described in paragraphs 22, 30 and 38.
On the other hand, counsel for the respondent submitted that having regard to the description of the dishonest and fraudulent design pleaded in paragraph 22 and the alleged intentional conduct pleaded in paragraphs 19 and 21, and the additional facts going to the applicants’ state of mind pleaded in paragraphs 39 and 40, it was open and correct for the judge to conclude that the intention to deprive the investors was the crucial element of the applicants’ dishonest and fraudulent design.
The question on the present application was not whether a particular view of the statement of claim was open as a matter of interpretation but whether the applicants had pleaded an arguable case. If arguable, the amendments should be allowed and the case proceed to trial.[20] We consider that the amendment does raise an arguable case against the respondent, and that justice requires that leave be granted to enable that case to be determined at trial. The case desired to be put at trial has been clearly identified by counsel and is comprehended by the statement of claim. On that case, the deprivation of the investors was not a ‘crucial’ or intentional element of the applicants’ dishonest and fraudulent design. In these circumstances the just disposition is to grant leave to amend. Otherwise, the claim is precluded.
[20]See Wickstead v Browne (1992) 30 NSWLR 1, 5–7 per Kirby P whose approach was upheld in the High Court in Wickstead v Browne (1993) 10 Leg Rep SL2; (1993) 179 CLR 688 (note). See further, State Bank of NSW v Vincent (Unreported, Supreme Court of New South Wales, Rolfe J, 1 February 1994); Australian Securities & Investments Commission v Yandal Gold Holdings Pty Ltd [1999] FCA 567 [8].
For these reasons ground 1 is made out.
Ground 2
The learned judge:
(m) erred in holding that:
(i) the applicants were required to plead that the respondent had knowledge of facts that were sufficient to make it obvious that the transfers to LGHA were intended to deprive the investors of the benefit of their investments; and
(ii) the applicants were required to displace the reasonable hypothesis that the character of the transfers by the applicants was capable of an innocent explanation involving the use of an ‘in house banker’;
(n) ought to have held that the applicants had pleaded that the respondent had actual knowledge of circumstances constituting each of the elements of the dishonest and fraudulent design set out in ground 1(b) sufficient to make that dishonest and fraudulent design apparent to an honest and reasonable person.
For the reasons relating to ground 1 sub-paragraphs (a)(i) and (b) are made out. So too paragraph (a)(ii), as to which we add the following. This ground is based on the statement in paragraph 23 of his Honour’s reasons. That was preceded by an earlier statement that:
… in the absence of knowledge of the plaintiffs’ intention and purpose, the transfers to LGHA, and investments made by it, may assume the character of relatively neutral events. I say ‘relatively’, because of the fact that some aspects of the transfers and investments might have been sufficient to put Mr Lane on enquiry.[21]
[21]Reasons [21].
Counsel for the respondent said this statement was the basis for the holding referred to in sub-paragraph (a)(ii). It is thus seen as a consequence of his Honour’s conclusion that the ‘crucial element’ of the intentional and purposive deprivation of investors was not pleaded. As we have taken a different view from his Honour on this, sub-paragraph (a)(ii) is made out.
Ground 3
The learned judge erred in holding that:
(o) the applicants had pleaded an explanation by the respondent of the applicants’ conduct;
(p) further or alternatively, the applicants had pleaded an explanation by the respondent of the applicants’ conduct that was consistent with the respondent’s innocence;
This ground refers to statements made by his Honour in paragraph 25 of his reasons quoted above, in which he sets out the third reason for rejecting the applicants’ submission that they were not required to plead that the respondent knew of facts that investor funds transferred to LGHA would not benefit investors or would be applied to projects from which they would derive no benefit; if pleaded such facts might be sufficient to support the necessary inference of knowledge of the applicants’ dishonest and fraudulent design.
The reference to the respondent’s explanation is accepted as being to statements in the extracts of his evidence attached to the statement of claim. But these statements cannot carry the basic issue any distance. That issue is whether the judge was correct in his understanding of the pleading; we have concluded otherwise. Further, what will be made of the alleged admissions will be a matter for determination at the trial. The present application is concerned only with the narrower question whether to allow the amendment. No more need be said on ground 3.
Conclusion
It was for these reasons that at the conclusion of argument we granted leave to appeal, allowed the appeal and made the orders earlier indicated.
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