Nicholson Street Pty Ltd v Letten (No 2)

[2016] VSC 678

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S CI 2014 03756

NICHOLSON STREET PTY LTD (ACN 069 104 089) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS	Plaintiffs
v
MARK RONALD LETTEN & ANOR	Defendants

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JUDGE:	Judd J
WHERE HELD:	Melbourne
DATE OF HEARING:	21 October 2016
DATE OF JUDGMENT:	10 November 2016
CASE MAY BE CITED AS:	Nicholson Street Pty Ltd & Ors v Letten & Anor (No 2)
MEDIUM NEUTRAL CITATION:	[2016] VSC 678	(First Revision - 18 November 2016)

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PRACTICE AND PROCEDURE – Application to amend statement of claim – Adequacy of pleading accessorial liability under the second limb of Barnes v Addy – Allegation of knowing assistance – Application refused.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr R Strong	King & Wood Mallesons
For the First Defendant	Mr S Hibble	Baker & McKenzie
For the Second Defendant	Mr J Graham	Maddocks

HIS HONOUR:

Introduction

1. By summons filed 10 October 2016, the plaintiffs Nicholson Street Pty Ltd (Receivers and Managers Appointed) (In Liquidation), the Glen Centre Hawthorn Pty Ltd (Receivers and Managers Appointed) (In Liquidation) and Twinview Nominees Pty Ltd (Receivers and Managers Appointed) (In Liquidation) applied for leave to file and serve a further amended statement of claim substantially in the form of a draft attached to the affidavit of Chloe Marian Moore sworn 10 October 2016.

1. The plaintiffs’ proposed amendments were in response to criticisms of the pleaded case against the second defendant, Paul James Lane, made in a previous judgment.   On that occasion I said,[1]

At the heart of the plaintiffs’ case against Lane is knowledge based upon his position and functions. The generality of the plea is unsatisfactory. For example, there are no allegations of Lane’s involvement in particular transactions. The particulars under paragraph 13 have been deleted. If certain conduct is to be relied upon by the plaintiffs, they must specify that conduct. It is not enough to refer to Lane as a person who was an ‘interface’ with bankers, or responsible for the preparation of annual accounts, or who, from time to time, ‘communicated’ with beneficiaries, or who held himself out as the Financial Manager, or who communicated with Letten about cash flow and other matters of financial management and who may have executed joint venture agreements. What is it about such conduct that implicates Lane as a person who knowingly assisted the plaintiffs in their dishonest and fraudulent design? The plaintiffs must allege, with more precision, the information available to Lane that would indicate to an honest and reasonable person that the conduct of each of the plaintiffs was dishonest and fraudulent. It is not alleged he knew what Letten knew, or of particular conduct by Letten.

The unsatisfactory foundation of the case against Lane is compounded by the allegation of assistance in paragraphs 47 and 48. There is a lack of definition to the functions described in paragraph 13(c), which go little further than alleging that Lane had some involvement in the management of the internal finance management entity. For a plea of knowing assistance, which necessarily involves knowledge of dishonesty and fraud, falling in one of the accepted categories, it is necessary to allege with precision the acts of the second defendant that made him a knowing participant in the breach of trust.

In order to establish knowing assistance, the plaintiffs must prove that the defendants’ conduct made a difference, in the sense that it advanced the primary breach in some way. There must be some causal significance to the conduct. The pleaded allegations and particulars must address that requirement. What was it about Lane’s involvement that made him an active participant in the dishonest and fraudulent design of the plaintiffs?

The plaintiffs have failed to make sufficiently precise allegations of conduct against Lane to establish the required knowledge and that he made a difference by his conduct.

[1][2015] VSC 583, [66]–[69].

1. In paragraph 13 of the proposed amended statements of claim, the plaintiffs added further particulars to elaborate the role of Mr Lane in the LGH Group.  Further particulars are also provided under paragraph 46, to support the allegation of Mr Lane’s knowledge.  These particulars include numerous references to transcripts of evidence given by Mr Lane during his examination in the Federal Court.  Reference to evidence, as particulars, is often unhelpful.  References to transcript said to contain an admission of fact are unacceptable.  Proper particulars ought to be provided of each material allegation or fact.  If the fact is denied, a witness may be cross-examined in the usual way.  Even if a plea of material fact, supported by reference to an admission, could be justified, it would be necessary to set out the precise words.  In the present case, the failure to plead Mr Lane’s words may not cause embarrassment to Mr Lane, but it does not assist the Court to assess the adequacy of the pleading, which is at times vague and imprecise.

1. The plaintiffs have also reformulated their allegation of ‘knowing assistance’ in paragraph 47, and added a new paragraph 47A.  They submitted that the proposed amendments remedied the defects and sufficiently defined the case that Mr Lane had to meet.  They submitted that Mr Lane assisted each plaintiff in the misappropriation of money while he was a director.  No case is advanced against Mr Lane for breach of duty as a director.  Rather, the plaintiffs have elected to proceed against him under the second limb of Barnes v Addy.  The plaintiffs submitted that Mr Lane’s assistance was not mere passive acquiescence, because he had permitted the first defendant, Mark Ronald Letten to control all bank accounts, and recorded the transactions as part of his duty to prepare accounts.

1. The allegations of knowledge against Mr Lane remain unchanged, although further particulars have been added.  The plaintiffs conceded that their case for knowledge required the Court to draw an inference, from the facts pleaded, that an honest and reasonable person would have known ‘that the conduct of each of the plaintiffs which he was assisting constituted dishonest and fraudulent breaches of trust’.

1. Mr Letten did not object to the grant of leave.  Mr Lane submitted that the deficiencies identified in the previous judgment had not been remedied, and the plea remained at an unsatisfactory level of generality.  He submitted that such allegations, requiring an assessment of evidence at trial to the Briginshaw standard, required a pleading that clearly linked him to the commission of the alleged breaches of trust, to support a finding that his conduct ‘made a difference’.  He submitted that the facts relied upon to support his knowledge would not support the necessary inference.

Background

1. The plaintiffs allege that in and from 1999 until 2010 Mr Letten, or companies controlled by him, described as the LGH Group, promoted managed investment schemes through which investors were invited to invest in property development projects.  Each plaintiff was a trustee of a trust.  Investor funds were to be pooled and applied to development projects.  Each trust was characterised as a joint venture.

1. LGH Group included LGH Administration Pty Ltd (‘LGHA’), which the plaintiffs allege ‘acted as a central treasury for the LGH Group and the trustees …’.  They allege that there were frequent transfers of money between the trustees (including the plaintiffs) and LGHA.  The plaintiffs allege that Mr Letten controlled the LGH Group, including LGHA, was the mind and will of each of those entities, and controlled the transfer of money between them.

1. The plaintiffs’ case concept is unusual, because they alleged their own fraud, entirely dependent upon the conduct of Mr Letten, while seeking relief against him for having procured breaches of trust by each of them, and for knowing assistance under the second limb of Barnes v Addy.  They do not advance a case for breach of duty as a director.  Procuring a breach of trust, as a cause of action, has experienced a recent revival.[2] 

   [2]Sino Iron Pty Ltd v Palmer (No 3) [2015] QSC 94; (2015) 2 Qd R 574, 598–9; Australian Super Developments Pty Ltd v Mariner [2014] VSC 464 [301].

1. The allegations of breach of trust, which the plaintiffs plead against themselves, involves their failure to get in funds paid by investors, and the use of trust property as security to borrow funds which were transferred to LGHA, and not used for trust purposes.  The plaintiffs allege that they knowingly deprived investors of the benefit of trust funds.  Thus, a central feature of the breaches of trust alleged is an intention to deprive investors of their entitlement — actual fraud.

1. The case concept also invites confusion because of the interface between the knowledge and intentions of the plaintiffs, and the causes of action alleged against Mr Letten.  The plaintiffs allege, against themselves, knowledge of facts and circumstances that would, if established at trial, evidence a dishonest and fraudulent scheme.  The state of mind of the plaintiffs is wholly dependent on the mind and will of their controlling influence, Mr Letten.  On the other hand, they allege alternate bases of knowledge on the part of Mr Letten, as part of their ‘knowing assistance’ case, including something less than actual knowledge.  The ‘wilful or reckless’ allegation against Mr Letten in paragraph 45 leaves open the possibility that at trial the plaintiffs will advance a case that had Mr Letten obtained legal and accounting advice he would have been informed of his own fraudulent scheme and presumably prevented himself from implementing the scheme.  While Mr Letten made no complaint about the proposed further amended statement of claim, the confusion surrounding the allegations against him flow on to the plaintiffs’ case against Mr Lane.

1. The allegations of assistance against Mr Lane, in paragraphs 47 and 47A, relate to the breaches of trust which each of the plaintiffs plead against themselves in paragraphs 19, 21, 27, 29, 35 and 37.  The plaintiffs allege that the breaches in paragraphs 19, 27 and 35 (borrowing against trust assets) were ‘assisted’ by Mr Lane through the performance of his function described in paragraph 13(c)(i).  In that sub-paragraph, the plaintiffs allege that from time to time Mr Lane was responsible for negotiating or assisting in the preparation of applications for loan facilities with LGHA’s bankers.  Particulars of the allegation are given.  The plaintiffs alleged that Mr Lane’s responsibilities included preparation of applications for additional borrowings by them, and other trustees, in cases where the proceeds were [not] intended to be used for the acquisition or improvement of property held by the trustees seeking those funds.[3] 

   [3]Following publication of these reasons for judgment on 10 November 2016, the plaintiffs’ legal practitioners brought to the attention of the Court an error detected in the reference to particulars of Mr Lane’s work responsibilities under paragraph 13(c)(i).  In draft pleading, the word ‘not’ had been omitted.  The particulars ought to have read as follows:

   ‘Mr Lane’s responsibilities included preparation of applications for additional borrowings by Trustees of Letten Trusts, including the plaintiffs, in cases where the proceeds of the borrowings were not intended to be used for the acquisition or improvement of the property held by the Trustee seeking those funds. …’

   Thus, the concluding observations in paragraph 12, based on pleading of an ‘innocent purpose’ were not soundly based.

1. These new particulars must be read in the context of the plaintiffs’ reluctance, which I assume to be well founded, to attribute to Mr Lane their corrupt purpose and intention.  They do not allege that Mr Lane undertook his work with the knowledge, intention, or purpose that the investors would be denied the benefit of borrowed and invested funds. They allege that it was Mr Letten who was the controlling mind and will of the plaintiffs and LGHA, and that it was his intention and purpose to deprive the investors of their entitlements. That is the essence of the fraudulent and dishonest design.

1. In the new, second layer of assistance (para 47A), the plaintiffs allege that Mr Lane assisted in relation to the breaches of trust in paragraphs 21, 29 and 27 (permitting the mixing of the plaintiffs’ funds with the funds of LGHA and failing to apply the funds solely for trust purposes) during the period when Mr Lane was a director of the plaintiffs.  The particulars of assistance are as follows:

The assistance consisted of authorising Mr Letten to have control of the bank accounts of the plaintiffs and to make transfers from those accounts to LGHA or the trustees of other Letten trusts as Mr Letten saw fit.

The authorisation is to be inferred from the facts that Mr Lane was a director of the plaintiffs who knew that Mr Letten had and was exercising control of the bank accounts of the plaintiffs to make such transfers and who approved of and acquiesced in that arrangement.

The approval and acquiescence of Mr Lane is to be inferred from the fact that he supervised the preparation of accounts which recorded such transfers and made no enquiry as to the reason or purpose thereof. (There is an unexplained reference to an admission in Mr Lane’s examination in the Federal Court.)

1. The plaintiffs acknowledge that their assistance case against Mr Lane requires a court to infer from the facts as pleaded that Mr Lane assisted the plaintiffs in their dishonest and fraudulent design by ‘authorising Mr Letten to have control of the bank accounts of the plaintiffs and to make transfers from those accounts to LGHA or the trustees of other Letten trusts as Mr Letten saw fit’.  Such ‘authorisation‘ is to be inferred from the facts that Mr Lane was a director of the plaintiffs, who knew that Mr Letten had and was exercising control of the bank accounts of the plaintiffs to make such transfers, and who approved of and acquiesced in that arrangement.  The plaintiffs do not allege that Mr Lane knew of the plaintiffs’ fraudulent intention.  The plaintiffs allege that Mr Lane’s approval and acquiescence ‘is to be inferred from the fact that he supervised the preparation of accounts which recorded such transfers and made no enquiry as to the reason or purpose thereof’.  Thus, the plaintiffs’ case against Mr Lane is that he assisted because he was a director, who knew that Mr Letten controlled the bank accounts, and prepared the accounts of the relevant entities.  In a context where, as the plaintiffs plead, Mr Letten controlled each of the entities, their bank accounts, and was the mind and will of each of the entities, the allegation of assistance made against Mr Lane does not, it seems to me, rise above passive acquiescence.[4] 

   [4]Re-engine Pty Ltd (In Liquidation) v Ferguson [2007] VSC 57, [120]; (2007) 209 FLR 1.

1. It is not alleged that Mr Lane knew that the investors were to be deprived of their money.  The plaintiffs do not suggest that the use of a central treasury or group banker (LGHA) was inherently dishonest or unlawful.  Accordingly, knowledge of transfers to and from the central banker would be unexceptional unless coupled with knowledge of a corrupt intention and purpose.  If the plaintiffs are to allege that Mr Lane assisted in transactions that involved a central banker, they must do more than allege that ‘from time to time (he) was responsible for negotiating or assisting in the preparation of applications for loan facilities with LGHA’s bankers.’  They must attribute to him, or the honest and reasonable person, knowledge of the corrupt purpose.  It is only by reference to such conduct, precisely pleaded, that the necessary element of knowledge can be fairly pleaded against Mr Lane.  Assistance must be given with knowledge of the dishonest and fraudulent design.

1. The allegation of knowledge made against Mr Lane is that certain facts would indicate to an honest and reasonable person that the conduct of each of the plaintiffs which he was assisting constituted dishonest and fraudulent breaches of trust.  While it is not necessary to establish that Mr Lane himself understood that he was assisting a corrupt purpose, the facts alleged must, if established, support the inference that an honest and reasonable man would have so concluded.  The particulars facts and matters, which Mr Lane is alleged to have known, may be summarised as follows:

(a)the plaintiffs held properties upon certain trusts for investors;

(b)LGHA treated the plaintiffs’ money as its own;

(c)LGHA acted as a central treasury for the LGH Group and the plaintiffs;

(d)there were frequent transfers of money to and from LGHA ‘which money was used by LGHA as it saw fit’;

(e)Mr Letten controlled the transfers of money;

(f)the LGH Group had a policy of maintaining a particular level of borrowings;

(g)if the borrowings fell below 65 per cent of value, further funds would be borrowed without regard to whether such money was required for the purpose of a particular trust; and

(h)the borrowings were paid to LGHA and used by it as it saw fit. 

1. Mr Lane is alleged to have known the foregoing facts and matters by reason of his position with LGHA; the fact that from time to time he negotiated or assisted in the preparation of applications for loan facilities; the fact that he was responsible for supervising and preparing financial accounts; the fact that he regularly communicated with Mr Letten about cash flow summaries, facility requests, joint venture arrangements, financial reporting and other financial information; and the fact that he executed joint venture agreements with the investors.  The plaintiffs allege, in particulars, that Mr Lane had made corresponding admissions in the Federal Court of Australia during his examination.

1. The particulars refer to, but do not identify with any precision, the evidence upon which the plaintiffs rely to establish each admission.  But let it be assumed that each of those allegations is established at trial, are they capable, individually or as a whole, of supporting an inference that an honest and reasonable person would have concluded that he was assisting the plaintiffs in their dishonest and fraudulent scheme?

1. In Finance & Guarantee Company Pty Ltd v James Auswild & Ors,[5] Sifris J undertook a helpful analysis of the legal principles applicable to pleading dishonesty.  A pleader must exercise great care to identify sufficient facts and particulars from which dishonesty may be inferred.  The particular dishonesty, with which the allegation against Mr Lane is concerned, is the dishonest and fraudulent design of the plaintiffs, whose conduct and purpose was to deprive the investors in each of the relevant trusts of the benefit of their money.  The allegation is one of deliberate fraud. 

   [5][2016] VSC 559.

1. The role of LGHA as the in-house banker, or ‘central treasury’ for the group, the movement of funds to and from the bank, and its use of funds in its custody and control, absent a dishonest purpose, are neutral facts.  The pleading does not differentiate between the role of a conventional bank and the in-house banker, or treasury.  Without proof of the dishonest intention on the part of those who control the flow and application of funds, the mere transfers and deployment of funds by the in-house banker would not support an inference of dishonesty.

1. The crucial allegation in the plaintiffs’ case is the alleged knowledge and purpose of the plaintiffs that the investors were to be deprived of the benefit of their money.   Nowhere do the plaintiffs allege that Mr Lane was aware of facts that would have caused an honest and reasonable person to conclude that they (or Mr Letten) had that intention and purpose.  Facts that might put an honest and reasonable person on inquiry are not enough.  Nor are facts which may point to incompetence.

1. There is a further problem with the facts pleaded in paragraph 46.  The allegations in paragraphs 46(b), (d), (e) and (h) are vague and imprecise.  They concern the basis upon which LGHA held and applied money.  The facts go no further than to suggest that it held money as if a central banker, and behaved like a central banker.  The relevance of the allegations in paragraphs 46(f) and (g) is unclear, as they relate only to the way in which the internal banker conducted its business.   These facts would not, if established at trial, support the inference that a reasonable and honest person, knowing such facts, would have concluded that the plaintiffs’ intention was to deprive the investors of their money.

Conclusion

1. In my opinion, the allegations against Mr Lane do not support the plaintiffs’ claim against him.  Leave to amend is refused.  If what is now pleaded is the best the plaintiffs can do, the claim against Mr Lane should be struck out.