Nicholson Street Pty Ltd v Letten (No 3)
[2017] VSC 62
•28 February 2017
| 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: | 9 December 2016 |
DATE OF JUDGMENT: | 28 February 2017 |
CASE MAY BE CITED AS: | Nicholson Street Pty Ltd & Ors v Letten & Anor (No 3) |
MEDIUM NEUTRAL CITATION: | [2017] VSC 62 |
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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 S Rubenstein | Maddocks |
HIS HONOUR:
On 18 November 2016 the plaintiffs were refused leave to file and serve a further amended statement of claim.[1] The plaintiffs now propound a draft further amended statement of claim. The second defendant, Paul James Lane, opposes the plaintiffs’ application for leave, submitting that the proceeding should be dismissed as against him. Mr Lane did not make a formal application for summary dismissal, or to strike out the plaintiffs’ pleading.
[1]Nicholson Street Pty Ltd & Ors v Letten & Anor (No 2) [2016] VSC 678.
The background to this application is sufficiently described in the earlier decision. The issue for determination is, once again, the adequacy of the pleaded case of ‘knowing assistance’ against Mr Lane. The relevant allegations against Mr Lane commence at paragraph 45A. The pleading has been significantly recast.
The plaintiffs’ application is for leave to file and serve a new statement of claim. I accept what was said by Sifris J in Finance & Guarantee Company Pty Ltd v Auswild & Ors (No 2)[2] as a correct summary of the applicable principles. The real issue between the parties, on this application, is whether the necessary elements of the cause of action have been adequately pleaded and particularised against Mr Lane, and whether that case, if established at trial, has a real prospect of succeeding. Thus, the concluding observation of Sifris J in Finance & Guarantee Company is apt:[3]
Additionally, as to the merits of the amendment, an amendment will be allowed unless it is so obviously futile that it should be struck out from an original pleading. As Forrest J concluded in Matthews at [34]:
[34] Perhaps, given the terms of the Civil Procedure Act 2010, the test is best expressed in the words of s 63 of that Act: If the amendment has no reasonable prospect of success at trial then that would be a highly relevant factor in the exercise of the discretion to refuse the application.
[2][2016] VSC 559.
[3]Ibid [31] citation omitted.
The starting point of the analysis is the nature of the dishonest and fraudulent design of the plaintiffs which, it is alleged, Mr Lane assisted. In paragraph 22 of their new proposed statement of claim, the plaintiffs allege, in respect of the first plaintiff:
By its conduct as described in paragraphs 17, 19 and 21, the first plaintiff intentionally applied or permitted LGHA to apply moneys 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.[4]
[4]Emphasis added.
Particulars
The first plaintiff had the knowledge alleged by reason of the facts pleaded at paragraphs 39 and 40 below.
A similar allegation, identical in all material respects, is pleaded by the second and third plaintiffs against themselves.[5]
[5]Statement of claim, paragraphs 30 and 38.
In Farah Constructions v Say-Dee,[6] the High Court acknowledged the seriousness of an allegation of knowing assistance, restating the importance of proper pleadings and particulars to facilitate an assessment of the evidence required under the test in Briginshaw v Briginshaw.[7]
[6](2007) 230 CLR 89.
[7](1938) 60 CLR 336.
A component of this pleading, not usually present in a dispute concerning the adequacy or merits of pleadings, is the plaintiffs’ reliance on admissions and vast tracts of pleaded evidence given by Mr Lane during his examination in the Federal Court.
The requirement of knowledge, on which the plaintiffs rely to engage the second limb of Barnes v Addy, is the fourth category in Baden v Societe Generale,[8] — knowledge of circumstances which would indicate the facts to an honest and reasonable person. That category of knowledge is designed to ensure that ‘the morally obtuse cannot escape by failure to recognise an impropriety that could have been apparent to an ordinary person applying the standards of such persons’.[9]
[8][1993] 1 WLR 509, 574–5.
[9]Farah Constructions v Say-Dee [177].
There was a dispute as to what facts would be sufficient to impose liability on Mr Lane. In their statement of claim, the plaintiffs alleged that an honest and reasonable person would conclude, from the facts known to Mr Lane, that transfers of borrowed funds by each plaintiff to LGHA (previously described as the group central treasury) were made with the intention and purpose of depriving investors of their entitlements. Such a statement of intention and purpose is equivalent to an intention to defraud. That is the plaintiffs’ primary case. They seemed to accept that the ‘honest and reasonable person’ should know that a fraud on investors was being perpetrated. In their written submissions the plaintiffs put their case as follows:
(a) The conduct of the plaintiffs was deliberate and had the direct and inevitable consequence that the investors were deprived of the benefit of the use of their money in that it went out of their hands and into the hands of LGHH in the circumstances known to Mr Lane;
(b) An honest and reasonable person would infer from the conduct of the plaintiffs, in the circumstances known to Mr Lane, that they intended that consequence, i.e. to deprive the investors of the benefit of the use of their money.
In oral submissions, the plaintiffs contended for a lower standard of knowledge. They submitted that it was enough to allege that Mr Lane knew of payments to LGHA ‘in circumstances where that was contrary to the basis on which the funds were invested and the security property was held by the respective plaintiff’. In other words, they need not go so far as to establish, on the facts known to Mr Lane, that an honest and reasonable person would have understood the fraudulent intention and purpose. It was enough to establish knowledge of a breach of trust.
As noted above, an important evidentiary plank of the plaintiffs’ pleaded case against Mr Lane was their deployment of admissions and transcript. The plaintiffs appear to accept the truth of Mr Lane’s evidence to establish the alleged admissions. Such an unusual pleading invites an assessment of the extent to which the pleaded evidence supports the alleged admissions.
The plaintiffs plead admissions in paragraph 45A. The admissions and supporting transcript are found in Annexure 1A of the statement of claim. They are as follows:
(1)From time to time Mr Lane was responsible for the preparation of applications for the negotiation of loan facilities with LGHA’s bankers, Westpac.
By reference to the pleaded evidence, Mr Lane said that the funding would either have been raised for renovations (presumably for trust properties) or to provide distributions back to shareholders. By shareholder, he plainly meant investors.
(2)Mr Lane prepared applications for negotiated 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 of improvement of the property held by the trustee seeking those funds.
The plaintiffs relied on the same evidence to support admission (2), as for admission (1). The alleged admission carried with it a purposive element — ‘not intended to be used for the acquisition or improvement of the property held …‘. The transcript references do not support admission (2), and tend to contradict it.
(3)Mr Lane was responsible for supervising the preparation and finalisation of annual financial accounts of LGHA and each of the Letten Trusts, including the Letten Trusts managed by the plaintiffs.
The evidence relied upon in support of admission (3) broadly supports the alleged admission.
(4)Mr Lane 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.
The evidence relied upon in support of admission (4) broadly supports the alleged admission.
(5)Mr Lane executed joint venture agreements with investors in a Letten trust on behalf of the trustee.
The evidence relied upon for admission (5) supports the proposition that Mr Lane signed some joint venture documents, although it is not clear which ones.
(6)Mr Lane knew that 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.
The evidence relied upon to support admission (6) broadly supports the admission.
(7)Mr Lane knew that it was the policy of LGH Group to maintain a level of borrowings on each property held by the trustee of a Letten trust equal to 65% of the value of that property from time to time.
The evidence, relied upon for admission (7), does not support it. Mr Lane was aware of what was described as a ‘banking requirement’ that the properties maintain at least a loan to value ratio of 65 per cent. It was put to him that there was a ‘business model of the group’ to use additional borrowings, presumably when additional equity was available, ‘to develop the subject property or any other property within the group?’. Mr Lane said, ‘If there was an increase in the facility, it would have been used … by the shareholders or the investors, either as … a return of capital, which would then go back to LGH and then how they would use those funds at LGH, I’m not aware of’.
(8)Mr Lane knew that if the borrowing secured on a property held by the trustee of a Letten trust fell below 65% of its value, the practice of LGHA was to arrange further borrowings by that trustee without regard to whether such borrowed money was required for the purpose of that Letten trust.
In support of admission (8), the plaintiffs rely upon the same evidence they claim supports admissions (1) and (7). That evidence does not support admission (8). On a fair reading of the transcript, Mr Lane agreed that there was a loan to value ratio of 65 per cent as a ‘banking requirement’, there were additional borrowings, and the borrowings were to be applied to renovations or a return of capital. The transcript references provide no foundation for an admission that there were further borrowings ‘without regard to whether such borrowed money was required for the purposes of that Letten trust’.
(9)Mr Lane knew that the proceeds of borrowings arranged as described in paragraphs (b) and (c) were paid to LGHA and used for such purposes as it saw fit.
It is not clear from the admission, as formulated in the schedule, what was intended by the words, ‘described in paragraph (b) and (c)’. Some clue might be derived from paragraph 47(d) of the statement of claim, where it is alleged that Mr Lane knew, when preparing applications for and negotiating each of the borrowings that ‘the proceeds of each of the borrowings by the plaintiffs referred to in paragraph 45C were to be paid to LGHA’. The particulars under that allegation refer to admission (9). Paragraph 45C refers to borrowings made by each of the three plaintiffs.
Let it be assumed that the plaintiffs contend for an admission by Mr Lane to the effect that he knew that the proceeds of borrowings by each of the plaintiffs were paid to LGHA, to be used for such purposes as it saw fit. The admission, of course, incorporates a state of knowledge of intent or purpose (as it saw fit) that is non-specific. The alleged admission does not depend on any knowledge by Mr Lane of the actual purpose for which the funds were applied. The same words (as it saw fit) are employed elsewhere in the pleading, to attach a non-specific state of knowledge to Mr Lane. Once again, the evidence relied upon does not support admission (9) and tends to contradict it.
The plaintiffs do not allege that Mr Lane had any part in the decisions to apply investor funds through LGHA, or knew what became of the money, or otherwise contradict his asserted position. While the plaintiffs may, at trial, seek to contradict what Mr Lane said in his pleaded evidence, his evidence illustrates the unsatisfactory nature of the non-specific allegation of knowledge as a basis upon which to allege accessorial liability for knowingly assisting in the perpetration of a fraud. Such a non-specific allegation, in the context of the case put against Mr Lane, is too uncertain and highly prejudicial if allowed to continue to trial.
The alleged admissions continue:
(10)Mr Lane knew that LGHA treated the money held by the trustee of the Letten Trusts, including the plaintiffs, as if those moneys were held by wholly owned subsidiaries of the LGH Group.
The evidence relied upon to support admission (10) contains some clarification of Mr Lane’s understanding of the way in which the group operated. For example, he regarded scheme investors as shareholders, who might receive a distribution or dividend through LGHA. It was put to him that LGHA treated all of the joint ventures as if they were the subsidiaries of a single corporate group. He answered, ‘That’s one way of looking at it, yes.’ It is difficult to see how the plaintiffs derive any useful admission from those transcript references to support the alleged admission.
(11)Mr Lane knew that 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.
The evidence relied upon to support admission (11) does so up to the point where it is alleged that Mr Lane knew that LGHA would use the money ‘as it saw fit’. Mr Lane said that the transactions between the joint venture entities and LGHA were transactions to return ‘shareholder’ funds.
(12)Mr Lane assisted Mr Letten to prepare a document called ‘LGH Group of Companies’ which was provided by Mr Lane to Westpac in or about November 2006.
The evidence relied upon to support admission (12) would indicate that Mr Lane was involved in the preparation of the document. The content of the document remains a mystery.
In paragraph 45B, the plaintiffs set out, with some amendments, the content of paragraph 13 from their previous draft. They allege management and consultancy positions occupied by Mr Lane and that, in those capacities, he prepared applications for loan facilities. In paragraph 45B(c)(ii), they plead that Mr Lane,
prepared applications for and negotiated additional borrowings by Trustees of Letten Trusts, including the plaintiffs, in cases where the proceeds of the borrowings were not intended by the plaintiffs or by LGHA or by Mr Lane to be used for the acquisition or improvement of the property held by the Trustee seeking those funds but rather were to be paid to LGHA to use as it saw fit;
Particulars
The plaintiffs rely on Mr Lane’s admission of this fact in Admission 2 in Annexure 1A.[10]
[10]Emphasis added.
As noted above, Admission (2) is not supported by the pleaded evidence. In paragraph 45B(c)(ii), the ‘dishonest and fraudulent design’, which the plaintiffs attribute to themselves in paragraphs 22, 30 and 38, has been reformulated and attributed to LGHA and Mr Lane. It is one thing to attribute the plaintiffs’ intention and purpose to LGHA, which was controlled by Mr Letten, but quite another to attribute that intention and purpose to Mr Lane without a proper foundation.
Mr Lane was a director of each of the plaintiffs, the general manager of LGHA and provided consultancy services to the group. The plaintiffs allege that he was involved in the preparation of group accounts and loan applications, and was familiar with joint venture documents. But the plaintiffs have expressly confined their pleading of the fraudulent application of investor funds to Mr Letten. They allege, in paragraph 43:
Mr Letten procured the breaches of trust by each plaintiff alleged in paragraphs 15 to 38 above.
Particulars
(i) At all material times, Mr Letten:
(A)was a director and company secretary of each of the plaintiffs and LGHA;
(B)was the controlling mind and will of each of the plaintiffs, with responsibility for the day to day management of each plaintiff’s affairs;
(C)was the controlling mind and will of LGHA, with responsibility for the day to management of LGHA’s affairs;
(ii)As the directing mind and will of LGHA Mr Letten caused LGHA to engage in the conduct alleged in paragraph 14 above;
(iii)Mr Letten had the knowledge alleged at paragraphs 39 to 41 above.[11]
No such allegations are made against Mr Lane.
[11]Emphasis added.
Further, in paragraph 12, the plaintiffs allege that at all material times, until 25 February 2010, Mr Letten was the controlling mind and will of LGHA and directed its affairs. The plaintiffs allege that Mr Letten controlled the transfers of money to LGHA. Mr Letten’s knowledge and intention, alleged in paragraphs 39 to 42, is based upon his controlling influence over the day to day affairs of the plaintiffs, who were perpetrators of the alleged fraud. Thus, the plaintiffs may be taken to have deliberately refrained from alleging, against Mr Lane, a corresponding control, or even involvement in the day to day management and affairs of the plaintiffs or LGHA. Nor do they allege that Mr Lane procured the breaches of trust alleged in paragraphs 15 to 38, or that he was involved in the application of investors’ money by LGHA, or knew what Mr Letten had done with it.
The allegation made against Mr Lane, that he knew LGHA used the funds ‘as it saw fit’, is devoid of particularity, and unsupported by the pleaded evidence. Moreover, the structure of the pleadings contrasts Mr Letten’s conduct and control of the group, with the absence of any allegation of detailed knowledge of the intention and purpose of particular transactions on the part of Mr Lane.
The significance of this very material difference between the conduct and controlling position of Mr Letten, and the pleaded position of Mr Lane, is that while Mr Letten’s alleged fraudulent intention is embedded within the plaintiffs and LGHA, it is not alleged to have been known to Mr Lane. The best the plaintiffs seek to do is to allege that an honest and reasonable person would have inferred from a limited range of facts, Mr Letten’s fraudulent intention and purpose in the application and use of funds received by LGHA.
Paragraph 45C is new. The plaintiffs submitted that its purpose is to make explicit the basis for inferences to be drawn against Mr Lane that an honest and reasonable person would have known, from facts known to Mr Lane, of the ‘dishonest and fraudulent design’. It does no such thing. They plead:
In the course of the performance of his functions and duties as described in paragraph 45B(c) above, Mr Lane prepared applications for and negotiated:
(a)the borrowings of the first plaintiff described in paragraph 19(a) above;
(b)the borrowings of the second plaintiff described in paragraph 27(a) above;
(c)the borrowings of the third plaintiff described in paragraph 35(a) above.
Particulars
This is to be inferred from the facts that:
(i)each of the said borrowings was effected in circumstances where it was not the plaintiffs’ intention or Mr Lane’s intention that the proceeds of the borrowing would be used for the Nicholson St JV Purposes, the Glen Centre JV Purposes or the Twinview JV Purposes respectively (as the case may be) but, rather, were to be paid to LGHA to use as it saw fit;
(ii)it was one of the functions of Mr Lane to prepare applications for and negotiate borrowings of that type.[12]
[12]Emphasis added.
The particulars under paragraph 45C recite the substance of earlier allegations of fact, and do not even seem to relate to the allegations in paragraph 45C(a), (b) or (c). It will be observed that the particulars, from which adverse inferences are to be drawn against Mr Lane, correspond with the allegations of material fact in paragraph 45B(c). The ‘fact’ mentioned in paragraph (i) of the particulars is not supported by the pleaded facts or the pleaded evidence.
In paragraph 45D, which is also new, the plaintiffs plead the execution by Mr Lane of additional loan documents recently obtained by the receivers. These relate to borrowings by the third plaintiff alleged to have been made in breach of trust. Paragraph 46 replicates and augments allegations previously made in paragraph 47. The plaintiffs alleged that in preparing and executing loan applications, Mr Lane assisted the various breaches of trust by the plaintiffs. Each such breach of trust included an express plea to the effect that each plaintiff borrowed on security of trust property ‘when it did not intend that the proceeds of such borrowings were to be used’ for trust purposes as defined. That may be so, as the plaintiffs and LGHA were under the control of Mr Letten who, it is alleged, controlled their day to day affairs and all of the relevant financial transactions. But it is an impermissible leap to attribute knowledge of his alleged fraudulent intention and purpose to Mr Lane on the basis of the pleaded facts and evidence.
Paragraph 47 was described by the plaintiffs as an expanded version of what had been paragraph 46 in the previous draft. The plaintiffs allege that by reason of his position in the group (paragraph 45B), the performance of his functions in preparing loan documentation, finalising accounts, communicating with Mr Letten and executing joint venture documents (paragraph 45B(c) and 45C) and executing various loan documents (paragraph 45D), Mr Lane knew:
(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 required the plaintiffs to open and maintain separate bank accounts and maintain all joint venture monies in those accounts;
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 to maintain a level of borrowings on each property held by the trustee of a Letten Trust equal to 65% of the value of that property from time to time;
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. A copy of the document and the covering letter from Mr Lane is in the possession of the plaintiffs and may be inspected by appointment.
The plaintiffs rely on Mr Lane’s admission that he participated in the preparation of this document in Admission 12 in Annexure 1A.
Further or alternatively, the plaintiffs rely on Mr Lane’s admission of his knowledge of this fact in Admission 7 in Annexure 1A.
(d)the proceeds of each 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 9 in Annexure 1A.
(e)neither LGHA nor the relevant plaintiff intended to use the proceeds of each the borrowings by the plaintiffs referred to in paragraph 45C above for the Nicholson St JV Purposes, the Glen Centre JV Purposes or the Twinview JV Purposes respectively;
Particulars
Mr Lane had knowledge of this fact by reason that he prepared the applications for and negotiated the borrowings in the performance of his function of preparing applications for and negotiating additional borrowings by Trustees of Letten Trusts, including the plaintiffs, in cases where the proceeds of the borrowings were not intended by the plaintiffs or by LGHA to be used for the acquisition of the property held by the Trustee seeking those funds.
In the case of the borrowings by the third plaintiff referred to in paragraphs (vi) and (vii) of the particulars under paragraph 35(c), Mr Lane also had the said knowledge by reason that the facility letter signed by him dated 1 August 2007 specified that the purpose of the facility was stated in the letter to be “To be paid to contractor for works undertaken at Moorhouse Shopping Centre in New Zealand.”
In the case of the borrowings by the third plaintiff referred to in paragraphs (viii) and (ix) of the particulars under paragraph 35(c), Mr Lane also had the said knowledge by reason that the facility letter signed by him dated 1 August 2007 specified that the purpose of the facility was stated in the letter to be “To assist with the construction of Cimitiere House, Tasmania and subdivision of Heritage Estate, Yarra Valley.”
(f)the said proceeds would be paid to LGHA without any security from LGHA for their repayment and without any form of express agreement (written or otherwise) setting out the terms upon which the monies were being paid;
(g)LGHA did not intend to reimburse the plaintiffs for the interest payable by them on the borrowings or otherwise pay interest to the plaintiffs on the monies provided by them;
(h)LGHA treated the money held by the trustees of the Letten Trusts, including the plaintiffs, as if those monies were held by wholly owned subsidiaries of the LGH Group;
Particulars
The plaintiffs rely on Mr Lane’s admission of his knowledge of this fact in Admission 10 in Annexure 1A.
(i)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 11 in Annexure 1A.
(j)the effect of raising loan monies from the bank against the security of the trust property, without the whole of those loan monies being applied to the purposes of the relevant trust, but rather being paid to LGHA, was to dilute or reduce the value of the investors’ investments in the relevant trust property;
Particulars
Mr Lane had knowledge of this fact by reason that he knew that LGHA treated the money held by the trustees of the Letten Trusts, including the plaintiffs, as if those monies were held by wholly owned subsidiaries of the LGH Group and he accounted for payments by those trustees to LGHA as reductions in the equity of the relevant joint ventures.
(k)Mr Letten controlled the transfers of money referred to in sub-paragraph (i).[13]
[13]Emphasis added.
Paragraph 47 repeats a number of the pleaded admissions. Some of the alleged admissions are not supported by the pleaded evidence. In paragraph 47(e), the plaintiffs allege that Mr Lane knew of the intention of the plaintiffs and LGHA. The first paragraph of the particulars repeats the substance of the material fact. The second and third paragraphs refer to the stated purpose of a facility which may have been antithetical to the investors’ interests, although the pleading does not make that clear. It might be argued that Mr Lane ought to have made enquiries and clarified the purpose of the investment.
In paragraph 47(f) the alleged absence of security, or express agreement with LGHA, is pleaded without context. Is it to be assumed that the absence of security or express agreement was a breach of trust? The plaintiffs have not sufficiently pleaded a basis upon which to contend, on the facts known to Mr Lane, that an honest and reasonable person would have known that the transfers to LGHA were not authorised, and in breach of trust, by reason of the absence of security or an express agreement. LGHA had, after all, been pleaded as the group treasury, or internal banker.
In paragraph 47(g) there is an unparticularised allegation that Mr Lane knew that LGHA did not intend to reimburse the plaintiffs for interest. If, as Mr Lane said in his pleaded evidence, the payments to LGHA were made on behalf of investors, as if dividends paid to shareholders, there may not have been an occasion to pay interest. The plaintiffs have failed to plead a basis for any obligation to pay ‘interest’ to constitute relevant knowledge. The allegation in paragraph 47(h) is a repetition of admission (10). In his evidence, Mr Lane used the term ‘shareholder’ to describe investors in the joint ventures, and referred to the transfers to LGHA as ‘dividends’.
Paragraph 47(i) is not supported by the pleaded evidence insofar as the alleged admission extends to Mr Lane’s knowledge that LGHA used the money ‘as it saw fit’. Such an allegation is non-specific, uncertain and unfairly prejudicial. Paragraph 47(j) pleads a consequence (dilute or reduce the value) with particulars that allege, in non-specific form, that Mr Lane knew how ‘LGHA treated the money’. Presumably, the plaintiffs rely on Mr Lane’s preparation of the accounts which, according to the allegation, seem consistent with his evidence of a belief that LGHA was engaged in a return of capital, or payment of a dividend. If so, it would seem inconsistent with an intention to defraud.
In paragraph 48 the plaintiffs allege facts which, they submitted, made it clear that the subject matter of the dishonest and fraudulent design was the borrowing of money and payment to LGHA in circumstances contrary to the basis upon which the funds were invested, and the property held by the respective plaintiffs.[14] They allege:
[14]Written submissions, paragraph 24.
Mr Lane assisted the plaintiffs as alleged in paragraph 46 above with knowledge of the matters specified in paragraph 47, being circumstances that would indicate to an honest and reasonable person at least the following:
(a)each plaintiff held property on behalf of investors who had been invited to invest and had invested money in a joint venture relating specifically to the acquisition of that property;
(b)each plaintiff had borrowed money on the security of the property which it held on behalf of the respective investors and paid the proceeds of the borrowing to LGHA for use for purposes other than the purposes of the respective joint ventures;
(c)the payment of the proceeds of the borrowings to LGHA was part of a systematic policy implemented by the plaintiffs with the intention of making funds held by them on behalf of investors available for use by LGHA as it saw fit and thus depriving the investors (whether permanently or not) of the benefit of the use of those funds;
(d)the plaintiffs intended so to deprive the investors of the benefit of the use of those funds;
(e)the payment of those proceeds to LGHA was contrary to the purposes for which the investors had been invited to invest and had invested their money and for which the plaintiffs held the property;
(f)LGHA did not intend to compensate the joint ventures for their interest borne on the borrowings or otherwise pay interest on the amounts provided;
(g)the proceeds were provided to LGHA without security or any express arrangement for their repayment and were accounted for by the plaintiffs as withdrawals of joint venture equity,
and thereby that the conduct of each of the plaintiffs in borrowing those monies and paying the proceeds to LGHA constituted dishonest and fraudulent breaches of trust.[15]
[15]Emphasis added.
Paragraph 48 involves repetition and overreach. The conclusions to be drawn by an honest and reasonable person, set out in paragraphs 48(a) to (g), are not supported by the allegations in paragraphs 46 and 47. The pleaded evidence of Mr Lane is inconsistent, and the plaintiffs have failed to plead an adequate foundation for knowledge of the ‘dishonest and fraudulent breaches of trust’. The generality of the plea of ‘trust purposes’, known to Mr Lane, will not substitute for detail when the plaintiffs rely on particular conduct or events, such as the absence of security, a failure to pay interest, or the application of borrowed funds to other projects. In any event, such facts, if known to Mr Lane, would not of themselves support the inference that there was a systematic policy of depriving the investors of the benefit of their investment.
The plaintiffs do not plead that, known to Mr Lane, Mr Letten was applying investor funds to his own projects, or to projects in which the investors plainly had no interest, or from which they would derive no benefit. The plaintiffs do not plead that Mr Lane knew that investor funds paid into LGHA by investors, or derived through borrowings, would or could never be returned to investors. Such facts, if pleaded, might form the basis of evidence at trial in support of the contention that an honest and reasonable person would have inferred the dishonest intention and purpose of the plaintiffs.
The plaintiffs argued, however, that it was not necessary to plead that Mr Lane (or the honest and reasonable person) knew the full extent of the plaintiffs’ dishonest scheme. They argued that it was enough to recognise an impropriety, and that a general understanding that fraud, breach of trust or fiduciary duty had occurred was enough.
While there may be room for debate about the degree of impropriety required to constitute a ‘dishonest and fraudulent design’, and whether there is a material difference between equitable and other kinds of fraud or dishonesty, it is settled law that the alleged assistant should have assisted a particular dishonest and fraudulent design. Thus, the allegation of knowing assistance in the present case must attach to the dishonest and fraudulent design of the plaintiffs, expressed in paragraphs 22, 30 and 38 of the statement of claim.
Reliance on the fourth category of knowledge in Baden[16] does not relieve the plaintiffs from their obligation to properly and cogently plead a case of relevant knowledge that a fraud of the character of that alleged was being perpetrated; not a mere breach of trust. While the authorities make it clear that the assistant need not know every detail of the dishonest and fraudulent design, enough must be known to convey the character of what was being perpetrated.[17] It is not enough to plead facts that might put Mr Lane (or the honest and reasonable person) on notice of a risk that a dishonest scheme might be perpetrated.[18] That would be to rely on the fifth category of Baden.
[16]Baden v Societe Generale [1993] 1 WLR 509, 575-576, 582.
[17]Baden p575.
[18]Nicholson v Morgan(No 3) [2013] WASC 110, [67].
The secondary or alternative case, advanced by the plaintiffs in oral submissions, was to attribute liability to Mr Lane on the basis that facts disclosing a breach of trust, in the absence of knowledge of the plaintiffs’ fraudulent intention or purpose, was sufficient. I do not accept that the secondary case constitutes a viable cause of action to establish the accessorial liability of Mr Lane. The facts alleged provide a basis upon which it might be contended that an honest and reasonable person would have understood that there was a risk to trust property, or that Mr Letten was dealing with investor property and funds in a manner that might have been unauthorised. Such an allegation does not correspond with the dishonest intention and purpose of the plaintiffs which, it is alleged, was assisted by Mr Lane.
The pleaded case against Mr Lane is confusing, circular and imprecise. As a pleading, it is inadequate. The pleading does not meet the standard of precision and clarity required to advance a case for accessorial liability, based on knowing assistance of a dishonest and fraudulent design. The facts upon which the plaintiffs rely to establish knowledge of the dishonest and fraudulent design do not go far enough to support an inference that, on the facts known to Mr Lane, an honest and reasonable person would have understood the true nature of the plaintiffs’ fraudulent intention and purpose.
The plaintiffs’ application for leave must be refused. But such an order, without more, is unsatisfactory. The plaintiffs will be left with their original statement of claim, which they do not press. I will hear the parties as to whether the statement of claim against Mr Lane should be struck out, whether the plaintiffs should be given a further opportunity to re-plead a case against Mr Lane, and on the question of costs.
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