Robert Abrook and Ors v Greg Paterson and Ors No. SCGRG 93/2131 Judgment No. 4990 Number of Pages 42 Practice Equity Statutes
[1995] SASC 4990
•3 March 1995
COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA MOHR(2), OLSSON(1) and DEBELLE(3) JJ
CWDS
Practice - Appeals against decision of Master on applications to strike out and amend portions of statement of claim - plaintiffs, members of former unincorporated friendly society, claiming damages from auditors of society, for failing to conduct audit properly - one plaintiff also suing in representative capacity on behalf of all members of society over relevant period - society dissolved and administrator appointed, in whom all property of society vested on trust, to wind up society.
On striking out application factual assertions in pleadings to be accepted - pleadings to be struck out only if alleged cause of action so untenable that could not possibly succeed - similar test to be applied to application to amend - application to strike out not an appropriate vehicle with which to dispose of contentious questions of fact and complex issues of law - pleadings and proposed amendment impugned in this case could not fairly be said to be so patently untenable that they could not possibly succeed - discussion of legal principles related to various topics pleaded or sought to be pleaded - appeal and proposed amendments allowed and cross appeal dismissed.
Equity - trusts and trustees - As administrator declined to take any action against auditors, plaintiffs claiming to be able to enforce any rights accruing to him on a derivative basis - administrator joined as defendant to action auditors contending that plea ought to be struck out - argued plaintiffs unable to bring derivative action because class of claimants too wide and because, since the appointment of administrator, what had been a private trust had become a public trust and that, as such, plaintiffs could not enforce it - such contentions debatable and as such not to be dealt with on application to strike out - Master's refusal to strike out upheld.
Equity - fiduciary obligations
Statutes - statutory powers and duties - Master correct in refusing to strike out allegation of breach of fiduciary and statutory duty - in part turning upon question of whether members party to or directly entitled to benefit of contract of audit and as such only determinable at trial.
Friendly Societies Act, 1913 (Qld) 550; Friendly Societies (Duties and Functions of Registrar) Regulations, 1991 (Qld) Regs 4.02-4.04; Friendly Societies Act, 1991 (Qld) and Family Security Friendly Society (Distribution of Monies) Act, 1991 (Qld) 55 35, 9, 25. Egan v The Commonwealth Minister for Transport (1976) 14 SASR 445 and Kinloch v Secretary of State for India (1882) 7 App Cas 619, applied. Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1994) 61 SASR 424; Bradley Egg Farm Ltd v Clifford and Ors
(1943) 2 All ER 378; ex parte Goodard and Anor; Re Falvey and Anor (1946) 46 SR(NSW) 289. Cockerell v Aucompte (1857) 140 ER 489; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; (1987) 8 NSWLR 270 and Tawilla Pty Ltd and Ors v Farrow Mortgage Services Pty Ltd (In Liquidation) (Court of Appeal, Queensland, 7 June 1994, unreported), discussed. Re Bucks Constabulary Widows' and Orphans' Fund Friendly Society; Thompson v Holdsworth and Ors (No 2) (1979) 1 All ER 623; United Scientific Holdings Ltd v Burnley Borough Council (1978) AC 904 and Wenlock v Moloney and Ors (1965) 2 All ER
871, considered.
HRNG ADELAIDE, 6 October 1994 #DATE 3:3:1995 #ADD 1:5:1995
Counsel for appellants: Mr T A Gray QC with Mr M F Blue
and Ms L G Stein
Solicitors for appellants: Fisher Jeffries
Counsel for respondent: Mr B O'Donnell QC with Mr Jarvis
Solicitors for respondent: Kelly and Co
ORDER
Appeal dismissed and cross-appeal allowed but only in respect of the refusal of the Master to strike out paras 107 to 117, and paras 139 to 151.
JUDGE1 OLSSON J The Full Court has before it, by leave, an appeal and a cross appeal arising from decisions of a Master in relation to both an application by the first to seventh named defendants to strike out the statement of claim in this action and also an application by the plaintiffs to amend the statement of claim. It should, however, be noted that, in light of issues ventilated before the Full Court, the plaintiffs now seek to propound an amendment in a form which is somewhat different from that which was before the learned Master.
2. Before addressing the various issues raised by the appeals it is first necessary to summarize the relevant facts as pleaded or are undisputed, which formed the backdrop to the applications before the Master.
3. It is common ground that, bearing in mind well established authority in that regard, those applications fell to be disposed of upon an acceptance of the facts actually pleaded, it being assumed, for the purposes of debate, that the factual pleas in the statement of claim can be made good at trial. (See Egan v The Commonwealth Minister for Transport (1976) 14 SASR 445 and the authorities therein referred to.)
4. In attempting the summary of the facts pleaded, or which are common ground, I will, as a matter of convenience, refer to the first to seventh named defendants as "Horwath".
5. I first deal with the dramatis personae related to these proceedings.
6. This litigation focuses upon the existence and operations of an unincorporated association of persons (referred to in the pleadings as "Members") known as the Family Security Friendly Society ("FSFS"). FSFS was originally formed in Queensland and, in 1987, registered as a friendly society under the Friendly Societies Act, 1913 of that State ("the Registration Act"). The Society had members in various States, but a large proportion of them were resident in South Australia.
7. FSFS was governed by a set of rules which, inter alia, contemplated the establishment of various contributory funds designed to confer upon members of them a wide range of sickness and other benefits and the provision of hospital, medical, dental, optical, home nursing and other services. Membership of the Society was contingent on (and the automatic product of) joining and continuing to contribute to one or more funds.
8. The rules stipulated that the business and operations of FSFS should be managed by a Board of at least seven directors ("the directors"). The directors were empowered to appoint officers and employees of the Society, as requisite.
9. The Registration Act was designed to regulate and control the existence and operations of friendly societies, as defined. Section 50 stipulated that it was an offence to carry on business as a friendly society unless that society was registered under the statute. The statute erected processes of registration and deregistration and contained a series of provisions designed to regulate the activities of such bodies and provide some measure of protection for those having dealings with them.
10. Certain of these prescriptions bore on matters of internal management. One of them required the conduct of an annual audit, by a licensed auditor, of the books and accounts of the transactions of a friendly society.
11. The Registrar of friendly societies was invested with substantial powers to secure compliance with the requirements of the Registration Act.
12. However, it is to be noted that, unlike many other statutes requiring registration of bodies, the Registration Act did not alter the juridical status of a society upon registration. A society which was an unincorporated body retained that status. It was not a requirement of the legislation that an applicant for registration be or become an incorporated body. On the other hand, section 37 of the Registration Act established a procedure whereby a registered society could, by special resolution, determine to convert itself into an incorporated body.
13. It is common ground that, although FSFS was duly registered under the Registration Act, it did not ever seek to avail itself of the provisions of section 37. Accordingly, at all material times, it remained an unincorporated entity.
14. The file discloses that a plaintiff named Curtis sues both in his capacity as a member of FSFS and also in a representative capacity on behalf of all of the persons who were members of FSFS at any time between 1 September 1989 and 15 January 1991. Those persons have, collectively, been referred to in the statement of claim as "the Society", and I will adhere to the same terminology.
15. A substantial number of persons, including the plaintiff Curtis, who were members of FSFS at material times or after 1 September 1989, have joined in the action as plaintiffs in their individual capacities. They are referred to in the statement of claim as "the Individual Plaintiffs". Once again, I will, in these reasons, adhere to the same description.
16. It is pleaded that, at all material times, there were seven directors of FSFS, three of whom also fulfilled the role of trustees ("the Trustees"). The Trustees held office in accordance with Rule 18 of the registered rules of FSFS. Pursuant to Rule 18.13 there was vested in them, as trustees for and on behalf of FSFS, all real and personal property of the society. However, by virtue of Rule 9, the power of and responsibility for management of the business and operations of FSFS were vested in the directors.
17. It is asserted, and seems common ground, that one of the directors in particular was guilty of improper conduct, in that he fulfilled most of the executive/managerial functions of FSFS and conducted its affairs for the purposes of his own gain and that of entities and persons associated with him. Indeed Mr Gray QC, of senior counsel for the plaintiffs in the action, went so far as to assert that the director had been guilty of what was tantamount to fraudulent behaviour. The conduct in question was said to have occurred from about late 1988 and continued during 1989, with disastrous financial consequences to FSFS. It was pleaded that numerous transactions occurred in breach of the Rules of the Society.
18. It is further pleaded that, in about September 1989, the Society engaged Horwath to be the auditors of the books and accounts of FSFS. This was said to have been brought about by resolution of the directors, despite the fact that the Rules of FSFS contemplated such an appointment by the members of that Society in general meeting. It is not presently in dispute that Horwath thereafter remained auditors of FSFS at all times material to these proceedings, presumably with the concurrence of the members in general meeting..
19. The assertions of the plaintiffs are that the misfeasance of one or more directors brought about the situation that, by the close of 1990, FSFS was in serious financial difficulty.
20. On 14 January 1991 the Governor of Queensland enacted regulations under the Registration Act titled "Friendly Societies (Duties and Functions of Registrar) Regulations, 1991" ("the regulations"). Whilst these were expressed to be of general application there seems little dispute that they were in fact brought into existence because of public concern which had arisen in relation to the affairs of FSFS.
21. For present purposes the provisions which are of particular significance are to be found in Regulations 4.02 to 4.04 inclusive. These read as follows:-
"4.02 Registrar as administrator.
(1) If the Registrar considers that it is necessary to do so
in order to protect the interests of members or creditors of
a society, it is the duty of the Registrar to appoint
himself or herself as administrator of the society to
conduct its affairs.
(2) The appointment must be made in writing.
(3) The Registrar must serve a copy of the appointment on
the secretary or an authorised officer of the society.
4.03 Registrar may appoint person to act on his or her
behalf.
(1) The Registrar, as administrator of a society, may, in
writing, appoint a person to act on his or her behalf in the
administration of the society.
(2) The person must act in accordance with any directions
of the Registrar.
4.04 Effect of appointment of administrator.
(1) On the making of an appointment under regulation 4.02 -
(a) the officers of the society cease to hold office;
and
(b) all contracts of employment with the society are
terminated;
and
(c) all contracts for the provision of services for the
society are terminated;
and
(d) the appointments of persons or firms as auditors of
the society are terminated.
(2) The Registrar, as the administrator of a society, must
conduct the affairs of the society and, for that purpose,
has the powers and functions of the officers and the
committee of management of the society.
(3) While the Registrar is the administrator of a society,
the property of the society is vested in the Registrar as
trustee of the society and the Registrar may deal with the
property in any way in which the trustees of the society
could have dealt with it."
22. It appears that, on 15 January 1991, that is to say on the day following promulgation of the Regulations, the Registrar (who is the eighth defendant in the action), acting pursuant to Regulation 4.02, appointed himself as Administrator of FSFS. It followed that, by virtue of Regulation 4.04(3), the property of FSFS was thereupon vested in him as trustee of FSFS and he became bound to deal with it on the basis that it was impressed with the same trusts as attached to it in the hands of the former trustees appointed pursuant to Rule 18 of the FSFS rules.
23. Significant general amendments were made to the legislative scheme related to friendly societies in Queensland when, on 1 August 1991, the Regulation Act was repealed and replaced by the Friendly Societies Act, 1991 ("the 1991 statute").
24. Inter alia, the 1991 statute, which was of general application, provided that, upon the repeal of the Registration Act, any former registered society was dissolved, but that there was constituted in its place "a corporation that is a continuation of the former society". That corporation was to bear the same name, if the former name included the words "Friendly Society".
25. The 1991 statute contained a series of transitional provisions. It particularly stipulated that, on dissolution of a former society and the incorporation of a continuing society:-
. the rules of the former society were to become the rules
of the continuing society
. the members of the former society were to become the
members of the continuing society
. the assets vested in the trustees of the former society
as trustees were to become assets of the continuing
society, without the need for transfer or conveyance
. pending litigation before a court or tribunal by or
against trustees of a society were to be continued
against the continuing society. There were also various other provisions which it is unnecessary to recite at this point.
26. The 1991 statute further expressly declared that, to allay any doubt, the regulations, by virtue of which the Registrar had appointed himself Administrator of FSFS, were and always had been valid and effectual.
27. Had the 1991 statute been and remained applicable to FSFS then the practical effect would have been that the unincorporated body would not only have been subsumed by a new corporate entity, but also, more importantly, it may well have been the situation that its property and assets would have passed to, or at least for the benefit of, that entity. I hasten to comment that it is, in my opinion, by no means certain that such a result would clearly have ensued because, at the relevant time, there were no assets vested in the trustees of the unincorporated body - they were then held by the Administrator, albeit upon like trusts to those which had originally attached to the trustees.
28. Be that as it may, the Queensland legislature, obviously becoming aware of possible complications in relation to FSFS, proceeded to enact the Family Security Friendly Society (Distribution of Monies) Act, 1991 ("the Distribution Act"), which came into operation on 11 December 1991.
29. It is important to note that the object of that statute was expressed in these terms:-
"An Act to provide for the continuance of the powers of the
Registrar as administrator and trustee of the Family
Security Friendly Society and to provide for the
distribution of funds held by or that may come into the
hands of the Registrar as administrator and trustee of the
Society."
30. The Distribution Act specifically stipulated that those provisions of the 1991 statute which directed that assets vested in trustees of a former society were to become assets of a continuing society and those provisions which continued pending litigation as against new corporate successors did not apply and have never applied to the "Society". It was also enacted that the Regulations had applied to the "Society" from 1 August 1991 and continued to apply to the "Society", subject to the Act.
31. It was contended by Mr O'Donnell QC, of senior counsel for Horwath, that, because the Distribution Act merely defined "Society" as meaning "Family Security Friendly Society", then it was patently referring to a corporate continuing body of that name created by the 1991 statute. He further argued that the effect of that statute had also been to vest the assets of the unincorporated body, which had been in the hands of the Administrator, in the new corporate entity.
32. It is unnecessary, if not impractical, finally to determine those issues at this stage - the more so as they will ultimately fall to be decided against the backdrop of evidence led at trial.
33. Suffice it to say that there are strong arguments contrary to such submissions.
34. First, it seems to me that the specific net effect of the Distribution Act was, as I have pointed out, to prevent the property of the unincorporated body vesting in any new corporate entity.
35. Secondly, the whole thrust of the Distribution Act seems to have been aimed at establishing a specific, separate "code" concerning the former unincorporated body and to establish a basis for its orderly winding up. There was clearly never any intention that it would continue, in a real sense, to operate as a new corporate entity - given that, perhaps per incuriam, such an entity may technically have been created (as a hollow shell) by the 1991 statute.
36. Thirdly, it is to be noted that the Distribution Act proceeded on the basis that the original appointment by the Registrar of himself as Administrator of the unincorporated FSFS continued in force. There is no suggestion that the winding up provisions of the 1991 statute are, or need to be, invoked. Section 5 of the Distribution Act merely stipulates that:-
"Administrator to collect property of Society
5. It is the duty of the administrator to collect the
property of the Society vested in the Registrar as trustee
under the regulations and to convert the property into
money, in the time and way that the administrator alone,
considers is in the best interest of investors and creditors
of the Society."
The assumption implicit in that section as to the continuing status of the Registrar as Administrator/Trustee would appear obvious.
37. Section 9 of the Distribution Act went on to provide that:-
"Application of moneys
9. The moneys of the Society that become available to the
administrator in performing the duty imposed by section 5
must be applied by the administrator in the following order -
(a) first, in payment of the expenses mentioned in section
4.05 of the regulations;
(b) next, in payment of the expenses of and incidental to
the performance of the administrator's duty under this Act;
(c) next, in payment of the creditors;
(d) finally, to be distributed to the investors under this
Act."
38. The expression "investor" was defined in the Distribution Act in these terms:-
"'investor' means a person who contributed money to the
Society for investment in a fund of the Society and whether
or not the person became, at law, a member of the Society,
and whether or not the fund was lawfully created;"
39. As Mr Gray QC pointed out, section 9, insofar as it speaks of an "investor" (which is really a term synonymous with "member") is quite meaningless when applied to any new corporate body following 1 August 1991. This is so because, it was said, no property of the unincorporated body was transferred to any new entity and it had no operation or actual funds as contemplated by the Rules. It therefore had no persons related to it who could aptly be described as investors, as defined.
40. In my opinion these are all powerful, if not potentially unanswerable, arguments, the significance of which will shortly emerge.
41. Before departing from the Distribution Act, and as a prelude to consideration of one specific submission made by Mr O'Donnell QC, I finally note that section 25 of the Distribution Act provides that:-
"Administrator's decision final
25. The administrator's decision under section 17 is final and
is not subject to judicial, administrative or any other form
of review whatever."
42. As appears from the statement of claim, the plaintiffs seek to found their causes of action against Horwath on a variety of bases. The Registrar has been joined as a defendant to the action because, it is said, he has declined a request that, as Administrator, he institute and prosecute a claim for damages against Horwath. The plaintiffs therefore bring their claim as a derivative action, insofar as it is based upon causes of action which, they say, should have been maintained by the Administrator.
43. In such a context it may broadly be said that the statement pleads these causes of action:-
1. Claims in or based on contract
(a) A claim for damages by the Society alleged direct
breach of contract with the members comprising it.
(b) A claim for damages by members of FSFS based on the
so-called "Trident" concept.
(c) A derivative claim for damages on behalf of members
said to be beneficiaries of the trusts administered by the
Trustees, with whom Horwath was said to have had a
contractual relationship.
2. Claims based in negligence
(a) A claim for damages by the Society alleging breach of
duty owed to the relevant members.
(b) A like derivative claim alleging breach of duty owed
to the Trustees.
(c) A like claim alleging breach of duty owed to the
Individual Plaintiffs as members of FSFS.
3. Claims based in breach of fiduciary duty
Three separate bases of claim by interests similar to those
in 2 above.
4. Breach of statutory duty
Three separate bases of claim by interests similar to those
in 2 above.
5. Breaches of Trade Practices Act/Fair Trading Act
Three separate bases of claim by interests similar to those
in 2 above.
44. Various forms of declaratory relief were also sought on behalf of interests similar to those in 2 above.
45. On 22 April 1994 application was made on behalf of Horwath to a Master to strike out the plaintiffs' statement of claim in the form in which it then stood. At the same time the plaintiffs sought leave, inter alia, to amend the statement of claim so that, in effect, it sought to plead the existence between Horwath and the Society of an ambulatory agreement between Horwath and the members from time to time comprising the Society or, alternatively, the existence of ambulatory promises by Horwath to such members, or the existence of ambulatory trusts and beneficial interests in relation to enforcement against Horwath of promises or rights related to the agreement.
46. After entertaining full submissions on behalf of the parties the Master declined to permit the above amendments and struck out various segments of the statement of claim. He declined to strike out other portions of the statement of claim sought to be impugned by Horwath.
47. The plaintiffs now appeal against the striking out orders made and the rejection of their proposed amendments. For their part Horwath appeal against the refusal of the Master to strike out those portions of the statement of claim unsuccessfully sought to be impugned by them. They also contend that the proposed amendments do not cure problems inherent in the statement of claim.
48. Prior to addressing the detailed issues which arose on the appeals it is necessary to reiterate what I said in the course of my judgment in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1994) 61 SASR 424 at 438.
49. I there pointed out that SCR46 sets out the basic obligations of a plaintiff as to a statement of claim and empowers the Court to strike out the whole or any part of a pleading which discloses no reasonable cause of action. I then proceeded to make the point that the authorities establish the proposition that a pleading in a statement of claim may only be struck out if, on the face of it, the alleged cause of action - as pleaded - is so obviously untenable that it cannot possibly succeed. I went on to say:-
"... The power to strike out is to be exercised with caution
and the mere fact that the cause of action as alleged is weak,
or not likely to succeed, is not sufficient to warrant a
striking out order. The pleading must be so deficient that it
is possible, unequivocally, to say that it does not, on any
view, raise a case which is sustainable in the form in which it
has been pleaded, even if the factual averments are made good."
50. The issues now before the Full Court fall to be assessed on those conceptual bases. Moreover, any proposed amendment in question needs to be assessed, as to its propriety, bearing the same principles in mind. If it seeks to raise issues which, on the face of them - accepting any factual averments proffered as being capable of proof - are fairly arguable as propositions of law, then it ought normally to be permitted.
51. Accordingly, I now turn to the detailed issues arising for consideration on such bases, as did the Master.
52. The learned Master pointed out that the first area of attack embarked upon by Mr O'Donnell QC necessarily had to be considered in light of the following express pleas contained in the statement of claim:-
"THE ENGAGEMENT AND THE AGREEMENT
54. In about September 1989, the Society engaged Horwath
to be the auditors of the books and accounts of FSFS ('the
Engagement').
55. Pursuant to the Engagement, in about September 1989
Horwath entered into an agreement with the Society (as it
was then comprised) ('the Agreement') pursuant to which
Horwath agreed to be and acted as the Auditors of the books
and accounts of FSFS.
Particulars
55.1 Resolution of the Board of Directors of FSFS made on
16 May 1989 appointing Horwath to be the auditors of FSFS's
books and accounts.
55.2 The appointment was accepted by Horwath in September
1989."
53. On the basis of that pleading Horwath contended that so much of the statement of claim as constituted a claim in contract by all of the members of FSFS between 1 September 1989 and 15 January 1991 (designated as "the Society") was untenable on two bases, namely that, manifestly, paragraphs 54 to 55.2 above could, at best, only support the allegation of a contract with those persons who were members of FSFS as at September 1989 and the partners of Horwath at that time; and also because, as a matter of law, any relevant contract could only have been a contract with the directors of FSFS and not the general body of members.
54. In the latter regard reliance was placed upon a series of authorities of which Bradley Egg Farm Limited v Clifford and Ors (1943) 2 All ER 378 and Peckham v Moore and Ors (1975) 1 NSWLR 353 are notable examples. These point out the inherent difficulties of concluding that numerous members of a large unincorporated, non trading, entity are individual contracting parties; and that it will usually be the case that the executive committee of such a body will be held personally liable as those who were the true parties to any contract purported to have been entered into by or on behalf of the unincorporated body. (See also M and M Civil Engineering Pty Ltd v Sunshine Coast Turf Club (1987) 2 Qd R 401 at 407.) Comfort was also sought to be obtained from what was said by Jordan CJ in ex parte Goddard and Anor; Re Falvey and Anor (1946) 46 SR(NSW) 289 at 295-296, where, inter alia, he commented that a transaction intended to bind the members from time to time of an unincorporated association is not possible in law (Walker v Sur (1914) 2 KB
930 at 937) and that individual members will not normally be held directly bound by contracts which relate to obligations continuing over a significant period of time.
55. The learned Master held that the two lines of argument advanced on behalf of Horwath were compelling. Whilst he conceded that the first point raised was potentially capable of cure by a suitable amendment, the second was not. He was thus constrained to uphold the contention of Horwath and strike out that aspect of the statement of claim. He held that the question of who is the contracting party in the case of an unincorporated association is a question of law rather than a question of fact and that, on the pleadings, a court would, inevitably, impute an intention that the directors of FSFS were the contracting parties in the instant case.
56. Mr Gray QC challenged that outcome in two ways.
57. First he tendered a document containing an amendment designed, it was argued, to overcome the problem of pleading facts capable of supporting the causes of action sought to be relied upon. It should be said that this was somewhat different from that before the Master and was pitched at meeting certain criticisms advanced before this court. Whilst I would normally be reluctant to entertain such a document and application to amend at this point it is nevertheless convenient to do so to avoid a multiplicity of proceedings and the expense necessarily associated with them.
58. That document contained a proposed amendment expressed in these terms:-
"54. In about September 1989, the Society as it was then
comprised engaged Horwath to be the auditors of the books
and accounts for FSFS ('the Engagement').
55. Pursuant to the Engagement, in about September 1989
Horwath entered into an agreement with the Society ('the
Agreement') pursuant to which Horwath agreed to be and acted
as the auditors of the books and accounts of FSFS.
Particulars
55.1 Resolution of the board of directors of FSFS made on 16
May 1989 appointing Horwath to be the auditors of FSFS's
books and accounts.
55.2 The appointment was accepted by Horwath in September
1989.
55A After the making of the Agreement, there was a series of
notations pursuant to which:
55A.1 new members of the Society became parties to the
Agreement;
55A.2 any new partners of Horwath became parties to the
Agreement.
55B 55B.1 The promises made by Horwath set out in paragraph
57 below were made for the benefit of the Society as
comprised in future from time to time.
55B.2 Further or in the alternative, it was the common
intention of the Society as it was then comprised and Horwath
and or in the alternative an implied term, or in the alternative
of the Society as it was then comprised alone, that the Society
as it was then comprised hold the benefit of the said promises
by Horwath on trust for the Society as comprised in future from
time to time.
55B.3 Further or in the alternative, in the circumstances
set out in paragraphs 3 to 55 above, the Society as it was then
comprised held the benefit of the said promises by Horwath on
trust for the Society as comprised in future from time to
time.
55B.4 In the premises, the Society are entitled to enforce
the Agreement and claim damages thereunder notwithstanding
that some members thereof were not parties to the Agreement;
55B.5 In the alternative to sub-paragraph 55B.4, the Society
as comprised from time to time were the beneficiaries of the
rights of the Society as it was then comprised to enforce
the Agreement and are entitled to sue in their own name to
enforce the rights of the Society as it was then comprised
under the Agreement.
55C In the alternative to paragraphs 54 to 55 above, if
(which the plaintiffs deny) the parties to the Agreement and
the Engagement were the Trustees or the Directors and not
the Society:
55C.1 The promises made by Horwath set out in paragraph 57
below were made for the benefit of the Society;
55C.2 Further or in the alternative, it was the common
intention of the Trustees or the Directors and Horwath
and/or in the alternative an implied term that or in the
alternative the intention of the Trustees or the Directors
alone that the Trustees or the Directors hold the benefit of
the said promises by Horwath on trust for the Society;
55C.3 In the premises, the Society are entitled to enforce
the Agreement and claim damages thereunder notwithstanding
that they were not parties to the Agreement;
55C.4 In the alternative to sub-paragraph 55C.3, the Society
were the beneficiaries of the rights of the Trustees or the
Directors to enforce the Agreement and are entitled to sue
in their own name to enforce the rights of the Trustees or
the Directors under the Agreement upon the failure of the
Trustees or the Directors and their successor the
Administrator to institute proceedings themselves."
59. Mr Gray QC argued that these were proper pleadings and that, consistently with the reasoning in Egan v The Commonwealth Minister of Transport, the Court cannot go behind the pleading and must decide the issues on the footing that the factual allegations are capable of proof.
60. He then went on to submit that the decided authorities as to capacity to contract with individual member of unincorporated bodies were by no means all in the one direction, as argued by Mr O'Donnell QC, and accepted by the learned Master. He contended that what was in issue was a question of fact to be determined in each case.
61. In this regard Mr Gray QC took as his commencement point the case of Cockerell v Aucompte (1857) 140 ER 489. The judges of the Court of Common Pleas there held that the numerous members of a so-called "coal club" were to be taken to be directly bound to a contract consummated on behalf of the club by its secretary with a contractor in respect of the delivery of coal to them as individuals. This was based upon a finding that the secretary had express authority to contract on their behalf as members.
62. He pointed out that Jordan CJ, in the course of his judgment in ex parte Goddard (supra) at 296, had also made the point that it is, in fact, legally possible for members of an unincorporated body to enter into legal relationships with others, albeit that, in many instances, there are serious practical difficulties in making good such a proposition. Such a possibility was also recognised by Bennett J in his dissenting judgment in Bradley Egg Farm Limited v Clifford and Ors (supra) at 383 and Gowans J in Carlton Cricket and Football Social Club v Joseph (1970) VR 487 at 496-496, when he said:-
"As was pointed out by Sir Frederick Jordan, CJ, in Ex
parte Goddard; Re Falvey (1946), 46 SR (NSW) 289, at p 296,
it is legally possible for persons combining together for a
purpose and identifying themselves by a name to enter into legal
relations with others. But whether the result is a contract
having legal force and in whom vest the resultant rights and
obligations depends, in my opinion, upon the particular
circumstances and on the means adopted. It is easier to achieve
a binding legal result in the case of a single transaction
having an immediate final and complete effect, like the purchase
of a parcel of goods, than in the case of a transaction
operating over a long period, such as a lease. And it is easier
to achieve the legal result if the legal rights or obligations
created are, in form, vested in or imposed upon a representative
acting for the general body, than in the case where the legal
rights and obligations purport to be vested in or imposed upon
the body itself by its name. In this latter case, according to
the nature of the transaction sought to be effectuated, the
attempt may produce no legal result at all."
63. It was Mr Gray's submission that, because the identity of the contracting party is always a question of fact and the facts pleaded, or sought to be pleaded, in the instant case averred such a fact it was not for the Master to foreclose that issue by purporting to decide it as a question of law on a striking out application.
64. This aspect of the appeal was also interwoven with a debate as to the propriety of a bald assertion by Mr O'Donnell QC that the Court will not countenance a concept of successive novations of contract, upon members of an unincorporated body joining or leaving that body. The ripostes of Mr Gray QC to that suggestion were, first, that it was not open to the Court, on a strike out application, finally to determine a plea that a series of novations had taken place (because, in the end, that depended on detailed evidence and the intentions of the parties) and, second, the more modern authorities do recognise that such a situation could be shown to exist. In this respect he drew comfort from the type of reasoning adverted to by McHugh JA (as he then was) in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR
270 at 277 ("the first Trident decision").
65. Whilst I suspect that, at trial, the plaintiffs will have a formidable task in making good their case in this regard, I, nevertheless, am of opinion that it was inappropriate for the Master to elect to strike out as he did. In my view he was mistaken in concluding that, in the circumstances pleaded, the Court would inevitably impute an intention that the directors (and not the members) were the contracting parties. This issue can only be resolved in light of the relevant factual evidence.
66. In that regard due consideration must be given to Mr Gray's points that:-
. the defendants admit that the firm of Horwath and Horwath
was retained to act as auditor for FSFS as a consequence
of a telephone call from the secretary and it is
undeniable that the audit reports were directed to the
members;
. the FSFS Rules expressly provided for the appointment by
the members in General Meeting;
. the Registration Act contemplated the possibility of
entry by members into contracts;
. there is a clearly arguable case based on novation
because:-
- the appointment of Horwath and Horwath was an ongoing one
and the membership of that firm in fact changed over
time;
- it was axiomatic and well known to Horwath and Howarth
that membership of FSFS continually changed and that it
must have been the intent - it was said - of all parties
that new members would become parties to and entitled to
the benefit of the audit contract.
. the reasoning of McHugh JA (as he then was) in the first
Trident decision (accepted on appeal by various members
of the High Court) clearly admitted of the existence and
recognition by the law of ambulatory contractual type
obligations in appropriate circumstances; and that
earlier authorities relied upon by Horwath had to be
viewed in that light.
67. I accept that all such features will, in due course, demand proper consideration of complex issues of fact and law and must combine to lead the court to the conclusion that it cannot unequivocally be said, on a strike out application, that the plaintiffs' case was not patently untenable (Lawrence v Griffith and Anor (1987) 47 SASR 455).
68. In any event, I am driven to accept the plaintiffs' contention that the learned Master appears to have overlooked that aspect of the Society's case which was based on non-party contractual enforcement, having regard to what was argued to be the logical extension and application of the reasoning accepted by the High Court in Trident General Insurance Co Limited v McNiece Bros Pty Ltd (1988) 165 CLR 107 ("the second Trident decision"), as sought to be pleaded in the proposed amendments. Such an approach is by no means non-arguable and would, in its own right, justify the pleadings sought to be maintained. Mr Gray QC emphasized that the situation in the instant case is, in certain respects, stronger than that in Trident, because Horwath and Horwath (in its changing, ambulatory form) was being paid fees from members' funds to produce audit reports directed to a group of members which changed from time to time and, unlike Trident, although members came and went over time, they did so in the context of a single, ongoing, identifiable body, albeit one which was unincorporated. In so saying I do not ignore the point made by Mr O'Donnell QC to the effect that the Trident decisions bore upon an express promise for the benefit of third parties, whereas the present contract was not in such direct terms. Whilst the plaintiffs may need to consider a more express plea that the audit work was agreed to be for the benefit of members, it seems to me that such a situation is a necessary inference from the pleadings as proposed to be amended.
69. I would therefore allow the appeal on this aspect and set aside the order made. I would further allow the appeal against the refusal of leave to amend and permit the amendments in the form now proposed to be made.
70. In so concluding I pay due regard to Mr O'Donnell QC's supplementary written submissions and the criticisms which he advances concerning the amendments and the effects of them. Some of those criticisms essentially reflect points which he earlier made in the course of his main submissions. Insofar as he attacks a lack of particularity Horwath has its separate remedies in due course and the plaintiffs may, perhaps, be well advised to give some more consideration to that aspect. However, that is not to deny the fundamental validity of the application for leave to amend.
71. Whether or not the pleas sought to be advanced by the amendments will, wholly or in part, founder on the type of reasoning advanced in Visic v State Government Insurance Office (1990) 3 WAR 122 and Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 will remain to be seen in light of the evidence as it finally emerges and the reasoning of the trial judge having regard to all relevant authorities and principles of law.
72. The learned Master next addressed the claim of "the Society" in negligence, based on the loss of assets of FSFS asserted in paragraph 106.1 of the statement of claim. He upheld the contention of Mr O'Donnell QC to the effect that, since the relevant assets were vested in the trustees, the only possible claim (if there is one) in respect of their loss was potentially by derivative action as prosecuted in paragraphs 126-137 of the statement of claim - the loss was not that of "the Society". He struck out paragraphs 106.1 to 106.3 inclusive, insofar as the individual claims relied upon such loss.
73. Distilled to the essence the argument of Mr Gray QC was that the Master simply disposed of this issue in a somewhat cavalier fashion and did not give due regard to the pleaded fact that the members did suffer loss (which pleading of fact should be accepted for present purposes) and that, in any event, the issue is one of fact which can only be decided on all of the evidence. (Swingcastle Ltd v Alastair Gibson (1991) 2 WLR 1091 at 1102-1103). Moreover, he contended that it was fairly arguable that:-
. the members of FSFS were the persons who suffered the
real loss, because the loss of assets of FSFS was one
suffered by all of its members
. the members of FSFS had an equitable, if not contractual,
interest in the assets in question (Registration Act,
section 30, Re Bucks Constabulary Widows' and Orphans'
Fund Friendly Society; Thompson v Holdsworth and Ors (No
2) (1979) 1 All ER 623) which is sufficient to found
their claim. In any event, he contended, the distinction
between legal and equitable loss has now largely
disappeared, having regard to authorities such as United
Scientific Holdings Ltd v Burnley Borough Council (1978)
AC 904 and Mouat v Clarke Boyce (1992) 2 NZLR 559.)
74. It seems to me that there is sufficient force in those contentions to warrant a conclusion that the Master was not justified, on a strike out application, in unequivocally concluding that the pleading in question was patently untenable, as a matter of law.
75. I would also allow the appeal in that regard and set aside the relevant striking out order.
76. The learned Master next directed his attention to the claim of the members of FSFS to be able to enforce the rights of the administrator against Horwath, on a derivative basis.
77. He noted the contentions of Mr O'Donnell QC that the effect of the relevant legislation has been to bring about a situation in which there is no enforceable trust in favour of the Society and that, in any event, the Society had not pleaded a situation which, in law, established that they were entitled to bring proceedings in their own names, joining the Administrator of FSFS as a defendant. The learned Master declined to strike out the relevant pleas in those regards found in paragraphs 118-137 of the statement of claim, saying that, although Mr O'Donnell QC had proffered a substantial argument in that regard, the issues were complex and he considered that it was inappropriate to deal with them on a striking out application, even if it could properly be said that the plaintiffs' case was weak. In that regard he referred to Wenlock v Moloney and Ors (1965) 2 All ER 871. (See also the dicta in Lawrence v Griffiths (supra), particularly at 463-464, in which White J emphasized that a strike out application was not a proper vehicle with which to dispose of disputed questions of fact and complex issues of law.)
78. The cross appeal seeks to revisit these issues and Mr O'Donnell QC has reargued them before this Court.
79. In my view the Master was patently correct and the cross appeal on these questions cannot be upheld.
80. In the first place Mr O'Donnell QC sought to submit that, by virtue of the legislative history which I have earlier traversed, the relevant property is now held for the new corporate version of FSFS and not the Society. As I have indicated, I do not accept that that was the consequence of the legislation and it is unnecessary to retrace that ground again.
81. Secondly, he argued that, in any event, the relevant property is now held on a public and not a private trust - it is, he said, therefore not enforceable by the Society at all.
82. This contention was based upon a consideration of the regulations, pursuant to which the Registrar appointed himself Administrator, and the Distribution Act. It was sought to be asserted that the present situation is that the Administrator holds the property formerly held by the Trustees, not as a trustee, but as a public official charged with the responsibility of getting in and liquidating the assets to which the Trustees were originally entitled; and then distributing them in accordance with a statutory scheme.
83. In my opinion, as has earlier been demonstrated, there is nothing in the regulations, taken alone, which places the Administrator appointed pursuant to them in any position different from a private trustee. On the contrary, regulation 4.04(3) appears to me to provide that the Administrator is to stand in the shoes of the Trustees and administer the relevant property in the same manner as they ought to have done.
84. It is noteworthy that section 3(1) of the Distribution Act expressly confirmed those regulations as continuing to be applicable to FSFS. What it then went on to do was to vest a series of procedural powers in the Administrator and specifically directed him to wind up FSFS and then disburse the moneys got in - in a manner which would have substantially been the same as would have been applicable had they remained in the hands of the Trustees, save that section 6 deemed all amounts contributed by investors part of a common fund. FSFS, as an unincorporated body, was, of course, effectively dissolved by the 1991 statute and a distribution of its property became necessary in any event, having regard to the trusts attached to it.
85. Whilst it is undeniable that there is a basis for contending that the Distribution Act may have converted a private trust into a public trust I am unable to accept that this is the inevitable conclusion to be arrived at. It seems equally arguable that the Administrator, in his then existing status as a trustee, merely had some new trusts engrafted on the assets in his hands. If it were otherwise then there seems to have been no point in preserving the regulations. Mr Gray QC argues that what fell from Lord Diplock in Tower Investments v The Department of the Environment (1978) AC 359 at 382 is apposite. Moreover, as Debelle J pointed out, arguendo, it must not be forgotten that, by way of contrast with the situation in Kinloch v Secretary of State for India (1882) 7 App Cas 619, the property in question was never a Government or public asset. It was always the case that the members had relevant equitable and/or contractual entitlements to it.
86. This is, once more, a difficult and complex question which is quite inappropriate for resolution on a strike out application. It must be resolved at trial in light of the whole of the facts revealed by the evidence. One might pose the rhetorical question - If it was intended to create a public trust, why was it necessary to include in the Distribution Act an express negation of applicability of the specific provisions of the 1991 statute earlier referred to? At the end of the day the proper conclusion to be drawn requires divination of the intention of the legislature, derived from the terms of the statute and its nature, effect and context. (Tito v Waddell
(1977) Ch 106 at 216.)
87. Mr O'Donnell QC reiterated his argument before the Master that, even if his primary submissions on this aspect of the case were not accepted, then the class of persons claiming is too wide - that the only permissible claimants were those who were still members as at 15 January 1991. For myself I do not see that this is, necessarily, the situation. Much will depend upon the detailed evidence and whether it indicates that members prior to that date with possibly unsatisfied claims were, under the rules of FSFS, nevertheless entitled to claim on the property which was in the hands of the trustees. The Master was plainly correct when he said that this was an aspect that would necessarily have to abide the trial of the action.
88. Little was said before this Court as to the assertion, on behalf of Horwath, to the effect that the circumstances were such that, on the pleadings, this was not a situation in which the plaintiffs are entitled to bring a derivative action, joining the Administrator as a defendant.
89. Whilst this may be a vexed question which, insofar as it relies at all on "special circumstances", may ultimately require some more explicit pleading in that regard, a real question will arise as to whether what is being claimed is based upon equitable interest rather than common law right and whether, in any event, the older principles in this area still remain good law in 1994. Moreover, any issue of special circumstances will necessarily fall to be decided in the light of all of the evidence in the case. All that need be said is that I agree with the learned Master that the Horwath contentions in this regard do fall within an area which is debatable on the authorities and that the position is not so clear cut as to be susceptible of resolution on an application to strike out. In his written submissions Mr Gray QC relies upon dicta and reasoning stemming from a series of authorities; and also the analogy of shareholders entitled to sue by derivative action, by reason of the refusal of directors to sue in the name of the Company. (See for example Deane J in the second Trident decision at 146 and the article by J.G. Starke
(1948) 21 ALJ 455 at 459.)
90. I see no reason to traverse the authorities and argument relied upon in detail. Suffice it to say that, once again, I am not convinced that the situation is by any means as clear cut as Mr O'Donnell QC would have this Court accept. These are patently issues which will have to be resolved at trial in the light of the evidence led.
91. The learned Master was next called upon to consider the claim in negligence by the Individual Plaintiffs against Horwath.
92. As was the situation before this Court, Mr O'Donnell QC strenuously contended that, on the basis of the well known authorities related to auditors of corporate bodies (such as San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340, R Lowe Lippmann Figdor and Frank v AGC (Advances) Limited (1992) 2 VR
671, Caparo Industries Plc v Dickman (1990) 2 AC 605, Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1994) 61 SASR 424 and the like), Horwath would only come under a duty of care to each individual plaintiff if it could be said (and it was specifically pleaded) that, by the relevant audit reports or otherwise, they performed their audit functions (inter alia) for the purpose of inducing those Individual Plaintiffs who were members of FSFS to maintain their investment in FSFS, or for the purpose of inducing those individual plaintiffs who were not then members to make an investment in FSFS. It was submitted that there was simply no allegation of an assumption of responsibility to any of the Individual Plaintiffs to provide audited reports, or otherwise perform audit functions to those members, so as to establish proximity. Specifically, attention was (inter alia) drawn to my own dicta in Esanda at 444-446.
93. It was argued that the pleading in the statement of claim fell short of any plea to that effect and that, accordingly, it failed to raise the necessary factual basis of proximity required to support the claim in negligence.
94. The learned Master struck out paragraph 139.3 of the statement of claim on such a basis as unsustainable, but was not prepared to strike out paragraphs 145.5 and 146.5 which assert that, but for the negligence of Horwath, the members, the trustees, the directors or the Registrar would have taken action to gain control of the affairs of FSFS and put a stop to any further dissipation of its assets - it being asserted by Mr O'Donnell QC that any loss thus arising would be a loss which would flow to the trustees and could be recovered by them and, if so recovered, there would be no loss to the members. (See, for example, the type of reasoning in Prudential Assurance Co Ltd v Newman Industries Ltd and Ors (No 2) (1982) Ch 204 at 222-223.) He felt that these were matters which would depend on the evidence; and their ultimate materiality could not fully be determined until the conclusion of any trial. The lastmentioned ruling was challenged on the cross appeal on the basis that the relevant pleas were incapable of giving rise to any pertinent cause of action.
95. Mr Gray QC sought to meet these submissions by pointing out that the authorities relied upon were all plainly distinguishable, because they related to situations in which a corporate entity was involved as the party contracting with the auditors; and that this necessarily had a profound impact, in most instances, upon the legal capacity for a third party to make out a cause of action, whatever might be the relationship of that party to the corporation. He said that, by way of contra-distinction, the present situation was one in which the engagement was negotiated for and on behalf of the members, the audit reports were specifically directed to them and the whole purpose of the audit was to protect their individual interests. It was, he stressed, specifically pleaded that, to the knowledge of Horwath, the members of FSFS relied upon the auditors to detect fraud and misappropriation; and that evidence would, in due course, be led in that regard.
96. I cannot see that, in such a context, it was appropriate to reject the substance of the plaintiffs plea, as patently unsustainable, in a summary fashion on a strike out application. Much will depend, as to the issue of proximity and the question of whose loss ensued from any conduct of Horwath, on the effect of the detailed evidence as it is adduced and whether or not, at the end of the day, the unincorporated status of FSFS and the provisions of its rules and the requirements of the applicable legislation prove to be differences without distinction, apropos the corporate entity audit cases. This remains to be seen.
97. I cannot escape the conclusion that the learned Master fell into error in striking out paragraphs 139.3 and that the cross appeal related to paragraphs 145.5 and 146.5 cannot be sustained. I would therefore allow the appeal as to paragraph 139.3 and dismiss the cross appeal on this topic.
98. Finally, it was complained by Horwath that the claims by individual plaintiffs for breach of statutory duty and fiduciary obligations were pleaded in far too wide a manner and were not supported either by relevant legislation or pleaded facts. They were, therefore, embarrassing; and portions of paragraph 139 and paragraph 57 of the statement of claim ought to be struck out.
99. The riposte of the learned Master to those suggestions was that Horwath had already been able to plead to the paragraphs in question and that the issues in question were not appropriate for disposal in the context of a strike out application and ought to be disposed of at trial.
100. On the appeal Mr O'Donnell QC emphasized that the statement of claim alleged that the auditors owed a duty to prospective members of FSFS - a contention which, he said, cannot be sustained having regard to the applicable legislative provisions. He also complained that it was asserted that Horwath had failed to comply with various published audit standards and ought to have considered post-balance date matters. There was, he argued, no statutory basis for imposing any such requirements.
101. The short answer to the lastmentioned points is that they beg the question as to what practical steps ought to have been taken to meet any relevant statutory obligations in an acceptable, professional manner.
102. As to the issue related to prospective members of FSFS, that is inextricably interwoven with the vexed question of the ambulatory nature of the engagement said to have been entered into and, as the learned Master rightly appreciated, must abide the outcome of the trial.
103. I consider that the decision of the learned Master was plainly correct on this aspect and the cross appeal related to it must fail.
104. The learned Master determined that a variety of other aspects complained of by Horwath realistically required to be left to one side until the final form of the desired statement of claim was stabilised and other matters had been resolved. This was obviously a counsel of common sense.
105. At the end of the day it is my view that the cross appeal ought to be dismissed, the plaintiff's appeal ought to be allowed and the striking out orders set aside. The proposed amendments sought by the plaintiffs in their present form should be allowed. That is not to say that, in the light of criticisms advanced by Horwath, the plaintiffs would not be well advised to revisit some areas of their statement of claim and consider further particulars of some aspects of the amendment, but that is not to the point in relation to the present appeals.
106. Before parting with this matter it should be mentioned that Mr O'Donnell QC urged upon this Court an adoption of the robust attitude expressed in Tawilla Pty Ltd and Ors v Farrow Mortgage Services Pty Ltd (In Liquidation) (Court of Appeal, Queensland, 7 June 1994, unreported) in which it emphasized the need to attempt, before trial, to eliminate complex allegations which are not likely to be reasonably arguable. Admirable though such an ideal may be, there are serious dangers of injustice in prematurely striking out allegations unless the strict tests of the authorities to which I have referred are unequivocally satisfied.
JUDGE2 MOHR J I agree.
JUDGE3 DEBELLE J This is an appeal from an order of a Master granting the application of the first seven respondents to strike out the appellants' statement of claim and refusing the appellants' application to amend their statement of claim. The respondents' application was made on the ground that the statement of claim disclosed no reasonable cause of action.
2. The principles governing applications to strike out a pleading are well settled and neither party called them into question. The Court will not grant an application to strike out a pleading on the ground that it discloses no reasonable cause of action except in a plain and obvious case: William Charlick Ltd v Smith (1922) SASR 364, 367; Egan v Minister for Transport
(1976) 14 SASR 445, 448. That principle has been applied on many occasions since. The respondents acknowledged that, for the purposes of the application, they must accept the truth of the allegations made in the statement of claim.
3. The issues in this action concern the Family Security Friendly Society ("the Society"). The Society is a Friendly Society registered under the Friendly Societies Act, 1913 (Q) ("the 1913 Act"). It was an unincorporated body. Its objects were to provide, among other things, medical and other benefits for its members. Although registered in Queensland, it appears that a large number of its members reside in South Australia.
4. The rules of the Society provide that the business and operations of the Society shall be managed by a board of seven directors and the directors exercise the powers of the Society. The directors were to be elected at the annual general meeting of the Society. The powers of the board are subject to the 1913 Act and to the rules of the Society. The rules of the Society also provide that there shall be three trustees of the Society. The trustees are required to retire in rotation and a new trustee is elected at each annual general meeting. A retiring trustee is eligible for re-election. Section 30 of the 1913 Act vests all property belonging to a society in the trustees for the use and benefit of the society and its members. Rule 18.13 of the rules of the Society is in like terms to s30.
5. From time to time, the Society established different funds and invited members of the public to subscribe to them. In consequence of the alleged misfeasance of one of its directors a Mr M.L. Cook, the Society has lost substantial monies. The statement of claim alleges that Mr Cook managed and controlled the Society and its assets for the purposes of his own gain and that of companies and persons associated with him and that he acted without significant reference to the trustees of the Society or its directors.
6. Sections 21 and 25 of the 1913 Act required the accounts of friendly societies to be audited in each financial year. On 16 May 1989 the board of directors of the Society resolved to appoint Horwath and Horwath to be auditors of the books and accounts of the Society. In September 1989 Horwath and Horwath accepted the appointment. The first seven defendants were all partners of Horwath and Horwath at all relevant times. Horwath and Horwath audited the accounts of the Society for the year ending 30 June 1989 and 30 June 1990. I will hereafter refer to the firm of Horwath and Horwath as "the auditors".
7. The eighth defendant is Mr J.A. Reyment, the Registrar of Friendly Societies in Queensland. No relief is sought against Mr Reyment and he has indicated that he will be abide the order of the Court.
8. The auditors made certain notes on their 1989 report. Whether they were a sufficient qualification of the report is a matter for determination at the trial of the action. On 15 November 1990 they sent their audit report for the year ended 30 June 1990 to the secretary of the Society. The report referred to transactions which were not in accordance with the requirements of the 1913 Act. Whether the statements amounted to qualifications or sufficient qualifications of the report might, again, be an issue for the trial. The auditors also sent their report to the Registrar of Friendly Societies.
9. The auditors' report on the 1990 accounts appears to have prompted action by the Queensland Government, which, on 14 January 1991, by an Extraordinary Gazette promulgated new regulations under the 1913 Act called the Friendly Societies (Duties and Functions of Registrar) Regulations 1991 ("the Duties and Function Regulations"). Regulations 4.02, 4.03 and 4.04 are relevant. They provide:
"4.02 Registrar as Administrator.
(1) If the Registrar considers that it is necessary to
do so in order to protect the interests of members or
creditors of a society, it is the duty of the Registrar to
appoint himself or herself as administrator of the society
to conduct its affairs.
(2) The appointment must be made in writing.
(3) The Registrar must serve a copy of the appointment
on the secretary or an authorised officer of the society.
4.03 Registrar may appoint person to act on his or her
behalf.
(1) The Registrar, as administrator of a society, may,
in writing, appoint a person to act on his or her behalf in
the administration of the society.
(2) The person must act in accordance with any
directions of the Registrar.
4.04 Effect of appointment of administrator.
(1) On the making of an appointment under regulation
4.02 -
(a) the officers of the society cease to hold office;
and
(b) all contracts of employment with the society are
terminated;
and
(c) all contracts for the provisions of services for the
society are terminated;
and
(d) the appointments of persons or firms as auditors of
the society are terminated.
(2) The Registrar, as the administrator of a society
must conduct the affairs of the society and, for that
purpose, has the powers and functions of the officers and
the committee of management of the society.
(3) While the Registrar is the administrator of a
society, the property of the society is vested in the
Registrar as trustee of the society and the Registrar may
deal with the property in any way in which the trustees of
the society could have dealt with it." Pursuant to the power vested in him by Regulation 4.02, the Registrar on 15 January 1995 appointed himself Administrator of the Society. The effect of that appointment was that all officers of the Society ceased to hold office and the Registrar as Administrator took over the management of the Society and the conduct of its affairs: Regulation 4.04. By virtue of s2 of the 1913 Act, the word "officers" includes the trustees. Thus, the trustees no longer held office and, pursuant to Regulation 4.04(3), the Registrar became trustee in their stead.
10. On 1 August 1991 the Friendly Societies Act 1991 (Q) came into force ("the 1991 Act"). That Act repealed the 1913 Act. Sections 13.2, 13.3, 13.4 and 13.9 are relevant. They provide: "13.2 In this Division -
'continuing society' means the corporation that, in
accordance with section 13.3, is a continuation of a former
society;
'former Act' means the Friendly Societies Act 1913;
'former society' means -
(a) a friendly society, social society, benevolent
society, cattle insurance society, house society or special
purpose society that, immediately before the repeal of the
former Act, was registered under the former Act; and
(b) the branches (if any) of the society;
'trustees', in relation to a former society, means the
trustees (including branch trustees) of the former society
holding office under the former Act before its repeal.
13.3 (1) On the repeal of the former Act, a former
society is dissolved and there is constituted by this Act in
its place a corporation that is a continuation of the former
society.
(2) The Registrar must, as soon as possible, issue a
continuing society with a certificate of incorporation.
(3) The corporate name of a continuing society is -
(a) the same as the name registered under the former Act
as the name of the former society if that name includes the
words 'Friendly Society'; or
(b) in any other case, a name that includes the words
'Friendly Society' (unless the Registrar has exempted, or is
proposing to exempt, the society from compliance with
section 3.5(1)) and is specified in the certificate of
incorporation issued under this section.
13.4 (1) On the dissolution of a former society and the
incorporation of the continuing society -
(a) the rules of the former society become the rules of
the continuing society; and
(b) the members of the former society become the members
of the continuing society; and
(c) the assets vested in the trustees of the former
society as trustees become assets of the continuing society
without the need for a conveyance, transfer, assignment or
other assurance; and
(d) the rights and liabilities of the trustees of the
former society as trustees become rights and liabilities of
the continuing society; and
(e) the obligations of the trustees of the former
society as trustees become obligations of the continuing
society; and
(f) proceedings before a court or tribunal by or against
the trustees of the former society as trustees that,
immediately before the incorporation of the continuing
society, were pending or in the course of being heard become
proceedings by or against the continuing society; and
(g) to the extent to which an act, matter or thing done
or omitted to be done on behalf of the former society had
any force or effect immediately before the incorporation of
the continuing society, it becomes an act, matter or thing
done or omitted to be done by the continuing society; and
(h) the members of the committee of management of the
former society become, and are taken to have consented in
writing to become, directors of the continuing society and
hold office as such until directors of the continuing
society are elected in accordance with its rules; and
(i) a reference in any instrument to the former society
or to the trustees of the former society as trustees becomes
a reference to the continuing society; and
(j) time that had commenced to run in relation to the
former society or its trustees as trustees becomes time that
had commenced to run in relation to the continuing society.
(2) The secretary of a continuing society must as soon
as practicable after its incorporation lodge with the
Registrar of Titles, the Registrar of Dealings or any other
person required by any Act or law to register, make or enter
any note or memorial on or in respect of any instrument of
title to land, as the case requires, a notice in writing in
the prescribed form setting out in relation to any estate or
interest in land held by any person in trust for or on
behalf of the society or a branch of the society or its
objects, such particulars and other matters as are
prescribed.
(3) In the case of any estate or interest in land vested
in the society under subsection (1)(c) -
(a) the Registrar of Titles, where the Real Property Act
1861 applies to that estate or interest; or
(b) the person or authority charged with registering
instruments of title to or dealings with that estate or
interest, where that Act does not apply to it;
has, upon lodgment of a notice under subsection (2) and
without payment of any fee, power to -
(c) make or cause to be made any necessary recordings in
the appropriate register or other record of titles or
dealings; and
(d) do and execute all such acts, matters and things as
may be necessary and proper;
to record that vesting.
(4) The vesting of property under this section and any
instruments executed as a consequence of this section to
give it effect do not attract duty under the Stamp Act 1894.
13.9 (1) To allay any doubt, it is declared that the
Friendly Societies (Duties and Functions of Registrar)
Regulations 1991 (the 'regulations') published in the
Gazette on 14 January 1991 at pages 97 to 109 inclusive are
and always have been valid and effectual.
(2) The regulations are to be read and construed as if
the following definition were, and had since the
commencement of the regulations been, inserted in regulation
1.02 after the definition 'meeting' -
'property', in relation to a society, includes all funds of
the society howsoever obtained or held by it."
Section 13.9 declares that the Duties and Functions Regulations 1991 always remained valid and effectual. Thus, notwithstanding the repeal of the 1913 Act, the appointment of the Registrar as Administrator of the Society continued in full force and effect. As will be seen, s13.4(1)(c) and (b) do not apply to the Society.
11. Before noting the extent to which the 1991 Act might affect the Society, it is convenient to examine the next legislative step in Queensland, the enactment by the Queensland Parliament of special legislation dealing with the Society. It is the Family Security Friendly Society (Distribution of Monies) Act 1991 ("the Distribution of Monies Act"). It commenced operation on 11 December 1991. In the Act the "Society" means the Family Security Friendly Society. It is necessary to refer to ss3, 4 and 5 of the Act. They provide:
"3. (1) It is declared that -
(a) sections 13.4(1)(c) and (f) and 13.8 fo the Friendly
Societies Act 1991 do not apply, and have never applied, to
the Society; and
(b) the regulations have applied to the Society from 1
August 1991, and continue to apply to the Society, subject
to this Act.
(2) Despite subsection (1)(a), the Governor in Council
may, by order in council, fix a day from which a provision
mentioned in that subsection is to apply to the Society.
(3) If the Governor in Council fixes a day under
subsection (2) from which both of the provisions mentioned
in subsection (1)(a) apply to the Society, the regulations
cease to apply to the Society from that day.
4. This Act governs the duties and responsibilities of the
administrator and, except where a contrary intention
appears, if there is an inconsistency between this Act and
any other Act or law, this Act prevails.
5. It is the duty of the administrator to collect the
property of the Society vested in the Registrar as trustee
under the regulations and to convert the property into
money, in the time and way that the Administrator alone,
considers is in the best interests of investors and
creditors of the Society."
Thus, the Distribution of Monies Act provides that the powers of the Registrar as Administrator and trustee of the Society continue and the Registrar is charged with the duty of collecting the property of the Society and distributing it in the best interests of the investors and creditors of the Society.
12. It is against that factual and statutory background that the issues on this appeal must be examined.
13. One of the plaintiffs brings this action of behalf of himself and all persons who were members of the Society any time between 1 September 1989 and 15 January 1991. The statement of claim is divided into three parts. First, there is a claim on behalf of all persons who were members of the Society between 1 September 1989 and 15 January 1991, whom I shall call "the members of the Society". The claim is for breach of contract to act as auditors of the Society, for breach of their duty of care and for negligence in performing their duties as auditors of the Society, for breaches of fiduciary duty, for breaches of statutory duties imposed on them pursuant to the 1913 Act, regulations and rules made thereunder, and for breaches of the Trade Practices Act (Cth) and of the Fair Trading Acts of South Australia or Queensland. Substantial damages are claimed against the auditors in respect of these breaches. It is to be emphasised that this claim is made on behalf of persons who were members of the Society between 1 September 1989 and 15 January 1991 and not on behalf of the individual members.
14. The next part of the statement of claim is headed "Trustees Claim". It is made as an alternative claim in case it should be held that the parties to the agreement by which the auditors were engaged were the trustees and not the members of the Society so that the trustees and not the members of the Society are the proper plaintiffs. The statement of claim avers that the trustees have the same causes of action against the auditors as are pleaded in the first part of the statement of claim. The plaintiffs plead that, upon the Registrar becoming Administrator of the Society, he became entitled to exercise all the powers and rights of the trustees, including the right to sue; that the plaintiffs had requested the Registrar as Administrator of the Society to bring this action against the auditors but he has declined and failed to do so; and that the Society is thereby entitled to bring the action to enforce the rights of the Administrator as trustee against the auditors. This claim is also made on behalf of all members of the Society between 1 September 1989 and 15 January 1991. It is not made by each individual plaintiff.
15. The third part of the statement of claim pleads a claim on behalf of individual members. It is made on behalf of some 500 named individual plaintiffs who were members of the Society and who made investments at different times in the period 1 September 1989 to 15 January 1991. This claim pleads that the auditors owe duties to the individual plaintiffs either as members of the Society or as prospective members of the Society, those duties being a duty of care, fiduciary duties, statutory duties pursuant to the 1913 Act and the regulations and rules made thereunder, and assets or liabilities pursuant to s82 of the Trade Practices Act or in the alternative pursuant to s84 of the Fair Trading Act (South Australia) or s99 of the Fair Trading Act (Queensland). One important difference between the claim of the individual plaintiffs and the claims made on behalf of the membership as a whole is that it does not include a claim for damages for breach of contract.
16. The auditors advanced the application to strike out the statement of claim on several grounds. The Master upheld some of the grounds but dismissed others. He also refused an application by the appellants to amend the statement of claim. The appellants appeal against those orders which allow the strike out application and against the refusal of the Master to allow their application to amend. The auditors cross-appeal against those orders which refused parts of the strike out application.
The Claim in Contract 17. The first issue concerned the claim for breach of contract in the first part of the statement of claim. It was submitted on behalf of the auditors that the statement of claim did not disclose a cause of action in contract between the members of the Society and the auditors. The auditors contended that the plaintiffs were purporting to rely on a contract where the parties are the auditors and an unincorporated association comprised of a large and fluctuating membership, a contract which the law does not countenance. The Master upheld that objection. The appellants appeal against that order. They appeal also against the order refusing them leave to amend the statement of claim. For the reasons which follow, the Master was correct in holding that the plea in paras 54 and 55 should be struck out.
35. It is pertinent to note also that the proposed amendments to para 55C.2 suffer from a lack of particularity. Paragraph 55C.2 pleads a state of mind in that it pleads a common intention on the part of the auditors and directors and later an intention the part of the directors. Such a plea must contain sufficient particulars: Rule 46.04(1)(f). There are no particulars and the plea must fail on that ground also.
36. The premise for the plea in para 55C.3 is the ability of the members to enforce the agreement as pleaded in paras 55C.1 and 55C.2. It, therefore, falls with those paragraphs.
37. The plea in para 55C.4 relies on the trust pleaded in para 55C.2 and must fall with para 55C.2. There is perhaps a further difficulty with this paragraph. The members as beneficiaries under that trust can sue to enforce the trust only if the directors had been asked to sue the auditors but have failed or refused to do so and if the directors are made defendants: Wilson v Darling Island Stevedoring and Lighterage Co Limited (supra); Trident General Insurance Co Limited v McNiece (supra). The proposed amendment does not address these requirements and must fail on that ground also.
38. The defects in the proposed amendments are of such a nature and pervade the amendments to such an extent that they should not be allowed. This is not a case where the propriety of the plea depends upon determinations of fact. I would, therefore, dismiss the appeal from the Master striking out paras 54 and 55 of the statement of claim and refusing leave to the appellants to amend their statement of claim. I would also refuse the application to amend the statement of claim which was made on this appeal. It follows also that the pleas in para 105-106 of the statement of claim are bad and that the appellants fail in their appeal against the order of the Master striking out para 106.
THE CROSS APPEAL The Claims in Negligence by the Individual Plaintiffs 39. The auditors appeal against the decision of the Master refusing to strike out paras 139-151 of the statement of claim in so far as those paragraphs allege that the auditors are liable in negligence to the individual plaintiffs. These paragraphs constitute that part of the statement of claim in which the claims of the individual plaintiffs are made. Both the 1989 and 1990 reports of the auditors were addressed to the members of the Society. Paragraph 139 alleges that the auditors owed duties of care to the individual plaintiffs as members or as prospective members of the Society. That duty of care is said to have arisen from the statutory and other obligations and duties of the auditors in preparing each audit, from the fact that they knew or ought to have known that members or prospective members would rely on them to report any breaches of the 1913 Act or any misconduct or impropriety in relation to the management of the Society, from the fact that the auditors knew or ought to have known that members or prospective members of the Society would rely on their skill and diligence to ensure that systems of controls and safeguards were in operation to ensure compliance with the 1913 Act, from the fact that the auditors knew or should have known that members or prospective members of the Society would rely on their skill and diligence in investing and continuing to invest in the Society, and from the fact it was reasonably foreseeable by the auditors that members and prospective members of the Society would suffer loss if the auditors failed to act with reasonable skill, expertise, care and diligence.
40. Paragraph 144 alleges a breach of that duty and that the auditors were negligent. Paragraphs 141-143 and 145-146 plead that the individual plaintiffs invested or maintained their investment in this Society in reliance on the auditors careful and diligent exercise of their duties. The claim for the loss of personal investment is a claim for an economic loss. The Master held that, although the individual plaintiffs would, on the facts pleaded, have some difficulty in establishing that the auditors owed them a duty of care, the contentions of the plaintiffs were not so plainly unarguable that there was not a sufficient basis upon which to strike out the pleading. For the reasons which follow I would allow this part of the cross-appeal.
41. In Caparo Industries PLC v Dickman (1990) 2 AC 605 the House of Lords held that the auditors of the company were not liable to one of its shareholders who had made an investment decision based on the auditors most recent report. Their Lordships held that, although a person may be liable for a negligent statement made to those who engage them or to those on whose behalf they are engaged, that liability exists only in relation to those transactions for which the person knew that the statement was required. In other words, the liability would exist only if the person making the statement was aware of the transaction which the plaintiff had in contemplation. Thus, liability for economic loss due to a negligent statement was confined to cases where the statement or advice had been given to a known recipient for a specific purpose of which the maker of the statement was aware and upon which the recipient had relied and acted to his detriment. Their Lordships then held that the purpose of auditors preparing an audit pursuant to the obligations under the Companies Act 1985 (UK) was the making of a report to enable shareholders to exercise their class rights in general meetings and did not extend to the provision of information to assist shareholders in the making of decisions as to future investment in the company. In reaching this conclusion, their Lordships held that there was no reason in policy or in principle why auditors should be deemed to have a special relationship with persons who were not shareholders and who are contemplating investment in the company relying on published accounts, even where the affairs of the company were known to be such as to render it susceptible to an attempted takeover. For that reason, the auditors owed no duty of care to the plaintiff in respect of its purchase of shares in the company. By this means their Lordships limited the liability of the auditors so that they would not be exposed to liability "in an indeterminate amount for an indeterminate time to an indeterminate class": see Ultramares Corporation v Touche (1931) 174 NE 441, 444.
42. Thus, there does not exist a relationship of proximity and thus no duty of care exists between auditors and the investing public generally in relation to a statutory audit unless the accounts are audited for the purpose of submission to a potential investor. As Lord Oliver noted (at 650-651) if that proposition be right,
"the attribution of such a duty arising from the receipt of
exactly the same information by a person who happens to be the
registered holder of a share in the company whose accounts are
in question produces entirely capricious results. O'Connor LJ
(1989) Q.B. 653, 715, in his dissenting judgment, instanced the
case of a shareholder who, having purchased further shares at an
overvalue on the basis of the accounts, shows the accounts to a
friend who has no existing shareholding but proceeds to make a
similar purchase. Each receives exactly the same information;
each relies upon it in exactly the same way and for the same
purpose; and the loss sustained in both cases is identical and
is equally foreseeable. Yet liability is said to exist in the
one case but not in the other. One has indeed only to consider
the circumstances of the instance case which must ultimately
result in drawing a distinction between the loss sustained as a
result of the initial purchase of shares (irrecoverable) and
that sustained as a result of purchases made after the first
registration (recoverable) although all purchases were made in
reliance upon exactly the same information."
The auditors are not liable, therefore, either to existing or prospective members of the Society in respect of their investment decisions.
43. The decision in Caparo is consistent with the views expressed by the High Court in San Sebastian Properties Pty Ltd v The Minister (1986) 162 CLR 340. In that case the Court examined the conditions in which the author of a negligent misstatement might be liable to those who have acted in reliance on it and have suffered economic loss. The Court recognised that it was necessary to diminish the risk of indeterminate liability for economic loss. Although the duty of care in the context of negligent misstatements is an instance of the principles governing the duty of care and negligence generally, the special considerations which arise in connection with the imposition of a duty of care on the author of the statement can only be unravelled in the variety of factual situations: see San Sebastian at 354. Liability will not necessarily be limited to those instances where the misstatements were made in response to a request as for example in Evatt v Mutual Life and Citizens Assurance Co Limited (1970) 122 CLR 628 or Shaddock and Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225. As the High Court said in San Sebastian at 356: "But there is no convincing reason for confining the liability to instances of negligent misstatement made by way of response to a request by the plaintiff for information or advice. The existence of an antecedent request for information or advice certainly assists in demonstrating reliance, which is a cornerstone of liability for negligent misstatement. However, such a request is by no means essential, though it has been suggested that instances of liability for misstatement volunteered negligently will be 'rare': Evatt (supra); Lambert v Lewis (1982) AC 225, at 264. The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an interest in the recipient so acting." The Court rejected a proposition advanced in that case that where A engages in conduct which is intended to cause B or a class of persons to act in a particular way, A comes under a duty of care to B or any member of the class who is induced to act in that manner. The Court said that the proposition was too wide ranging. The Court held that the law will impose a duty of care on the maker of a statement where the statement was made for the purpose of inducing the plaintiff, or the members of a limited class including the plaintiff, to commit themselves financially upon the basis that the statement is true and the plaintiff acts in reliance on the statement. The Court went on to say (at 358):
"It is necessary not only that A intends that B or members
of a class of persons should act or refrain from acting in a
particular way, but also that A makes a statement with the
intention of inducing B or members of that class, in reliance on
the statement, to act or refrain from acting in particular way,
in circumstances where A should realise that the economic loss
may be suffered if the statement is not true. In cases where
the defendant intends the statement to operate as a direct
inducement to action, the reasonableness of the reliance will
not be a critical factor, although in other cases the defendants
appreciation of the reasonableness of reliance will be
relevant."
The Court concluded, therefore, that the author of the statement will be liable only where the statements have been made with the intention of inducing the plaintiff or a class of which the plaintiff is a member to act in reliance on the statement.
44. The decision in Caparo was made on the footing that, in order to establish the requisite relationship of proximity to give rise to a duty of care, the plaintiff had to be able to show, not only that the auditors knew that their reports were being prepared for the benefit of the shareholder and the shareholder would rely on the report, but also that they knew the purpose for which the shareholder relied on them: see Lord Bridge at 620-621. In this respect the decision reflects the reasoning of the High Court in San Sebastian.
45. Thus, foreseeability of economic loss and known reliance on the statement is not necessarily sufficient to give rise to a duty of care in a case of this kind and courts in this country have given effect to that principle: see Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1994) 61 SASR 424 at 431 and R Lowe Lippmann Figdor and Franck v AGC (Advances) Ltd (1992) 2 VR
671.
46. There is no plea that the auditors prepared their reports or performed their duties in response to a request by any of the individual plaintiffs or by any person on their behalf for the purpose of enabling those who were member or prospective members of the Society to make decision concerning investment in the Society. Instead, the individual plaintiffs seek to advance their claim on the footing that one of the purposes of the audit reports prepared by these auditors was to enable the individual plaintiffs to make investment decisions. A claim of that kind attributes to an audit report a purpose which it does not have.
47. The role of auditors when preparing a report under the companies legislation in the United Kingdom was examined at some length in Caparo Industries PLC v Dickman (supra) by Lord Bridge at 625-625, by Lord Oliver at 629-632 and at 653-654 and by Lord Jauncey at 658-662. Lord Oliver said (at 631): "Thus the history of the legislation is one of an increasing availability of information concerning the financial affairs of the company to those having an interest in its progress and stability. It cannot fairly be said that the purpose of making such information available is solely to assist those interested in attending general meetings of the company to an informed supervision and appraisal of a stewardship of a company's directors, for the requirement to supply audited reports to, for instance, preference shareholders having no right to vote at general meetings and to debenture holders cannot easily be attributed to any such purpose. Nevertheless, I do not, for my part, discern in the legislation any departure from what appears to me to be the original, central and primary purpose of these provisions, that is to say, the informed exercise by those interested in the property of the company, whether as proprietors of shares in the company or as holders of rights secured by debenture trust deed, of such powers as are vested in them by virtue of their respective proprietary interests." And later, His Lordship concluded (at 654):
"the purpose for which the auditors certificate is made and
published is that of providing those entitled to receive the
report with information to enable them to exercise in
conjunction with those powers which the respective proprietary
interests confer upon them and not for the purposes of
individual speculation with a view to profit. The same
consideration must limit the existence of a duty of care also,
in my judgment, limit the scope of the duty and... the duty of
care is one owed to the shareholders as a body and not to
individual shareholders."
That summary of the purpose of an auditor's report applies with equal force to the case where the audit is made of the accounts and financial affairs of an unincorporated association. The fact that the report is addressed to the members does not in any respect alter that position. The report could equally have been addressed to either the director of the trustees of the Society. I do not think the question of liability will necessarily depend upon the question of to whom the auditor's report is addressed.
48. Paragraph 139.3 pleads a direct relationship between the auditors and the individual plaintiffs on a ground that the auditors were engaged by the general body of members. That plea relies on the contract which, for reasons given earlier, does not exist. Further, the plea is bad in that it fails to have regard to the purpose for which the report was prepared. As already stated, the auditors performed their duties for a purpose other than enabling individual members to make investment decisions. For these reasons, the auditors are not liable to the individual plaintiffs for the investment decisions made by the individual plaintiffs who were either existing or prospective members of the Society.
49. The individual plaintiffs have one other string to their bow in respect of their claim in negligence. They include in paras 145.5, 146.5 and 150.5 a plea that the breach of the duty by the auditors cause them to suffer loss in that either they, the trustees, the directors or the Registrar would have taken action to take control of and safeguard the operations and assets of the Society or close down the operations and realise the assets of the Society. But the loss is not a loss to the individual members: the loss is the collective loss of the members of the Society and, as such, it is a loss to the trustees as the persons in whom is vested all of the property of the Society. The loss can be recovered by a claim by the trustees against the auditors: cf Lord Bridge in Caparo at 626.
50. If the trustees, or the Administrator, were to pursue the auditors and recover damages against them for the loss of value of the assets of the Society, then the individual plaintiff would have suffered no loss of their investment. The position is similar to that when a company recovers damages in respect of a loss of assets of the company so that the individual shareholders have suffered no loss.
51. The auditors attacked the pleading in para 139 on other grounds. But, in light of my conclusion at paras 139 to 151 should be struck out, it is unnecessary to deal with that question.
52. For these reasons, I would allow the appeal against the refusal of the Master to strike out the claim by the individual plaintiffs in negligence.
The Claims of the Membership for Breach of Certain Duties 53. The auditors appeal against the refusal of the Master to strike out paras 107-117 of the statement of claim. Those paragraphs plead that the auditors were in breach of a duty of care in conducting the audits and acted negligently in respect of the persons who were members of the Society between 1 September 1989 and 15 January 1991. Paragraphs 111-117 plead breaches of s52 of the Trade Practices Act (Cth), s56 of the Fair Trading Act (SA) and s30 of the Fair Trading Act (Qld), alleging that the auditors engaged in conduct that was misleading or deceptive or was likely to mislead or deceive the members, the trustees, the directors and the Registrar in that it was likely to lead them to believe that the Society was being properly managed.
54. The loss sustained by the Society as a result of the breaches pleaded in paras 107-117 is a loss in respect of which the proper plaintiff is the trustees of the Society, not the general body of members. By s30 of the 1913 Act, the property of the Society is held by the trustees for the use and benefit of the members. Clause 38 of the Second Schedule to the 1913 Act empowered the trustees to bring legal proceedings on behalf of the Society. Like provisions are to be found in Clause 18.13 and Clause 19.1 respectively of the rules of the Society.
55. By force of Regulation 4.04(3) of the Duties and Functions Regulations, any claim which the trustees could have made against the auditors was vested in the Registrar as Administrator. There are questions whether the Registrar is still bound by that trust. The resolution of that issue turns on the operation and effect of the Duties and Functions Regulations and the Distribution of Monies Act. However, whatever the effect of that legislation, the best position of the appellants can only be that the causes of action are vested in the Registrar as trustee and they, therefore, have no standing. The claims in paras 107-117 should therefore be struck out.
The Trustee's Claim 56. Like issues are involved in relation to the appeal by the auditors against the refusal of the Master to strike out paras 118-137 of the statement of claim. Paragraph 118 pleads, in the alternative to paras 54, 55 and 58, that, if the agreement was made with the trustees, the duty of care of the auditors was owed to the trustees and the trustees were the only persons entitled to sue, the general body of members is entitled to enforce the rights which the Administrator now declines or fails to enforce. I adopt the summary prepared by counsel for the auditors of the steps by which the members assert this claim. They are:
(a) the auditors were engaged by the trustees, and owed
contractual, tortious and fiduciary duties to the trustees;
(b) the trustees of the Society were acting as trustees
for and on behalf of the members from time to time, and the
duties owed by the auditors were owed to the trustees in
that capacity;
(c) the auditors were in breach of those duties, whereby
the assets of the Society were lost;
(d) the loss of assets of the Society comprised a loss
of trust assets, for which the trustees would otherwise be
entitled to recover;
(e) by a combination of regulations and legislation
passed in 1991 the rights of the trustees vested n the
Administrator (appointed 15th January 1991);
(f) the members of the Society have asked the
Administrator to commence proceedings against the auditors,
but he had declined to do so;
(g) in the premises, the members of the Society are
themselves entitled to bring proceedings (in their own
names) against the auditors, joining the Administrator as a
respondent.
There is an immediate difficulty with this plea in that there is no plea elsewhere in the statement that the auditors were engaged. This may not be a great hurdle for the appellants as the trustees are the persons who may sue on behalf of the Society and thus would be able to sue even if the contract was made between the auditors and the directors of the Society.
57. Central to the ability of the members to pursue this claim is the proposition that the Administrator holds any cause of action available against the auditors upon a private trust for the members of the Society as is pleaded in para 135 of the statement of claim. The auditors attacked the claim on the ground that the combined effect of the Duties and Functions Regulations, the 1991 Act and the Distribution of Monies Act is that the vesting of the property in the Administrator did not create a private class which was enforceable at law. It was submitted that, notwithstanding that Regulation 4.04(3) vested the property in the Administrator "as trustee of the Society", the effect of the 1991 Act and of the Distribution of Monies Act is to remove the obligations of a private trustee. Instead, it is submitted, the 1991 Act and the Distribution of Monies Act in particular vested the property of the Society in the Administrator for purposes of administration only, thereby creating a public trust which the members could not enforce: Kinloch v Secretary of State of India (1882) 7 App Cas 619; Tito v Waddell (No 2) (1977) Ch 106 at 216; Town Investments Ltd v Department of the Environment (1978) AC
359; Harmer v Federal Commissioner of Taxation (1989) 91 ALR 550. The Master held that it was at least arguable that the legislation created a trust enforceable as a private trust. For the reasons which follow, I think the Master was correct.
58. As the issues arise on an application to strike out pleadings, it is inappropriate to express a final and conclusive view. The following views are expressed for the purpose of determining only whether the auditors have established a clear case that the appellants cannot succeed on this ground. Mr O'Donnell QC invited the Court to deal more robustly with these issues. I do not think that an application to strike out pleadings is an appropriate means of reaching a final determination on such questions. The better course is to apply under Rule 75.02 for an early determination of preliminary questions of law.
59. The terms of Regulation 4.04(3) vested the property of the Society in the Administrator "as trustee of the Society" and authorised the Administrator to "deal with the property in any way in which the trustees of the Society could have dealt with it". It is plainly arguable that the effect of Regulation 4.04(3) was not only to vest the property in the Administrator but also to vest it subject to the trusts created by s30 of the Act, if not also by rule 18.13 of the rules of the Society. As s30 of the 1913 Act created the trust, it would not be possible by regulation to revoke or vary that trust. The enactment of the 1991 Act and the repeal of the 1913 Act did not affect the operation of the Duties and Functions Regulations. They were expressly kept in force by s13.9 of the 1991 Act. Thus, the Administrator continued to hold the property of the Society subject to the trust created by s30 of the 1913 Act.
60. The question then arises whether the 1991 Act and the Distribution of Monies Act affects those trusts in any way. Mr O'Donnell QC, who appeared for the auditors, submitted that, when read as a whole, the Distribution of Monies Act states the functions and duties of the Administrator in such a detailed and comprehensive fashion as to preclude a private trust. It is convenient again to refer to the terms of s5:
"It is the duty of the administrator to collect the property
of the Society vested in the Registrar as trustee under the
regulations and to convert the property into money, in the time
and way that the administrator alone, considers is in the best
interests of investors and creditors of the Society."
The concluding words of s5 which invest the Administrator with a wide discretion do not necessarily negate the conclusion that this is a private trust capable of enforcement by the members as beneficiaries. There are a number of reasons for that view. First, there is, I think, a tenable argument that the Act draws a distinction between the duty of the Administrator to collect and get in the property of the Society and his duty to distribute it. That is made clear by the long title of the Distribution of Monies Act which provides:
"An Act to provide for the continuance of the powers of the
Registrar as administrator and trustee of the Family Security
Friendly Society and to provide for the distribution of funds
held by or that may come into the hands of the Registrar as
administrator and trustee of the Society."
Section 5 imposes a duty on the Administrator to collect the property of the Society vested in him "as trustee under the regulations and to convert the property into money". The underlined words indicate that the Administrator continues to hold property of the Society subject to the same trusts as those under the Duties and Functions Regulations, which are the trusts imposed by s30 of the 1913 Act. Further, an examination of the provisions of the Act discloses that the Act is essentially directed to the distribution of monies once the Registrar has exercised his powers as trustee under the Duties and Functions Regulations and has collected the property of the Society and converted it into money. Its provisions deal, for example, with advertisement of claims, with the procedure for determining claims, and priorities in respect of payments when the distribution is made. All of this points to the conclusion that the Distribution of Monies Act does not revoke or qualify the trusts imposed upon the Registrar by virtue of these Duties and Functions Regulations except to the extent of enabling the distribution. Next, it is arguable that the discretion operates only in respect of decisions made by the Administrator to convert the property into money and does not affect the duty to collect and get in the property of the Society. Mr O'Connell QC referred to s24 of the Act which enables the Administrator to get instructions from the Governor if the Administrator believes that the expenses of distribution would not warrant a distribution. But the direction of the Governor relates only to distribution. It does not qualify the duty to get in the property of the Society.
61. Mr O'Donnell QC called in aid the fact that the Administrator has wide discretions as to claims made against the Society's property, a discretion which is not subject to judicial, administrative or any other form of review: see s17 and s25 of the Distribution of Monies Act. But, again, it is to be noted that this wide discretion is limited to claims made: it does not operate upon the duty to get in the property of the Society.
62. Mr O'Donnell QC also submitted that the 1991 Act had the effect of causing the members of the Society to be no longer the beneficiaries of the trust. He referred to s13.3 of the 1991 Act which dissolved each society registered under the 1913 Act and constituted in its place a corporation that is a continuation of the former society. He referred also to s13.4 which made the members of the former society members of the continuing society which had been constituted as a corporation. Thus, he said, the appellants ceased to be beneficiaries of the trust and became instead members of the new corporation.
63. The Master held that the question involved a consideration of a series of statutes as they relate to what he called a complicated fact situation. The facts may not be complicated but again I do not think that the argument advanced on behalf of the auditors is so clear that the Court should accede to it on this application. It is, I think, properly arguable that the property of the Society and the trusts on which the Administrator held that property remain wholly unaffected by s13.3 and s13.4. Section 3 of the Distribution of Monies Act provides that s13.4(1)(c)and (f) do not apply to the Society. Thus, the assets of the Society did not become assets of the new corporate Society and remained always in possession of the Administrator. That conclusion is reinforced by s3(1) of the Distribution of Monies Act. The assets were, therefore, always subject to a trust for the members of the former Society, a conclusion reinforced by s5 which, as already noted, imposes on the Administrator a duty "to collect the property of the Society vested" in the Registrar "as trustee under the regulations". The trust was not, therefore, affected by the incorporation of the Society. The members of the Society always remained beneficiaries under the trust.
64. Other considerations bear on these issues. It is inappropriate to consider them all. The Master was correct in holding that it was at least arguable that the trust created by the regulations was in the nature of a private trust enforceable by the members.
65. I would, therefore, dismiss this part of the auditors' cross-appeal.
Summary 66. That statement of claim in this action suffers from the defect that an attempt has been made to plead every conceivable cause of action. The time may well have come for it to be carefully re-examined and re-drawn so that the trial can proceed on the real issues.
67. For these reasons, I would order that the appeal be dismissed and that the cross-appeal be allowed but only in respect of the refusal of the Master to strike out paras 107 to 117, and paras 139 to 151.
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