FEDERAL COURT OF AUSTRALIA
Sandhurst Trustees Limited v Clarke [2015] FCAFC 21
Citation: Sandhurst Trustees Limited v Clarke [2015] FCAFC 21 Appeal from: Application for leave to appeal: Clarke v Sandhurst Trustees Limited [2014] FCA 580 Parties: SANDHURST TRUSTEES LIMITED (ABN 1600 403 0737) v GRAEME CLARKE and MARION CLARKE File number(s): QUD 294 of 2014 Judge(s): DOWSETT, DAVIES, WIGNEY JJ Date of judgment: 26 February 2015 Catchwords: PRACTICE AND PROCEDURE – application for leave to appeal from decision of a single judge of the Federal Court granting discovery to prospective applicant pursuant to r 7.23 of the Federal Court Rules 2011 (Cth) – power to order preliminary discovery – applicable principles – no appealable error demonstrated – application for leave to appeal dismissed Legislation: Federal Court Rules 2011 (Cth) rr 1.32, 1.33, 1.34, 1.35, 7.23 Federal Court of Australia Act 1976 (Cth) ss 24(1), 24(1A)
Corporations Act 2001 (Cth) Chapter 2L, ss 318(1), 318(4)Cases cited: Malouf v Malouf (1999) 86 FCR 134; [1999] FCA 284
Décor Corporation Pty Ltd v Dart Industries (1991) 33 FCR 397; [1991] FCA 655
Wills v Australian Broadcasting (2009) 173 FCR 284; [2009] FCAFC 6
Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58
Apache Northwest Pty Ltd v Newcrest Mining Ltd (2009) 182 FCR 124; [2009] FCAFC 39
George v Rockett (1990) 170 CLR 104
ObjectiVision Pty Ltd v Visionsearch Pty Ltd (2014) 108 IPR 244; [2014] FCA 1087
EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd
(No 3) (2012) 199 FCR 533; [2012] FCA 48
Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434
Kirella Pty Ltd v Hooper (1999) 161 ALR 447
Zapf Creation AG v OWT Australia Pty Ltd [2001] FCA 759
Slick v Westpac Banking Corporation [2006] FCA 1712
Warkworth Mining Ltd v Bulga Milbrodale Progress Association Inc (2014) 307 ALR 262; [2014] NSWCA 105Date of hearing: 19 November 2014 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 56 Counsel for the Applicant: Mr M Hoffman QC with Mr M Trim & Mr J Green Solicitor for the Applicant: Group Legal Bendigo and Adelaide Bank Limited Counsel for the Respondents: Mr A Martin SC with Mr G Drew Solicitor for the Respondents: Shine Lawyers
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 294 of 2014
BETWEEN: SANDHURST TRUSTEES LIMITED (ABN 1600 403 0737)
AppellantAND: GRAEME CLARKE
First RespondentMARION CLARKE
Second Respondent
JUDGES:
DOWSETT, DAVIES, WIGNEY JJ
DATE OF ORDER:
26 FEBRUARY 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The application for leave to appeal be dismissed.
2.The applicant pay the respondent’s costs of the application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 294 of 2014
BETWEEN: SANDHURST TRUSTEES LIMITED (ABN 1600 403 0737)
AppellantAND: GRAEME CLARKE
First Respondent
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- Sandhurst Trustees Limited v Clarke [2015] FCAFC 21
- Case
- [2015] FCAFC 21
- Decision Date
CaseChat Overview and Summary
In the case of Sandhurst Trustees Limited v Clarke, the primary judge granted discovery to the prospective applicant, Mr Clarke, under rule 7.23 of the Federal Court Rules 2011 (Cth). Sandhurst Trustees Limited sought leave to appeal this decision. The dispute centered around whether Mr Clarke had a reasonable basis to believe he had a right to obtain relief from Sandhurst, and whether Sandhurst held documents relevant to this belief. The Federal Court was tasked with determining whether the primary judge correctly applied the principles governing the power to order preliminary discovery and whether any appealable error was demonstrated.
The court examined whether Mr Clarke's belief about his potential right to relief was more than mere speculation. The primary judge found that Mr Clarke had made reasonable enquiries but lacked sufficient information to decide whether to commence proceedings. Moreover, the judge concluded that Sandhurst likely held documents that would assist Mr Clarke in making this decision. The court's reasoning included the failure of Wickham, the company involved, to maintain proper records and the apparent lack of knowledge by certain directors about the business operations. These findings led the court to conclude that Mr Clarke's belief was not speculative.
The Federal Court held that the primary judge's decision to grant discovery was correct. The court found that the primary judge applied the relevant principles accurately and that no appealable error was evident in the decision. Consequently, the application for leave to appeal was dismissed. The court ordered that Sandhurst pay the costs of the application.
The court examined whether Mr Clarke's belief about his potential right to relief was more than mere speculation. The primary judge found that Mr Clarke had made reasonable enquiries but lacked sufficient information to decide whether to commence proceedings. Moreover, the judge concluded that Sandhurst likely held documents that would assist Mr Clarke in making this decision. The court's reasoning included the failure of Wickham, the company involved, to maintain proper records and the apparent lack of knowledge by certain directors about the business operations. These findings led the court to conclude that Mr Clarke's belief was not speculative.
The Federal Court held that the primary judge's decision to grant discovery was correct. The court found that the primary judge applied the relevant principles accurately and that no appealable error was evident in the decision. Consequently, the application for leave to appeal was dismissed. The court ordered that Sandhurst pay the costs of the application.
Orders
Orders of the court
1. The application for leave to appeal be dismissed.
2. The applicant pay the respondent’s costs of the application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
Senior counsel for Sandhurst did not take issue with this passage. THE DECISION BELOW The primary judge was satisfied that:(a)Mr Clarke’s belief that he may have a right to obtain relief in the Court from Sandhurst was not “mere speculation”, concluding (at [156]) that:There is a basis upon which he could form an objectively reasonable belief that he may be entitled to relief in the Court in proceedings based upon a contended breach of duty on the part of [Sandhurst].(b)Mr Clarke and his advisors had made reasonable enquiries to try and obtain information sufficient to enable Mr Clarke to decide, with legal advice, whether to start a proceeding in the Court against Sandhurst on the grounds identified;(c)after making those reasonable enquiries, Mr Clarke does not have sufficient information available to him to decide whether to commence a proceeding in the Court to obtain the relief sought; and(d)Mr Clarke reasonably believes that Sandhurst has, or is likely to have, or has had, or is likely to have had, in its control documents directly relevant to the question of whether Mr Clarke has a right to obtain relief in the proposed proceedings and that inspection of the documents by Mr Clarke and his advisors would assist him in making that decision. Although not expressly stated in the reasons, it is implicit that such findings applied also to Mrs Clarke, given the terms of the orders made. In finding that the condition in r 7.23(1)(a) was established, the Court relevantly reasoned at [155] as follows:It seems to me, however, that Mr Clarke could, objectively, reasonably hold the view that he may be entitled to a right to relief in the Court in respect of the contended breaches of duty. It may be that many of the matters contended for by Sandhurst have merits in the context of a trial of questions of fact and law should a claim be commenced. However, at the very threshold, Mr Clarke in forming a belief about whether he may have a right to obtain relief in the Court in respect of contended breaches on the part of Sandhurst does so against the background of a range of factors conditioning that view and they are these:1. Sandhurst, a professional trustee, agreed to act as trustee “for the benefit of the Noteholders” subscribing for unsecured deposit note debentures pursuant to prospectuses issued in accordance with the Trust Deed and the Act. The Trust Deed and the Act cast duties upon the trustee the purpose of which is to provide some measure of protection for the noteholders. 2. The analysis conducted by the administrators and then those individuals in their capacity as liquidators of Wickham reveals by reference to the reports dated 29 January 2013, 29 April 2013 and 5 September 2013 a total failure in the underlying position of Wickham and the performance of the business undertaking of raising money by investments made by noteholders and the lending of those funds to borrowers. 3. The content of the reports, available to Mr Clarke for his consideration, have been described in detail in these reasons. The final report dated 5 September 2013 says that of 24 loans made by Wickham only three of those loans were made on the basis of first mortgage security. Five further loans were made on the basis of second mortgage security. No files have been able to be located in respect of four loan transactions. In respect of eight borrowers, the position emerges that the borrowing entity has now had receivers and managers appointed. In respect of four further loan transactions, the borrowing entity is either in liquidation or is deregistered or in the process of being deregistered as a company. 4. Although the noteholders’ funds were to be lent by Wickham in accordance with the criteria prescribed by Sch 4 of the Trust Deed, the reports of the administrators and liquidators suggest that the criteria were not properly applied. 5. Moreover, Mr Sherwin has been a director of the company from the outset. He is described in the prospectus documents as a man having extensive experience in the financial planning industry and other relevant experience. Mr Siemons was a director of Wickham from about April 2009. He was described in the supplementary prospectus as having been involved in financial management for over 25 years with extensive experience in analysing financial statements and preparing management accounts. Yet, when interviewed by the administrators in the course of their investigations and asked about Wickham’s “business activities including details of the loan book”, Mr Sherwin and Mr Siemons apparently said to the administrators that they “knew nothing about the business operations and that they were handled by Garth Robertson”. 6. Not only was there a major failing in the financial position of Wickham, there was, apparently, a major failure on the part of two directors to properly engage with the business activities, operations and undertaking of Wickham. 7. An investor lending money to Wickham within a statutory structure which necessitated the presence of a trustee acting for the benefit of the noteholders, might well form a view that a professional trustee experienced in engaging with individuals purporting to act as directors of a borrower from noteholders might well have developed a professional and sophisticated “nose” (although not necessarily that of a “blood hound”) attracting the attention of the trustee to the notion that neither Mr Sherwin nor Mr Siemons apparently knew anything about the business operations of Wickham and, in particular, the matters about which the administrators inquired, namely, the business activities of Wickham and the loan book. The loan book was the asset, the interest returns upon which would provide the security for the redemption of the investments by the noteholders. A noteholder might well ask “what was the trustee doing?”. The answer might be a great deal but, for present purposes, the question simply is whether a noteholding lender to Wickham might reasonably form, objectively, a view that he or she may have a right to relief in the Court in respect of a contended breach of the identified duty, by the trustee. 8. The reports reveal a gross exaggeration in the value of the identified loans by Wickham. 9. The reports reveal, as early as 29 January 2013, a substantial failure on the part of Wickham to maintain proper files, records of loan transactions, correspondence, valuations and other documentation in relation to loan transactions. 10. The final report of the liquidators on 5 September 2013 suggests that loan recoveries might be as low as 6c in the dollar or might rise to an upper estimate of 35c in the dollar before the costs and expenses of the liquidation and realisation of the debts are taken into account. 11. Mr Sherwin and Mr Siemons told the liquidators that Mr Garth Robertson was the man who knew all about the business activities of Wickham, its business operations and matters related to the loan book. The liquidators have identified a particular concern about the contended conduct of Mr Robertson as already discussed. Mr Robertson resigned as an employee and director of Wickham on 19 December 2012, two days before the appointment of administrators. 12. Again, an investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might well ask whether a professional trustee standing in the shoes of Sandhurstmight have taken steps to investigate the degree of Mr Roberson’s engagement with the business undertaking of Wickham. Perhaps officers of Sandhurst did precisely that and were satisfied with their enquiries. 13. Whilst Sandhurstmight well rely upon the audit reports, the unqualified nature of those reports and the absence of any matter drawn to the attention of the trustee falling within s 313(2) of the Act, the uncontradicted position seems to be that Mr Kingston so totally failed to discharge his duties that he has given an undertaking to ASIC never to act as an auditor again. 14. An investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might well ask whether an experienced, sophisticated, professional trustee, experienced in dealing with auditors, ought to have become astute to, by reason of enquiry or otherwise, at least some circumstance which suggested a basis for concern about apparently profound inadequacies in the skills and performance of the person purporting to properly act as an auditor of financial statements of a disclosing entity dealing with the money of investors. So total and complete was Mr Kingston’s failures in the conduct of the audit that he voluntarily gave the undertaking to ASIC described in the report of the administrators. 15. An investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might, objectively, reasonably form the view that relying upon the statements of directors (and particularly a declaration signed by Mr Sherwin who says that he had no knowledge of the business activities of the company) and the certificates of an auditor so profoundly failing in the discharge of audit responsibilities as to give an undertaking not to act as an auditor again, was not sufficient to properly discharge the duties of the trustee to a noteholder under the Trust Deed or s 283DA of the Act, (that is to say, Mr Clarke as a person who contends he suffered loss or damage by reason of the trustee’s contravention of s 283DA of the Act). 16. In addition, the administrators, as professional insolvency investigators in relation to these matters, took the view that if Wickham was placed in liquidation there was a proper basis for at least conducting investigations into whether Sandhursthad complied with its obligations under the Trust Deed (see [90] of these reasons). Moreover, the liquidators later took the view that there was a proper basis for continuing to investigate Sandhurst’s compliance with obligations under the Trust Deed (see [104] of these reasons) and in the further report of 5 September 2013 the liquidators continue to note that they are conducting investigations into compliance by Sandhurst with its obligations under the Trust Deed (see [109] of these reasons). If the administrators and then the liquidators are expressing these views as experienced administrators, Mr Clarke might reasonably believe, in the context of these other matters, that there is a proper basis for concern about the discharge of duties on the part of the trustee and that he may have a right to relief in the Court in respect of a contended breach of duty on the part of the trustee. It follows that Mr Clarke’s belief is not mere speculation. There is a basis upon which he could form an objectively reasonable belief that he may be entitled to relief in the Court in proceedings based upon a contended breach of duty on the part of the trustee. Of course, all of the relevant questions of fact and law would need to be determined in the relevant proceedings. PROPOSED GROUNDS OF APPEAL
Ratio Decidendi
Legal Principle Established
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