Smith v Leveraged Equities Ltd [No 2] - [2014] WASC 128

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: SMITH -v- LEVERAGED EQUITIES LTD [No 2] [2014] WASC 128

CORAM: ALLANSON J

HEARD: 2 DECEMBER 2013

DELIVERED : 11 APRIL 2014

FILE NO/S: CIV 3124 of 2009

BETWEEN: EDWIN GEORGE SMITH
Plaintiff
AND
LEVERAGED EQUITIES LTD
First Defendant
TODD MICHAEL KING
Second Defendant
ACN 118 453 679 PTY LTD
Third Defendant
AUSTRALIAN STOCKBROKING AND ADVISORY SERVICES LTD
Fourth Defendant
GLENICE BERYL KING
Fifth Defendant

Catchwords:

Practice and procedure - Interrogatories - Leave to interrogate - Turns on own facts

Legislation:

Rules of the Supreme Court 1971 (WA), O 1 r 4A, O 1 r 4B

Result:

Leave granted to plaintiff to interrogate in part
Application otherwise dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr R W Douglas
First Defendant             :     Mr J A Thomson SC & Mr J R Ludlow
Second Defendant         :     No appearance
Third Defendant           :     No appearance
Fourth Defendant          :     No appearance
Fifth Defendant            :     No appearance

Solicitors:

Plaintiff:     Solomon Brothers
First Defendant             :     HWL Ebsworth Lawyers
Second Defendant         :     No appearance
Third Defendant           :     No appearance
Fourth Defendant          :     No appearance
Fifth Defendant            :     No appearance

Case(s) referred to in judgment(s):

Associated Dominions Assurance Society Pty Ltd v John Fairfax & Sons Pty Ltd (1952) 72 WN (NSW) 250
Dalecoast Pty Ltd v Monisse [1999] WASCA 103

ALLANSON J: The first defendant, Leveraged Equities, provided margin loans for share transactions. The fifth defendant (Glenice King) had a margin loan facility with Leveraged Equities. The second defendant (Todd King) traded through that facility, and also through a facility in the name of Komplexity Capital Pty Ltd. Mr King was the plaintiff's broker.
On 30 July 2007, in transactions arranged by Mr King, the plaintiff agreed to transfer 85,000 Wesfarmers Ltd shares as collateral to Mrs King's margin loan facility, and signed an authority letter, and an application form by which he undertook obligations as a guarantor. The plaintiff was placed at risk of becoming liable to pay toLeveraged Equities any amount due by Mrs King under the margin loan facility. That risk materialised.
The plaintiff has pleaded claims against various defendants, including Mr King and the firm of brokers that employed him. Leveraged Equities has been the only active defendant.
The plaintiff seeks leave to interrogate Leveraged Equities. Leveraged Equities agreed to answer some questions, but the majority of the application is disputed.

The loan agreement

It is first necessary to have regard to some terms of the loan agreement for the margin loan facility. In the agreement, Leveraged Equities speaks in the first person to the borrower in the second person.
The maximum amount of money Leveraged Equities said it was prepared to advance 'is an amount less than the total Security Value of all Secured Property': cl 1.1. Security Value and Secured Property are both defined terms:
Secured Property means:
(a) all Securities that are transferred into, or registered under, the Holder Identification Number of the Sponsor;
(b)all Securities that are transferred to the Nominee;
(c)all New Rights;
(d)all your rights to repayment of redemption of money in a Deposit Account …
(e)any Additional Securities.
Security Value means the total value of all of the Secured Property over which we have a first ranking Security Interest from time to time in accordance with the Agreement, calculated as the value applied by us to each item of Secured Property from time to time multiplied by the percentage we assign to each item of the Secured Property from time to time.
By cl 4.6, the lender may value the Secured Property or any part of the Secured Property at any time and may determine and vary valuation methods and policies in its absolute discretion.
The borrower can apply to make as many borrowings as it wishes, '[h]owever, at the time we advance money to you the Total Amount Owing must not exceed the Security Value': cl 2.1 (e). Total Amount Owing is defined to mean 'the Account Balance plus any interest, fees, costs, expenses and other amounts … payable … under this Agreement'. Account Balance is also a defined term and means 'the aggregate principal amount of all Loans outstanding from time to time under this Agreement, including interest and any other amount added to the Loans in accordance with this Agreement'.
Leveraged Equities reserved an absolute discretion to decline to advance the loan: cl 2.2 (c).
Part 4 of the agreement deals with margin requirements. If at any time on any day the Total Amount Owing exceeds the Security Value by more than the Buffer, then on the next business day the borrower must give a Security Interest over additional property, re-pay some or all of the Total Amount Owing, or sell, or give directions to sell or redeem, some or all of the Secured Property and apply the sale proceeds to repay the money owed, so that the Total Amount Owing no longer exceeds the Security Value: cl 4.1. Buffer is defined as:
the percentage of the market Security Value as determined by us … and as varied by us … This percentage varies according to the type of Secured Property (and in some cases there may be no buffer applicable to that type of Secured Property).
Under cl 4.2, if cl 4.1 applies and either the All Ordinaries Index decreases by 10% or more in a 24 hour period, or the market value of any or all of the Secured Property drops by more than 10% in value in a 24 hour period, the borrower is obliged to comply with cl 4.1 by 3 pm on the same day, or, if those circumstances arise after noon, by 3 pm on the next business day.
Clause 4.3 deals with notices of a margin call. Leveraged Equities is under no obligation to notify the borrower, and the borrower is obliged to monitor the status of the Total Amount Owing and the Security Value. When a borrower is in default of the obligation to ensure that the Total Amount Owing does not exceed the Security Value, Leveraged Equities is entitled by notice to require all or part of the Total Amount Owing to be immediately due and payable, and to enforce its mortgage over any Secured Property: s 2, pt A, cl 4.5; s 2 pt D, cl 55.2.

The case against the first defendant

The plaintiff claims that Leveraged Equities failed to disclose to him facts which were 'unusual features' of the margin loan facility (pars 21A, 21B). The statement of claim pleads that:
(a)the unusual features set out in par 21A were unusual features of Mrs King's margin loan facility, unusual features of any such margin loan, and not expected by the plaintiff to be the case: par 21B;
(b)Leveraged Equities knew of each of the unusual features: par 21C; and
(c) had Leveraged Equities disclosed the unusual features, the plaintiff would not have entered into the arrangement: par 21D.
The plaintiff pleads that, in the circumstances, the failure to disclose all or any of the unusual features constituted a representation that there were no unusual features of the margin loan facility, further or alternatively, that the margin loan facility did not bear any of the specified unusual features: par 21E. That conduct is alleged to be a misrepresentation, and to be misleading or deceptive conduct in trade or commerce, in breach of the Fair Trading Act 1987 (WA), the Australian Consumer Law, and the Australian Securities and Investments Commission Act 2001 (Cth): par 21F, par 21H.
Further, the plaintiff alleges that Leveraged Equitiesengaged in unconscionable conduct in connection with the supply of margin lending services to Mrs King and contravened the Fair Trading Act, the Australian Consumer Law, and the Australian Securities and Investment Commission Act in taking advantage of a special disability under which he was acting: pars 22 to 30.
At pars 16.1 to 16.5, the plaintiff pleads matters that are relevant to his claims against Mr King, and also to the causes of action against Leveraged Equities. In par 16, the plaintiff alleges that, as at 30 July 2007:
1.Mrs King owed a total amount of $3,267,546.38: par 16.2.1.
2.The total owing comprised (so far as I can understand pars 16.2.1.1 and 16.2.1.2)
(1)$205,859.38 owed to Leveraged Equities, and
(2)$3,061,687 owed to the sellers of shares which Mrs King had contracted to purchase. This amount was owing to the broker E*Trade or to the clearing participant Pirie Street Custodian Ltd, and would be owing to Leveraged Equities were it to meet existing requests which Mr King had made for draws on the margin loan facility.
3.$965,906.99 was owed to Mrs King from shares which she had contracted to sell but where the trade had not yet settled.
4.Taking into account those amounts and the securities held by Mrs King, at the value ascribed to them by Leveraged Equities, there was a shortfall due from Mrs King toLeveraged Equities of $1,799,621.40: par 16.2.5.
Leveraged Equities admits pars 16.1, 16.2.1.1 to 16.2.1.3, and 16.2.2 to 16.2.5.
The 'unusual features' of the margin loan facility are set out in pars 21A.1 to 21A.18. There are many of them, and the pleading is difficult to follow. This is particularly so for par 21A.8A, which has 15 subparagraphs, three of which have multiple parts. In essence, it is a plea that Leveraged Equities failed to disclose certain facts to Mr Smith before he signed relevant documents, but this appears to have been lost in the descent into detail.
For present purposes, it is sufficient to set out the following allegations:
1.On its proper construction, the margin loan facility provided:
21AA.1 the maximum amount that Leveraged Equities would advance to Mrs King was an amount less than the total Security Value of all Secured Property;
21AA.2 Secured Property meant securities listed on the ASX and validly transferred to or registered under Pirie Street Custodian in favour of the obligations owed by Mrs King under the facility, together with all rights arising from each such security;
21AA.4 if at any time on any day the Total Amount Owing exceeds the Security Value by more than the Buffer, then Mrs King was required to take the steps set out in cl 4.1;
21AA.6 Buffer means 10% of the Security Value;
21AA.7 if at any time on any day the Total Amount Owing exceeds the Security Value by more than the Buffer, and within a 24 hour period either the All Ordinaries Index decreases by 10% or the market value of any Secured Property decreases by more than 10%, Mrs King was obliged to take the steps required by cl 4.2;
21AA.8 while Mrs King was in default of the obligations under either cl 4.1 or cl 4.2, Leveraged Equities was entitled by notice to require all or part of the Total Amount Owing to be immediately due and payable and, by notice, to enforce its mortgage over the Secured Property (margin call).
2.Leveraged Equities prepared reports for its customers which stated a ratio called the Margin Utilisation Ratio, representing the Total Amount Owing divided by the Security Value. Where the Margin Utilisation Ratio exceeded 110%, Leveraged Equities may exercise its right to make a margin call: par 21AB.
3.On multiple occasions, Leveraged Equities advanced loans to Mrs King inconsistently with the requirement that the maximum amount that would be advanced was an amount less than the total Security Value of all Secured Property: par 21A.1A.
4.On multiple occasions, Leveraged Equities advanced loans to Mrs King when she was in breach of the obligation under cl 4.2 of the Loan Agreement: par 21A.1B.
5.On multiple occasions, the Margin Utilisation Ratio exceeded 110%, where Leveraged Equities' policy was to refuse to advance funds if to do so would result in a Margin Utilisation Ratio exceeding 100%, and to make a margin call when the Margin Utilisation Ratio exceeded 110%: par 21A.1. In pars 21A.2 and 21A.3, the plaintiff pleads occasions during July 2007 when the Margin Utilisation Ratio was many times greater than 100%. In par 21A.7, he pleads that on multiple occasions before July 2007 Leveraged Equities made advances when the Margin Utilisation Ratio exceeded 110% or came to exceed 110% as a result of the advance.
6Before the addition of the plaintiff's 85,000 Wesfarmers Ltd shares as security, had Leveraged Equities advanced to Mrs King the funds she owed as pleaded at par 16.2 (set out above), the Margin Utilisation Ratio would be approximately 500%.
7.During July 2007, the Total Amount Owing had reached approximately $2.7 million: par 21A.6
8.Notwithstanding these matters, Leveraged Equities had not exercised its rights under the margin loan agreement and no margin call had been made at any time before 30 July 2007: par 21A.8.
6.By 30 July 2007, Mr King had given orders, on behalf of Mrs King, for the purchase of shares, where there was a real prospect that Mrs King would be unable to deliver the purchase price of the shares, or the net amount that would be owing after deducting money receivable by her. By reason of the arrangements between Mr King and the broker, E*Trade, proceeds from any sale of shares held by Mrs King with the broker would be held and applied by the broker to meet her obligations in respect of unsettled purchases and sales of shares, and would not be available to meet any indebtedness to Leveraged Equities, or there was a real prospect that would be so. Leveraged Equities knew there was a real prospect of that occurring, and knew that Mr King had a material personal interest in the provision of the collateral and guarantee from the plaintiff: par 21A.8A.
7.The following matters were, in the circumstances, an unusual accommodation to Mrs King:
(a)making advances under the margin loan facility when the Margin Utilisation Ratio exceeded 100%, or came to exceed 100% as a result of the advance: par 21A.9.1;
(b)making advances in breach of or inconsistently with the terms of the margin loan facility: par 21A.9.2A; and
(c)failing to make a margin call: par 21A.9.2.
8.The reasons why that accommodation was made was an unusual feature of the margin loan facility: par 21A.10.
9.The conduct of the margin loan facility had breached its approved credit limit of $400,000: par 21A.11.1.
10.The conduct of the margin loan facility met Leveraged Equities' criteria for a high risk account: par 21A.11.2.
The plaintiff also pleads a claim in unjust enrichment, for conduct which occurred later: par 54, par 66. He claims Leveraged Equities received property transferred in breach of fiduciary duty, knowing of that breach: par 72A.

The defence

In its defence, Leveraged Equities pleads:
1.The Margin Utilisation Ratio was not a ratio defined under the margin loan facility, but that Leveraged Equities used it in reports to customers to indicate to the customer 'what his or her position would be if all of the unsettled purchase and sale contracts which the customer has entered proceed to settlement'. It was not an indication of the customer's actual position based upon funds actually borrowed. It was not an indication that Leveraged Equities would lend the customer sufficient funds to settle all unsettled purchase contracts. And it was not applied by Leveraged Equities in determining whether to lend money to a customer to fund unsettled contracts: par 11AB.
2.The decision whether to lend money to enable the customer to settle outstanding purchase contracts was generally made according to the Funding Principles: principles contained within proprietary software constructed by Leveraged Equities. The decision was subject to any decision by employees of Leveraged Equities to override the outcome of applying the Funding Principles: par 11AC.
3.The Funding Principles are set out in par 11 AD:
11AD.1 on any particular day, a customer is entitled to borrow funds to settle an outstanding purchase contract (a Buy Contract) due to be settled on that day within the borrowing limit previously agreed between Leveraged Equities and the customer (the Borrowing Limit);
11AD.2 in determining whether the Borrowing Limit is exceeded on any particular day, Leveraged Equities will take into account any funds which will become available to the customer pursuant to unsettled sale contracts which have been entered by the customer in respect of shares presently held by the customer (a Matched Sale);
11AD.3 to the extent that a Buy Contract can be funded within the Borrowing Limit, taking into account the proceeds of any Matched Sales, Leveraged Equities will lend funds to the customer to settle the Buy Contract;
11AD.4 where there is more than one Buy Contract outstanding on a particular day, Leveraged Equities will consider the earliest dated Buy Contract first and to the extent that there are funds available within the Borrowing Limit, taking into account the proceeds of any Matched Sales, Leveraged Equities will lend funds to the customer to fund each Buy Contract;
11AD.5 after funding as many Buy Contracts as possible within the Borrowing Limit, taking into account the proceeds of Matched Sales, Leveraged Equities will take into account the net funds which will become available to a customer, or the net payment which a customer will have to make, as a result of any unsettled sale contracts which have been entered by the customer in respect of shares which the customer has contracted to buy (a Dependent Sale and a Dependent Buy);
11AD.6 Leveraged Equities will provide funds to a customer to make a Dependent Buy if, after considering the net payment to be received or made by the customer following the Dependent Sale, the Borrowing Limit is not exceeded;
11AD.7 Otherwise, Leveraged Equities will not provide funds to a customer to settle a Buy Contract.
Leveraged Equities pleads that, for the purposes of cl 4.2 of the margin loan facility (properly construed):
11AE.1 where there is a Matched Sale, the face value of the proceeds of the Matched Sale are taken into account as part of the Security Value….
11AE.2 to the extent that Leveraged Equities provides funds to a customer based upon the proceeds of a Matched Sale, the funds lent to the customer increase the Total Amount Owing at the same time as the Security Value is increased by the proceeds available from the Matched Sale;
11AE.3 where there is a Dependent Sale, the face value of the proceeds of the Dependent Sale are taken into account as part of the Security Value … immediately the Dependent Buy is funded by Leveraged Equities and the shares are transferred [to custodians];
11AE.4 to the extent that Leveraged Equities provides funds to a customer based upon the proceeds of a Dependent Sale, the funds lent to the customer increase the Total Amount Owing by the amount of the Dependent Buy at the same time as the Security Value is increased by the proceeds available from the Dependent Sale.
In par 11AF, Leveraged Equities pleads that, in those circumstances, the Funding Principles were consistent with the proper construction and operation of cl 4.2.
Leveraged Equities denies the allegations in pars 21A.1A and 21A.1B of the statement of claim. It admits that it did not disclose the matters alleged in 21A.1 to 21A.18 prior to the plaintiff signing the application form and authorisation letter: par 11A.1. It admits that on occasions the Margin Utilisation Ratio from Mrs King's margin loan facility exceeded 110%, but says that this occurred as a result of unsettled trades that were pending, and which were taken into account in the calculation of the automatically generated Margin Utilisation Ratio, even though those trades were not yet settled and may not have settled if there were insufficient funds available: par 11A.2.

Leveraged Equities says that the Margin Utilisation Ratio did not accurately reflect the basis of any decision by it to lend funds to Mrs King: par 11A.3. And that, whenever Mrs King needed to provide further funds or security to enable outstanding trades to settle without the ratio exceeding 110% based upon funds actually advanced, further funds or security were provided prior to settlement of any outstanding trades: par 11A.4. Leveraged Equities says that there were two occasions only when it allowed outstanding purchase contracts to settle taking into account that further funds would become available to Mrs King, when other outstanding sale contracts were settled within a short time thereafter: par 11A.5.
Leveraged Equities denies the matters pleaded in par 21A.9, and that in the circumstances there was any unusual accommodation granted to Mrs King.
In 11A.10, Leveraged Equities denies 'that any aspect of the conduct in trading upon the Margin Loan Facility meant that the Margin Loan Facility was classified as "high risk" by Leveraged Equities'.
In the alternative, Leveraged Equities pleads in par 11AA.7.2 that it and its customers acted on the basis that the margin loan facility operated in this way. It pleads that there was nothing unusual in it applying this construction of the margin loan facility in its dealings with Glenice King compared to its dealings with other customers who had entered margin loan facilities on the same terms.
Leveraged Equities denies the allegation that there were the unusual features alleged: par 11D. It denies the allegations of misleading or deceptive conduct, and that its conduct was unconscionable.

The interrogatories

The plaintiff served a series questions in interrogation of Leveraged Equities. Some questions, and parts of three others, are not in dispute. The parties ask the court to determine whether leave should be granted to interrogate in the terms of questions 1, 2(c), 2(e), 5(i), 10 (except 10(f)), and 11 to 22. The full terms of the questions in issue are attached as a schedule to these reasons.
Before dealing separately with the questions, there are some general points to be made.
First, no issue has been taken regarding delay.
Second, leave to administer interrogatories is not granted as of right. Even though the defendant has agreed to answer some of the questions put, that creates no presumption that it should be required to answer the remainder. In deciding whether grant leave, the court must have regard to the Rules of the Supreme Court 1971 (WA) O 1 r 4A and r 4B, and must follow the course that best ensures the attainment of the objects set out in those rules. This requires consideration of the extent to which the grant of leave will promote the just determination of the litigation, the costs of the procedure to the parties and the State, and whether it is proportionate to the value, importance and complexity of the subject matter in dispute.
In Dalecoast Pty Ltd v Monisse [1999] WASCA 103 [5] ‑ [6] Owen J applied case management principles to the question of leave when he said:
It is often the case that the benefit to be obtained from delivering interrogatories is far outweighed by the inconvenience and expense to the other party in having to answer them. As a mechanism for understanding the case which a party has to meet they have, at least to some extent, been replaced by the pre-trial exchange of witness statements which is ordered in most cases. The standard form of pre-trial documents orders mean that a party will seldom go to trial not knowing what documents it has to prove strictly.
These are developments that have occurred in recent times and the present regulatory framework for interrogatories has to be seen against that background. In the 1996 amendments to the Rules of the Supreme Court there was a significant change to the regime for interrogatories. It is now necessary to obtain leave before any interrogatories are administered … The leave regime is administered with case management principles in mind. Considerable thought needs to be given to whether it really is necessary to administer interrogatories consistent with the principles enshrined in O 1 r 4B. If they are considered necessary, great thought must go in to the framing of them so that they achieve the object for which they are designed without putting the other party to unnecessary trouble and expense.
In the present case, the plaintiff's claim depends in part on the conduct of Leveraged Equities with regard to the operation of the margin loan facility made to Mrs King, and its failure to advise him about unusual features in the way that facility had been operated. To the extent that the administration of interrogatories may lead to the admission of facts within the knowledge of Leveraged Equities, the procedure has the potential to both promote a just outcome and to reduce the time required to establish those matters at trial. I also take into account that the questions are about matters that are within the defendant's knowledge, but may be known to the plaintiff only incompletely, or through documents obtained on discovery.
Third, Leveraged Equities argues that, following recent amendments to the pleadings, the gravamen of its dispute with the plaintiff concerns the proper construction of the terms of its facility agreement with Mrs King. That is no answer. The plaintiff has pleaded his claim under statutory causes of action which are of wider compass than the question of construction and which may permit a range of remedies, including orders varying or voiding the transactions entered by the plaintiff. The remedies available for the statutory causes of action may be particularly significant where the defence pleads that the claim is apportionable, and neither Mr King nor his employer are actively defending the action.
Fourth, it is relevant that the party required to answer is a corporation which must make suitable inquiries of its servants and agents to supply answers. In this case, it must make inquiries about matters in 2007. I have had regard to this in assessing the burden imposed by questions requiring multiple answers. It is also particularly relevant to part of question 22, for reasons I set out below.
Last, both in pleading and in interrogatories, the plaintiff's legal representatives have adopted a style of multiple subparagraphs that makes normal reading impossible, while any appearance of precision is illusory. The questions in dispute contain within them numerous additional questions. For example, to answer question 5(i) Leveraged Equities would need to answer a series of questions about the calculation of five different values - Total Amount Owing, Security Value, Buffer, Margin Utilisation Ratio, and Borrowing Limit. It must state 'to what degree and in what proportion' three specified matters were included in each calculation. To add to this multiplicity, some questions refer back to other questions. For example, question 7 asks a series of questions about 'any notice or report of the occurrence of any circumstance identified in questions 6(d), (e) and (f)', when questions 6(d) and (e) themselves have multiple parts. Question 22 potentially requires 160 answers.

Question 1 - Leveraged Equities Risk Categorisation

The question is directed to any system of risk categorisation for margin loan facilities, what categories of risk were routinely adopted or applied, the criteria adopted or applied, and the quality or quantity of each criterion. The request is based on the claim that the conduct of Mrs King's facility met Leveraged Equities' criteria for a high risk account, and the defence denial that any aspect of the conduct in trading on the facility meant that it was classified as 'high risk'. There is evidence from the discovery that, in September 2007, the King account was considered 'high risk'. The plaintiff has shown that it is not fishing, in the sense described in Associated Dominions Assurance Society Pty Ltd v John Fairfax & Sons Pty Ltd (1952) 72 WN (NSW) 250, 254.
If the conduct of the King account met Leveraged Equities' criteria for a high risk account before 30 July 2007, and it did not advise the plaintiff before he provided the additional security for trading on the account, that bears directly on the pleas in misleading and deceptive conduct and unconscionable conduct. If there was no system or criteria for assessing an account as 'high risk', that also is relevant on the pleaded cases. I am satisfied the question is relevant.
Leveraged Equities further argues that question 1 wrongly assumes that there is some significance in whether the facility was 'high risk'. In the context of pleas that Leveraged Equities knew of but did not disclose unusual features of the account, this question cannot be dismissed as a non-issue.
Leveraged Equities also argues that the question is vague, embarrassing and thus oppressive in use of the phrase 'routinely or systematically', and in asking for the 'quality and quantity' of criteria used in categorising accounts by reference to risk. In my opinion, in question 1 it is plain enough what it meant. As in any construction exercise, a word or phrase cannot be isolated. When asking about a system of categorisation, a question asking for the categories and criteria systematically adopted or applied in implementing it, and the qualitative and quantitative aspects of those criteria, is not so lacking in clarity so as to make the interrogatory oppressive.
I will grant leave for question 1.

Question 2 (c) - Buffer and Credit Limit

In this question, the plaintiff asks what percentage value for the 'Buffer' Leveraged Equities typically applied to margin lending facilities to other customers during 2006, 2007 and 2008 'as default or ordinary such values'. The question must be considered in context that Leveraged Equities was also asked to state the percentage value of the Buffer under the facilities operated by Mr King on behalf of his mother and Komplexity Capital.
The plaintiff justifies this question, and many others, by the general proposition that Leveraged Equities denied par 21A.9 of the statement of claim. That is, it denied, as an unusual feature of the margin loan account, that it gave an unusual accommodation to Mrs King. The plaintiff submits that by that defence Leveraged Equities:
denies that the Glenice King margin loan facility was treated differently to other margin loan facilities provided by Leveraged Equities. Having raised that contention, it is not open to Leveraged Equities to refuse to answer questions about how it treated those other facilities.
That submission puts the matter too broadly. The allegation in par 21A.9 is specific: the plaintiff alleges three matters, each of which was an unusual accommodation to Mrs King: the making of advances when the Margin Utilisation Ratio exceeded or came to exceed 100%; the making of advances in breach of or inconsistently with the terms of the margin loan facility; and the failure to make a margin call. The only terms specified are cl 1.1 and cl 4.1.
The pleading regarding the Buffer is quite limited. The plaintiff pleaded that the value of the Buffer was 10% of the Security Value: par 21AA.6. Leveraged Equities pleaded the definition of Buffer in the loan agreement: par 11AA.5. The plaintiff pleaded that Leveraged Equities advanced loans to Mrs King in breach of cl 4.1 of the loan agreement (that is, when the Total Amount Owing exceeded the Security Value by more than the Buffer), and that this was an unusual accommodation. He did not plead any claim to which the value of the Buffer in the Margin Loan Account, compared with the default or ordinary value of the Buffer in other margin loan accounts, is relevant.
This question is not sufficiently relevant to the pleaded case, and I do not grant leave for question 2.

Questions 5 to 9 - Calculation of Margin Utilisation Ratio

Question 5, as amended at the hearing, is directed to the 'systematic' calculation of five factors: the Total Amount Owing, the Security Value, the Buffer, the Margin Utilisation Ratio, and the Borrowing Limit. The objection is again to relevance.
The reasons given for question 2 apply also to this question. The plea of an unusual accommodation, and its denial, do not put in issue that any one of these factors was calculated differently for the facility conducted on behalf of Mrs King. That, however, is not a complete answer in this instance.
Question 5 asks whether, and to what degree and in what proportion, the calculations included:
(j)the anticipated proceeds of pending but unsettled sell orders; and
(k)the obligations under pending but unsettled buy orders;
(l)any unsettled obligations owed by a margin loan borrower to that borrower's stockbroker in respect of shares purchased through, sold through or held through such stockbroker.
In its defence, Leveraged Equities pleads that the decision whether to lend money to enable a customer to settle outstanding purchase contracts was generally made according to the Funding Principles set out in par 11AD. It pleads that those principles included that, in determining whether the Borrowing Limit was exceeded, Leveraged Equities would take into account any funds which had become available to the customer pursuant to unsettled sale contracts, and the net funds available as a result of any unsettled sale contracts entered into by the customer. In par 11AE, Leveraged Equities pleads the manner in which it would take into account the proceeds of sale in determining the Total Amount Owing and the Security Value. In par 11AA.7, Leveraged Equities pleads that there was nothing unusual in it applying the construction of the margin loan facility pleaded in these paragraphs in its dealings with Mrs King, compared to its dealings with other customers.
This plea puts in issue the calculation of the Total Amount Owing and the Security Value, and thus the Margin Utilisation Ratio which is based on those values, and the relevance of obligations under unsettled orders to the calculation. Leveraged Equities has itself pleaded the relevant comparison between Mrs King's facility and its dealings with other customers. It has also put in issue the principles it applied in calculating those values and determining whether funds would be advanced. The defence has put those matters in issue, in support of its positive plea of a custom or conventional estoppel between Leveraged Equities and its customers regarding the operation of its loan agreements. Questions about the system by which those values were calculated are relevant to the pleaded issues.
The further objection is taken to question 5 that, as an interrogatory about general practice, it is vague and embarrassing. I do not agree with the defendant's construction of the question. The question is so worded to make clear that it is not asking for information about each calculation or each decision made on each other loan. Rather, the plaintiff is enquiring regarding systems and the practices under those systems in making a calculation. In that context, I do not regard the expression of the question in terms of 'steps', the frequency of each step, and the method of conducting it, as embarrassing or oppressive. If no system was routinely followed, that answers the question.
I allow question 5 to the extent that it relates to the calculation of the Total Amount Owing and the Security Value, and the Margin Utilisation Ratio. The other two values - Buffer and Borrowing Limit - are not in issue on the pleadings.
Questions 6(a) to (c), read with 6(d), seek information about whether Leveraged Equities had a system by which it ascertained whether the Total Amount Owing exceeded the Security Value, 105% of the Security Value, 110% of the Security Value, and the Security Value by more than the amount of the Buffer. If it did, the plaintiff asks it to state the steps in that system, how frequently it was done and how it was done. Except for the value of 105% of the Security Value - the relevance of which is not clear - the facts sought would be relevant evidence to establishing the allegation that an unusual accommodation was made for the King account.
Questions 6(a) to (c) and (e) seek similar information regarding the Margin Utilisation Ratio. In the light of the plea in par 21A.9.1, the facts sought would be relevant to establishing the plaintiff's case. Similar considerations apply to the questions about the Buffer in 6(f).
I would grant leave for the interrogatory, as amended, but limited to the period ending 30 July 2007.
Questions 7 and 8 are ostensibly directed to what would happen within Leveraged Equities should its systems reveal that the Total Amount Owing exceeded the Security Value by the various values specified. Neither question is clearly expressed. For the answers to the questions to be admissible evidence, some greater precision in the questions is required. When this lack of clarity is combined with the multiple permutations which the questions require, I am not satisfied that it would be proper to grant leave.
Question 9 depends upon questions 7 and 8 being answered, and leave should be refused also for that question.

Questions 10 and 11 - Capacity of margin loan borrower to meet obligations

These questions are not sufficiently relevant to any matter put in issue by the pleaded case of either party. The plaintiff puts forward no basis for relevance other than that Leveraged Equities answered those questions with regard to the facilities operated on behalf of Mrs King and Komplexity Capital. That is not, in itself, a sufficient reason to make the answers relevant.
I will not grant leave for these questions.

Questions 12 to 17

The issue joined regarding whether Leveraged Equities made special accommodation for the account conducted on behalf of Mrs King supports the issue of these interrogatories which seek facts regarding: the steps systematically taken by Leveraged Equities (on the assumption that there was a system) when the Total Amount Owing exceeded the Security Value, 110% of the Security Value, and the Security Value by more than the Buffer; whether additional steps were taken in relation to the facility operated by Mr King; and steps that were part of the system that were not taken in relation to that facility. Again, the question is properly read as referring to the systems in place, and not to individual decisions or actions on each account. To that extent I would allow questions 12 and 13, with one qualification. The plaintiff has not shown the relevance on the pleadings of the mid step of '105% of the Security Value' and I would not grant leave for that part of the questions.
Question 14 concerns the reconciliation of the Margin Utilisation Ratio and the ratio of the Total Amount Owing to the Borrowing Limit. The plaintiff has not demonstrated how, on the pleaded case of either party with regard to the Funding Principles, it is relevant to establish how Leveraged Equities reconciled the ratio of the Total Amount Owing to the Borrowing Limit and the Margin Utilisation Ratio.
I would not grant leave for question 14.
Questions 15 and 16 are, in my opinion, relevant for the period up to 30 July 2007. Again, the questions are appropriate only to the extent that they seek to identify the elements of any system applied by the defendant in making the specified decisions. The systems used within Leveraged Equities are peculiarly within its knowledge. The provision of this information at this stage would, in my opinion, meet the objects of good case management.
Were question 17 similarly confined, it may be permitted. It is not for the court to redraft the question to make it permissible. I would not grant leave for question 17.

Questions 18 -19 - Process for provision of collateral and guarantees

The plaintiff supports questions 18 and 19 by the general submission that any deviation by Leveraged Equities from its usual practices when obtaining the collateral and guarantee from the plaintiff is relevant to the claims that it engaged in unconscionable conduct and received collateral knowing that this receipt was caused by a breach of fiduciary duty by Mr King. Both of these allegations need to be clearly pleaded, with sufficient particularity.

The plea of unconscionable conduct is not based upon any allegation of departure from usual practice, but is quite specific in relying on Leveraged Equities' knowledge of particular matters (par 22), and the plaintiff's serious disadvantage due to his lack of knowledge of those matters (pars 23, 24).
The plea of knowing receipt in par 72A is similarly specific. Departure from usual practice is not the basis of the plea.
The subject of questions 18 and 19 falls outside the case that has been pleaded, and I refuse leave.

Question 20 - Failing trades

The plaintiff supports these questions by the general submission that Leveraged Equities' practices concerning failures by a margin loan borrower to deliver securities or pay the purchase price on a stockbroking account are relevant to the issues alleged in pars 21A.8A.8 to 21A.8A.10 of the statement of claim, and the plea of Leveraged Equities' knowledge of those matters in pars 21A.8A.12 to 21A.8A.14.
Paragraph 21A extends over seven pages, with 19 subparagraphs (subpar 8A itself containing 8A.1 to 8A.15). It is easy to lose the thread of the plea, but it is an allegation that Leveraged Equities failed to disclose certain facts which were unusual features of the margin loan account before the plaintiff signed the application form and authorisation letter on 30 July 2007. As I understand subpar 21A.8A it is, in substance, a plea that one of the unusual features was that Leveraged Equities knew that Mr King had a material personal interest in procuring the collateral and guarantee from the plaintiff, as a consequence of failing trades, and knew that Mr King had procured them.
When regard is had to the plea said to support this interrogatory, it is not, in my opinion, sufficiently relevant to require Leveraged Equities to detail the matters requested, and I refuse leave.

Question 21 - Information exchanged between margin lender and stockbroker as to breaching trades

The plaintiff supports the questions within question 21 by reference to pars 21A.8A.11.2 and 21A.8A.14 of his statement of claim. The pleas in those paragraphs, in the context of par 21A and the causes of action based on it, do not support such a general interrogatory about the frequency and means of exchange of information between Leveraged Equities and E*Trade and any other broker engaged by a borrower. A more specific question may have been admissible, but that is not what was asked.

Question 22 - Breaching purchases of securities

There are several reasons why I would refuse leave for this question.
First, there are eight orders referred to in question 22: one on 23 July 2007, six on 24 July, and one on 26 July. For each of those eight orders, the plaintiff seeks leave to ask Leveraged Equities to answer 17 questions, with three further questions for each of the orders, depending upon earlier answers. The number of questions is not itself determinative, but the burden on a party in answering is a factor to be considered. Presumably, the answers to the questions are not available in documents, or it would have been dealt with by discovery.
Second, in question 22(a)(i) and (b)(i) it asks, for each order, for Leveraged Equities to answer by reference to the aggregate amount which 'Leveraged Equities then regarded Glenice King as owing to it'. It is not appropriate, in my opinion, to ask what a corporation regarded as owing to it.
Third, question 22(a)(i)(A) is directed to whether the amount owing exceeded the value of 'each such security'. The relationship of the amount owing to the value of each such security is not relevant on the pleadings. The relevant relationship is of the Total Amount Owing to the Security Value - that is, the value of all secured property. Question 22(b) refers back to 22(a)(i)(A).
Taking those matters together, I am not satisfied that leave should be granted for a question in these terms.

Conclusion

For these reasons I would grant leave for the plaintiff to interrogate in terms of questions 1, 5, 6, 12, 13, 15 and 16, limited in the terms specified above, but otherwise dismiss the application.

Schedule - the interrogatories

Leveraged Equities Risk Categorisation

1.State:
(a)whether Leveraged Equities had any system of risk categorisation for margin loan facilities;
(b)if so, each category of risk associated with a margin lending facility routinely or systematically adopted by or applied by Leveraged Equities;
(c)if so, each criterion applied by or adopted by Leveraged Equities when categorising the risk associated with a margin loan facility; and
(d)if so, state the quality or quantity of each such criterion which Leveraged Equities associated with each such risk category.

Buffer and Credit Limit

2.State each percentage value of the 'Buffer', as that term is defined, under:
…
(c)other margin lending facilities provided by Leveraged Equities to customers in, or operative during, 2006, 2007 and 2008 as default or ordinary such values,
('Buffer') applicable from time to time:

…
(e)in the case of (c) above, typically,
during 2006, 2007 and 2008.

Calculation of Margin Utilisation Ratio

5.State:
(a)each step;
(b)the frequency of each step; and
(c)the method of conducting each step;
(if any) by which Leveraged Equities in fact systematically calculated:

(d)the Total Amount Owing, the Security Value and the Buffer (as those terms were defined in each margin loan facility);
(e)the Margin Utilisation Ratio as automatically generated by the electronic system used by Leveraged Equities (as pleaded in par 11A.2 of Leveraged Equities Fifth Further Amended Defence); and
(f)the Borrowing Limit (as pleaded in par 11AD of the Defence),
during 2007 under:
…

(i)other margin loan facilities offered by Leveraged Equities to customers in, or operative during, 2007;
including whether:

(j)the anticipated proceeds of pending but unsettled sell orders; and
(k)the obligations under pending but unsettled buy orders;
(l)any unsettled obligations owed by a margin loan borrower to that borrower's stockbroker in respect of shares purchased through, sold through or held through such stockbroker;
were included, and if so to what degree and in what proportion, in such calculations.

6.State:
(a) each step;
(b)the frequency of each step; and
(c)the method of conducting each step;
(if any) systematically undertaken by Leveraged Equities during 2007 to ascertain whether:

(d)the Total Amount Owing exceeded:
(i)the Security Value;
(ii)105% of the Security Value;
(iii)110% of the Security Value; and
(iv)the Security Value by more than the amount of the Buffer,
(as those terms were defined in each margin loan facility);

(e)the Margin Utilisation Ratio as automatically generated by the electronic system used by Leveraged Equities (pleaded in par 11A.2 of the Defence), did not exceed:
(i)100%;
(ii)105%; and
(iii)110%; and

(f)whether the Borrowing Limit (pleaded in par 11D of the Defence) was exceeded:
under:

(g)the Margin Loan Facility;
(h)the Komplexity Margin Loan Facility; and
(i)other margin loan facilities provided by Leveraged Equities to customers in, or operative during, 2007.

7.State, during 2007 and 2008:
(a)the frequency of;
(b)any automatic or default consequences of;
(c)the means of communication of; and
(d)the level and role of those persons who would usually receive,
any notice or report of the occurrence of any circumstances identified in questions 6(d), (e) and (f) above to Leveraged Equities, and each step which would systematically occur by Leveraged Equities (or by a data management system used by it) upon receipt of such notice or report.

8.State, during 2007 and 2008:
(a)each step or sequence of steps;
(b)the frequency of each such step or sequence;
which would:

(c)arise or occur automatically; or
(d)fall to be considered and, if so, the level and role of the decision-makers of Leveraged Equities;
upon the occurrence of any circumstance identified in questions 6 (d), (e) and (f) above.

9.State each:
(a)additional step taken, beyond those identified in each of questions 6, 7 and 8 above; or
(b)step identified in each of questions 6, 7 and 8 above which was not taken;
in ascertaining whether:

(c)the Margin Loan Facility; and
(d)the Komplexity Margin Loan Facility;
upon the happening of any circumstance set out in questions 6 (d), (e) or (f) above during 2007.

Capacity of Margin Loan Borrower to Meet Obligations

10.State:
(a) each step;
(b)the frequency of each step; and
(c)the method of conducting each step;
systematically undertaken by Leveraged Equities during 2007 to ascertain whether a margin loan borrower was capable of meeting that borrower's obligations under the relevant margin loan facility, in respect of:

…
(f)other margin loan facilities offered by Leveraged Equities to customers in, or operative during 2007 and 2008.

11.State each:
(a)additional step taken, beyond those identified at question 10; or
(b)step identified in question 10 which was not taken;
by Leveraged Equities in ascertaining the capability of each of:

(c)Glenice King; and
(d) Komplexity;
to meet their obligations to Leveraged Equities during 2007 and 2008.

12.State:
(a) each step;
(b)the frequency of each step; and
(c)the method of carrying out each step;
routinely or systematically undertaken by Leveraged Equities during 2007 when the Total Amount Owing exceeded:

(d)the Security Value;
(e)105% of the Security Value;
(f)110% of the Security Value; and
(g)the Security Value by more than the Buffer,
(as those terms were defined in each margin loan facility) under margin loan facilities provided by Leveraged Equities to customers in, or operative during, 2007.

13.State each:
(a)additional step taken, beyond those identified in question 12; or
(b)step identified in question 12 which was not taken;
by Leveraged Equities in response to each of the events identified in questions 12(d) to 12(g) above in respect of:

(c)the Margin Loan Facility; and
(d)the Komplexity Margin Loan Facility.

14.State:
(a)each step routinely or systematically undertaken by Leveraged Equities to reconcile the Margin Utilisation Ratio as automatically generated by the electronic system used by Leveraged Equities (as pleaded in par 11A .2 of the Defence) and the ratio of the Total Amount Owing to the Borrowing Limit (as pleaded in par 11AD of the Defence) for margin loan facilities during 2007; or
(b)if there were no such steps described in question 14(a), state any steps taken to reconcile the 'automatically generated margin utilisation ratio' and the ratio of the Total Amount Owing to the Borrowing Limit (as pleaded in par 11AD of the Defence) in 2007 or 2008.

15.State each step routinely or systematically undertaken by Leveraged Equities to determine whether to permit a draw upon a margin loan facility where:
(a)prior to the draw:
(i)the margin loan borrower exceeded the credit limit for the margin loan facility;
(ii)the margin loan borrower exceeded the Borrowing Limit (as pleaded in par 11AD of the Defence) for the margin loan facility;
(iii)the Total Amount Owing exceeded:
(A)the Security Value;
(B)105% of the Security Value;
(C)110% of the Security Value; and
(D)the Security Value by more than the Buffer,

(as those terms were defined in each margin loan facility) for the margin loan facility;

(b)the draw resulted in or would likely result in:
(i)the margin loan borrower exceeding the credit limit on the margin loan facility;
(ii)the margin loan borrower exceeding the Borrowing Limit (as pleaded in par 11AD of the Defence) on the margin loan facility;
(iii)the Total Amount Owing exceeding:
(A)the Security Value;
(B)105% of the Security Value;
(C)110% of the Security Value; and
(D)the Security Value by more than the Buffer,

(as those terms were defined in each margin loan facility) for the margin loan facility,
including:

(c)the level and role of each decision maker in each decision entailed by such process; and
(e)each criterion applied to each such decision, and the weight attributed to each such criterion.

16.State:
(a)each step routinely or systematically taken in the process by which any decision was made as to whether, in respect of a particular margin loan facility:
(i)the margin loan borrower would be permitted to exceed the credit limit on the margin loan;
(ii)the margin loan borrower would be permitted to exceed the Borrowing Limit (as pleaded in par 11AD of the Defence) on the margin loan facility;
(iii)the Total Amount Owing would be permitted to exceed:
(A)        the Security Value;
(B)        105% of the Security Value;
(C)        110% of the Security Value; and
(D)        the Security Value by more than the                 Buffer,
(as those terms were defined in each margin loan facility) for the margin loan facility;

(b)the criteria applied to any decision made in any such step; and
(c) the level and position of the decision maker for any such decision.

Margin calls

17.State:
(a)each step in the process by which;
(b)each criterion considered when;
(c)the weight applied to each such criterion when;
Leveraged Equities would refrain from exercising rights available to it upon a failure of a margin loan borrower to comply with that borrower's obligations under cl 4.1 of the relevant margin loan facility, and state:

(d)the level and role of each decision maker of Leveraged Equities involved in each decision entailed by each such step; and
(e)the type of record routinely or systematically made during each such step.

Process for Provision of Collateral and Guarantees

18.State:
(a)each statement made;
(b)each inquiry made;
(c)the means by which each such statement or inquiry was communicated;
(d)the means by which each such statement and inquiry, and any response, was recorded;
routinely or systematically by Leveraged Equities during 2007 and 2008 in respect of each provision of collateral or a guarantee by a person other than the borrower in respect of a margin loan, prior to or at the time of the acceptance of such collateral or guarantee.

19. State:
(a)each additional statement or inquiry made beyond;
(b)each statement or inquiry omitted from;
the matters identified in question 18, prior to the:

(c)provision of documents pleaded in par 5.1 of the Defence;
(d)provision of the collateral pleaded in par 49 of the Statement of Claim; and
(e)provision of the collateral pleaded in par 51 of the Statement of Claim.

Failing Trades

20.State, during 2007 and 2008:
(a)each step routinely or systematically taken by Leveraged Equities in response to the failure of a margin loan borrower to timely deliver securities (in the case of a sale order), or pay the purchase price (in the case of a purchase order) on the stockbroking account or accounts associated with a margin lending facility; and
(b)how, and the frequency with which, information as to any such failure was obtained by Leveraged Equities.

Information Exchanged Between Margin Lender and Stockbroker as to Breaching Trades

21.State:
(a)what;
(b)with what frequency; and
(c)by what means,
information was routinely or systematically exchanged between Leveraged Equities and:

(d)ETRADE Australia Securities Ltd ACN 078 174 973 ('E*Trade'); and
(e)any other broker engaged by a Leveraged Equities margin lending borrower as stockbroker associated with a Leveraged Equities margin loan facility.

Breaching Purchasers of Securities

22.In relation to each of the orders for the purchase of securities pleaded in par 21A.8A.1 of the Statement of Claim and listed at Answer 1 to the plaintiff's Answers and Objections to Leveraged Equities' Request for Further and Better Particulars of the Sixth Amended Statement of Claim, state:
(a)whether, at the time each order was placed:
(i)the amount which Leveraged Equities then regarded Glenice King as owing to it under the Margin Loan Facility exceeded:
(A)the aggregate of (each element to be stated with respect to each such security):
a. the market value which Leveraged Equities then attributed to each such security; and
b. the discount, if any, which Leveraged Equities then applied to each such security to set a security value for each such security;
(B)105% of such aggregate value;
(C)110% of such aggregate value; and
(D)such aggregate value by more than the value of the Buffer which Leveraged Equities then considered applicable to the Margin Loan Facility;

(ii)the Margin Utilisation Ratio automatically generated by the electronic system used by Leveraged Equities (as pleaded in paragraph 11A.2 of the Defence exceeded 100%, 105% and 110%);
(iii)the Borrowing Limit (as pleaded in par 11AD of the Defence) of the Margin Loan Facility was exceeded; and
(iv)the credit limit of the Margin Loan Facility was exceeded,
for the Margin Loan Facility;

(b)whether a draw upon the Margin Loan Facility for the purpose of meeting the purchase price for each such tranche of shares purchased would have caused:
(i)the aggregate value amount by which Leveraged Equities then regarded Glenice King as owing to it under the Margin Loan Facility to exceed:
(A)the aggregate value identified in question 22(1)(a)(i)(A) above, together with the aggregate of such market value and such security value in respect of each security for which Glenice King then had outstanding purchase orders in relation to the Margin Loan Facility (each element stated with respect to each such security);
(B)105% of such total aggregate value;
(C)110% of such total aggregate value; and
(D)such total aggregate value by more than value of the Buffer which Leveraged Equities then considered applicable to the Margin Loan Facility;

(ii)the 'automatically generated margin loan ratio' to exceed 100%, 105% and 110%; and
(iii)the Borrowing Limit (as pleaded in par 11AD of the Defence) of the Margin Loan Facility to be exceeded; and
(iv)the credit limit of the Margin Loan Facility to be exceeded,
for the Margin Loan Facility;

(c)if the answer to question 22(a) and/or question 22(b) above is yes:
(i)whether a decision or decisions was or were made (with or without reasons) to permit, or to refuse to permit, Glenice King to make such a draw on the Margin Loan Facility;
(ii)if so, what that decision or decisions was or were; and
(iii)if so, the identity(ies) of and the role(s) and level(s) of the decision maker(s).

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Citations

Smith v Leveraged Equities Ltd [No 2] [2014] WASC 128

Cases Citing This Decision

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Statutory Material Cited

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Dalecoast Pty Ltd v Monisse [1999] WASCA 103