The Bell Group Ltd (In Liquidation) and Ors v Westpac Banking Corporation and Ors (5)

[2004] WASC 273

THE BELL GROUP LTD (In Liquidation) & ORS -v- WESTPAC BANKING CORPORATION & ORS (5) [2004] WASC 273

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2004] WASC 273
Case No:	CIV:1464/2000	Heard:	6 & 7 DECEMBER 2004
Coram:	OWEN J	Delivered:	8/12/04
No of pages:	36	Judgment Part:	1 of 1
Result:	Rulings made
Category:	B
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Parties:	THE BELL GROUP LTD (In Liquidation) (ACN 008 666 993) OTHER ENTITIES * WESTPAC BANKING CORPORATION (ACN 007 457 141) THE BELL GROUP LTD (In Liquidation)
Catchwords:	Practice and procedure Pleadings Barnes v Addy knowing assistance Pleading an allegation of dishonesty Turns on own facts
Legislation:	Nil
Case References:	Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 Brambles Holdings Ltd v Carey (1976) 15 SASR 270 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974-75) 132 CLR 373 Fluor Australia Pty Ltd v State Energy Commission (WA), unreported; SCt of WA; Library No 6682; 10 April 1987 Gold Coast City Council v Pioneer Concrete Pty Ltd (1998) 157 ALR 135 In re R deceased [1951] P 10 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93 The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (4) [2004] WASC 162 The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors [2001] WASC 315 Not included

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

IN CIVIL

CITATION : THE BELL GROUP LTD (In Liquidation) & ORS -v- WESTPAC BANKING CORPORATION & ORS (5) [2004] WASC 273 CORAM : OWEN J HEARD : 6 & 7 DECEMBER 2004 DELIVERED : 8 DECEMBER 2004 FILE NO/S : CIV 1464 of 2000 BETWEEN : THE BELL GROUP LTD (In Liquidation) (ACN 008 666 993)

First Plaintiff

OTHER ENTITIES *
Second to Thirteenth Plaintiffs

AND

WESTPAC BANKING CORPORATION (ACN 007 457 141)
First Defendant

OTHER ENTITIES *
Second to Fifth Defendants

(BY ORIGINAL ACTION)

WESTPAC BANKING CORPORATION (ACN 007 457 141)
First Plaintiff by Counterclaim

OTHER ENTITIES *
Second and Third Plaintiffs by Counterclaim

AND

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THE BELL GROUP LTD (In Liquidation)
First Defendant by Counterclaim

OTHER ENTITIES *
Second to Tenth Defendants by Counterclaim

(BY COUNTERCLAIM)

* Refer to WASC 93 [2004] for full list of entities

Catchwords:

Practice and procedure - Pleadings - Barnes v Addy knowing assistance - Pleading an allegation of dishonesty - Turns on own facts

Legislation:

Nil

Result:

Rulings made

Category: B

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Representation:

Original Action

Counsel:

First Plaintiff : Mr R M Robson QC,
Mr J W S Peters SC &
Mr D Crennan
Second to Thirteenth Plaintiffs : Mr R M Robson QC,
Mr J W S Peters SC &
Mr D Crennan
First Defendant : Mr T M Jucovic QC &
Mr D E J Ryan SC
Second to Fifth Defendants : Mr T M Jucovic QC &
Mr D E J Ryan SC

Solicitors:

First Plaintiff : Blake Dawson
Waldron
Second to Thirteenth Plaintiffs : Blake Dawson
Waldron
First Defendant : Freehills
Second to Fifth Defendants : Freehills

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Counterclaim

Counsel:

First Plaintiff by Counterclaim : Mr T M Jucovic QC &
Mr D E J Ryan SC
Second and Third Plaintiffs by Counterclaim : Mr T M Jucovic QC &
Mr D E J Ryan SC
First Defendant by Counterclaim : Mr R M Robson QC,
Mr J W S Peters SC &
Mr D Crennan
Second to Tenth Defendants by Counterclaim : Mr R M Robson QC,
Mr J W S Peters SC &
Mr D Crennan

Solicitors:

First Plaintiff by Counterclaim : Freehills
Second and Third Plaintiffs by Counterclaim : Freehills
First Defendant by Counterclaim : Blake Dawson
Waldron
Second to Tenth Defendants by Counterclaim : Blake Dawson
Waldron

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

Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250
Brambles Holdings Ltd v Carey (1976) 15 SASR 270
Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974-75) 132 CLR 373
Fluor Australia Pty Ltd v State Energy Commission (WA), unreported; SCt of WA; Library No 6682; 10 April 1987
Gold Coast City Council v Pioneer Concrete Pty Ltd (1998) 157 ALR 135
In re R deceased [1951] P 10
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563
Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255
Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378
The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93


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The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (4) [2004] WASC 162
The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors [2001] WASC 315

Case(s) also cited:

Not included


(Page 6)

1 OWEN J: These reasons cover a ruling that I am required to make as to whether the 8th amended statement of claim (8ASC) and its accompanying particulars permit the plaintiffs to advance a case based on allegations of conscious wrongdoing by individual bank officers.

2 In these reasons I have found it convenient to set out, sometimes at length, passages from the transcript of the proceedings. Most of those extracts have been edited for grammar and syntax and to make them more intelligible.

Background

3 The background to, and nature of, this litigation is described in several interlocutory decisions, namely The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors [2001] WASC 315, The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (3) [2004] WASC 93 and The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors (4) [2004] WASC 162.

4 Briefly (and for the purpose only of making these reasons as self-sufficient as possible) the background is as follows. There was a series of transactions in 1990 by which security over most of the assets of the Bell group of companies was granted to certain banks that were previously unsecured creditors of three companies only in the group. There are two groups of banks. One is a syndicate of six Australian banks led by Westpac Banking Corporation. The other is a syndicate of 14 overseas banks led by Lloyds Bank plc.

5 Several companies within the Bell group were placed in provisional liquidation, liquidation or receivership at various times from April 1991. The plaintiffs are various companies within the group and their liquidators. The banks are the defendants.

6 The plaintiffs say that by virtue of the transactions all significant and worthwhile assets of the Bell group were made available to the banks for repayment of the debts owed to the banks by some group companies in priority to the claims of all other creditors. The plaintiffs also say that the transactions were entered into when the relevant companies were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent and that the banks knew they were obtaining an advantage at the expense of other unsecured creditors.

7 The plaintiffs say the securities taken as a result of the transactions are invalid and seek recompense (under various heads) for the recoveries

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and gains. In essence, they contend that had the transactions not been entered into, the proceeds from the sale of the assets over which security was taken would have been available to satisfy inter-group indebtedness and would have flowed through to various companies within the group. Those proceeds would therefore have been applied for the benefit of all unsecured creditors.

8 The plaintiffs allege that the directors effected the transactions in breach of their duties to companies within the group at the expense of the other unsecured creditors and in the interest of the ultimate shareholder of the group. They also allege that the banks knowingly participated or assisted in the breaches of duties by the directors. The banks deny any wrongdoing and deny that the plaintiffs are entitled to recover anything.

9 The borrower companies defaulted in their obligations under the transaction documents. The banks exercised powers under the security documents and received proceeds amounting to approximately $280,000,000. In addition, the plaintiffs allege that during 1990 and 1991 the banks made gains from the arrangement of approximately $68,000,000. The plaintiffs seek recovery of those proceeds and gains and other monetary compensation totalling approximately $1.4 billion. The plaintiffs advance cases against the banks based on (among other things) Barnes v Addy and equitable fraud. State of mind is therefore very much in issue.

10 The trial commenced on 22 July 2003. The plaintiffs' opening went until April 2004. Evidence was then taken from a number of witnesses and the plaintiffs closed their case on 11 October 2004. Since then the defendants have been opening their case. The opening appears to have some way to run. The defendants have given notice that they intend to call approximately 220 witnesses. The plaintiffs then have a case in reply on a particular issue. The case is not likely to finish (if it ever finishes) until some time in 2006.

The Problem Enunciated

11 When the plaintiffs closed their case they did so subject to final resolution of their application to amend 8ASC and the particulars. At that stage they had given notice of some of the proposed amendments. Notice of further proposed amendments was given in November 2004. Some of the proposed amendments were agreed but others were contested. Argument concerning the contested issues took place on 17 November 2004.

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12 On 1 December 2004 I gave oral reasons disposing of the outstanding amendments. Most were resolved in favour of the plaintiffs. But at the outset of the oral reasons delivered on 1 December 2004 [Tra: 18129] I said this:

"State of mind looms very large in this case, … that is, the state of mind of the directors and the state of mind of the banks. For present purposes it looms very large in two guises: first whether a state [of] mind that has been alleged by the plaintiffs as being held by the directors or the banks or both involves conscious dishonesty or conscious wrongdoing or whether it is some lesser form of mental position. Secondly what are the varying forms of mental disposition (knowledge, belief, suspicion, reckless disregard or knowledge that ought to have been gained) and how each of those mental dispositions affect the several causes of action advanced by the plaintiffs."

13 I then referred back to an exchange at [Tra: 17431] to [Tra: 17432] (which I will not set out) as a result of which I thought the plaintiffs had confirmed that their case was not based on allegations of conscious wrongdoing or conscious dishonesty (whether of the directors or bank officers). I then proceeded to rule on the outstanding amendments.

14 At the conclusion of the ruling, at [Tra: 18137] and following, Mr Robson, Senior Counsel for the plaintiffs, placed on the record that my apprehension of the plaintiffs' case was wrong. In summary he said that while there was no allegation of conscious wrongdoing on the part of the directors, the plaintiffs had not disavowed a case of conscious dishonesty against the banks and the pleading should not be read down in a way that would bring about that result. Further exchanges occurred at [Tra: 18137] concluding with these statements made by me at [Tra: 18160] and [Tra: 18161]:

"… one alternative would be for me to put [the plaintiffs] clearly on notice … that I cannot and will not make any findings of actual dishonesty because to do so would be outside the way I read the pleaded case. If you need a finding of actual dishonesty to make out one or more of your causes of action, the consequence would be that you would fail in that cause of action. With a finding of fact that there was a calculated abstention but without a finding of fact that that amounts to dishonesty or conscious wrongdoing, then you could succeed. … So long as the plaintiffs understand that I would regard any

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allegation of conscious dishonesty as being outside the pleaded case. That is the way I have approached the pleadings. That is the way I read them. That is not to say that you cannot bring forward a factual case based on a calculated abstention."

15 I gave further thought to the issues overnight and was left with a degree of uncertainty as to what the plaintiffs' position really was. I returned to the issues the following day, 2 December 2004 at [Tra: 18228] and following. I set out my understanding of what is a most uncertain state of the law on knowing participation (the second limb of Barnes v Addy) and my appreciation of the way in which the distinction between a case based purely on objective grounds (as opposed to subjective dishonesty of individual bank officers) might impact on the litigation. I gave to the parties a document [MISD.00002.081] setting out four possible scenarios in which a knowing participation case might be put. I posed a number of questions for the parties to consider. They were designed to elicit from the plaintiffs a concise and precise statement as to whether their case involved allegations of conscious dishonesty by individual bank officers and, if so, how they contended such a case arose on the pleadings and the particulars in their current form. An edited extract of what I said that morning is set out in the Schedule to these reasons.

16 The substantive argument on these questions occurred on 6 and 7 December 2004. Mr Robson confirmed that the plaintiffs' case did indeed involve allegations of conscious wrongdoing on the part of the bank officers. He went through the pleadings (with which I will deal shortly) and then summarised the position at [Tra: 18273] in this way:

"… the pleadings at their highest therefore allege the banks knew of insolvency, knew of the consequences on creditors. They knew - this is the highest it's alleged - or believed that the transaction would be set aside or there was a significant risk this would happen as a consequence of directors' breach of duties and for those reasons amongst others it is said they knowingly participated in the breach of duty.

It's clear from those allegations - I'll take you to our opening in a moment - that it's being alleged at its highest that the banks knew the transactions were contrary to law or might be contrary to law and it follows from that that they knew or suspected they might be doing the wrong thing because this is not a transaction where they stood to one side and observed it. The transactions

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involved the banks entering into the transactions. There wouldn't be any transaction without the banks' activities, so there is an allegation, your Honour, that because they knew as pleaded that the transaction would or there was a significant risk that they would be set aside because of certain things, the banks knew that the transactions were contrary to law."

17 Mr Robson then referred to the way in which these matters had been put in the plaintiffs' opening at [Tra: 1711], [Tra: 1722], [Tra: 1723], [Tra: 1727], [Tra: 2136] and [Tra: 2139]. I think those submissions can fairly be summarised as involving the proposition that the banks had legal advice that there was a risk the transactions could be set aside but if they were set aside the banks would be no worse off, indeed probably better off. This has come to be referred to in the proceedings as "the no worse off" thesis. It is one of the critical planks on which the plaintiffs' case is built.

18 I think it is fair to summarise the plaintiffs' position this way. The plaintiffs allege conscious dishonesty, conscious wrongdoing, conscious impropriety or want of probity on the part of individual bank officers because the banks proceeded with the transactions armed with certain knowledge. That store of knowledge included, importantly but not exclusively, knowledge as to the financial state of the companies, the effect of the transactions on creditors and that the transactions would or might be set aside because they were brought about by a breach of fiduciary duty by the directors and hence were contrary to law.

19 The position of the defendants can be quite succinctly stated. They say that at all times during and since the October 2000 amendment application (at least until 1 December 2004) the plaintiffs had disavowed a case based on conscious wrongdoing by the directors or by bank officers. Put in the way phrased by Mr Ryan, Senior Counsel for the defendants, the plaintiffs paid a price for their success in the 2000 amendment application. This "involved the plaintiffs accepting as the price of that amendment that they didn't allege conscious dishonesty in the case". The defendants contend that the plaintiffs have thereby waived their right to rely on such a case or are estopped from doing so. Further, they should not be permitted now to withdraw or resile from that concession. The defendants also contend that in any event the pleadings do not reveal a case based on conscious wrongdoing by individual bank officers.

20 The plaintiffs deny that they made the concession or disavowal to which I have referred. They say that the concession was limited to

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conscious wrongdoing on the part of the directors and that subjective dishonesty on the part of individual bank officers was never raised. Accordingly, no question of release from, or an attempt to resile from, the concession arises.

21 The plaintiffs' position is that, in its current state, 8ASC (as particularised) is properly and adequately pleaded so as to permit them to raise the issue of conscious wrongdoing by individual bank officers. Put simply, that is the problem I now have to resolve. The defendants pressed strongly that I should determine whether the plaintiffs had waived their right to, or were estopped from, raising such a case because of the concession. For reasons that I will relate later, I do not think I need to do so.

The Barnes v Addy Pleadings

22 It is not necessary to set out the full extent of the pleadings. Rather, I should go straight to the Barnes v Addy claim.

23 As a broad (but inexact) statement, pars 49 to 49D of 8ASC plead that, either as a matter of contract or agency, information known to one bank was known to all banks. In pars 50 to 59A the banks are said to have known, believed or suspected or ought to have known numerous things including:

(a) that certain nominated companies were insolvent, nearly insolvent, of doubtful solvency or would inevitably become insolvent;

(b) who were the directors of the several relevant companies;

(c) the liabilities of the group exceeded its assets;

(d) there were shareholding and debtor and creditor relationships between various of the companies within the group that had certain consequences.

24 In addition to the plea identified at (a) above, par 58 pleads that by reason of "the banks' calculated abstention from inquiry … the banks knew of the financial position of" certain of the companies. In the particulars to par 58 the matters into which, so the plaintiffs contend, inquiry should have been made, are set out. The particulars then contain these two subparagraphs:

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"(e) The enquiries … would have been made by honest and reasonable persons in the position of the Banks who did not already have the information which such enquiries would have yielded or who did not already know or believe that the financial position of Bell Participants was as pleaded … .

(f) It is to be inferred from the matters above that the Banks abstained from such enquiries because they believed, or suspected, as was the fact, that the Bell Participants as pleaded were in the financial position as pleaded … and that the results of such enquiries would have confirmed that."

25 In pars 59B to 59T it is alleged that the banks either knew or believed or suspected, or a combination of those states of mind, numerous things including:

(a) that if one Bank made demand for repayment of its then outstanding facilities other Banks would be likely to follow suit and that the companies could not or would not be able to meet the demands;

(b) certain on-loans made within the group arising from "junk bond" issues and which might previously have been thought to be subordinated to the debts owed to the Banks might not be subordinated;

(c) if the main companies in the group were called on to pay their debts they would have to liquidate assets;

(d) group companies may be wound up within six months of the transaction having been entered into;

(e) the longer the time that elapsed after the companies entered into the transactions before winding up the greater the prospects of the Banks resisting a claim that the transactions were invalid;

(f) as a consequence of the transactions all worthwhile assets of the group would be made available to the Banks in priority to other creditors;

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(g) the relationship between Bond Corporation Holdings and the Bell group;

(h) the directors of the Bell group had a conflict of interest between their duties as directors and their personal interests or the interests of Bond companies.

26 There are three other provisions that are important for present purposes. I will set them out in full.

"59S. From at least early to mid-December 1989, during and after the Scheme Period, the Banks knew or believed that the Scheme and some or all of the Transactions would be set aside or undone or that there was a significant risk that this would happen:

(a) if one or more of the Bell Participants were wound up commencing within six months of it or them entering into a Transaction;

(b) in any event under other provisions of the applicable insolvency and companies legislation or as a consequence of a breach of directors' duties.


……………

59TA. Prior to the February Meetings, with the knowledge, belief and suspicion which they held from the times pleaded in paragraphs 59B to 59T, the Banks:


(a) refrained from seeking any or any adequate information about the current financial position of the Bell Participants;

(b) refrained from seeking any or any adequate information about any schemes to restructure the financial position of the Bell Participants and the position of those companies' creditors, future creditors and shareholders in any such scheme;

(c) refrained from seeking any or any adequate information about the position of the Bell Participants' creditors, future creditors and shareholders as a consequence of the Banks' and

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the Bell Participants' entry into and giving effect to the Transactions and the Scheme.

…………..

59U. With the knowledge belief or suspicion pleaded to in paragraphs 50 to 59T and in the circumstances referred to in 59TA and 59TB, the Banks proceeded with the Scheme and the Transactions with the belief and with the intention that the Banks would be no worse off (than their present position) if the Transactions were set aside or undone and the Banks had to disgorge any gains thereby obtained."

27 Paragraph 59S contains (among other things) an allegation that the banks knew (among other states of mind) that the transactions would or might be set aside as a consequence of them being entered into in breach of the directors' duties to the companies. The allegation in par 59TA that the banks refrained from seeking certain information is particularised in much the same way as the "calculated abstention plea" in par 58. It should be noted that there are subparagraphs that are the equivalent of those set out above as (e) and (f) under the particulars to par 58. Paragraph 59U is the pleading foundation for the "no worse off" thesis. The particulars to par 59U set out the legal advice received by the banks and other documents from which the allegation proceeds.

28 There are several things I need to say about the law, these pleadings and their impact on the case.

29 First, as I have already said, there is considerable uncertainty as to what is the current state of the law in Australia concerning the subjective and objective elements of knowledge for Barnes v Addy claims. Nothing I say in these reasons is intended to be a complete analysis of what is a complex area of the law. For the purposes of this application I am assuming (without deciding) that it is not necessary to establish subjective dishonesty on the part of either the errant fiduciary or the third party. In other words, I am assuming that once the court finds that the third party was armed with a certain store of knowledge the question becomes how a court of equity, using the standards of the honest and reasonable person having that same store of knowledge, would view the impugned conduct.

30 Secondly, the pleadings from pars 50 to 59U attribute to the banks knowledge, belief and suspicion (among other states of mind). Nice questions might arise whether "knowing participation" or "knowing

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assistance" can be made out if the relevant facts or circumstances are merely believed or suspected rather than known. But this may depend ultimately on the evidence and the findings to be made on the evidence. I need say no more about that matter at present.

31 Thirdly, I have been told that the true meaning of par 59S of 8ASC is very much in issue between the parties. This has not yet been argued before me. But the defendants will contend that the reference in par 59S(b) to the banks knowing that the transactions would or might be set aside "as a consequence of a breach of directors' duties" does not open up a case based on bank knowledge of breaches of the particular duties set out in pars 39A to 39F. This is not something that I am presently called on to decide.

32 Fourthly, I am assuming (without deciding) that, in a proper case, where the state of knowledge or belief of a corporation is in issue it is possible to aggregate the knowledge or beliefs of a number of individuals and impute the combined result to the corporation. I will have more to say about this issue later. But I am also aware that the defendants will contend that in a case of equitable fraud (and I presume also conduct that would be impugned by a court of equity in a Barnes v Addy claim) an exercise of aggregation of that nature would be inapposite. This too is something that I am not presently called on to decide.

33 Fifthly, that the plaintiffs' claim proceeds in equity. There is no claim at common law in deceit, actual fraud of the Derry v Peek variety or anything similar. So far as I am aware there never has been a claim of that nature. Notions of wrongdoing, dishonesty and the like must, therefore, be assessed according to "the plain principles of a court of equity" (Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974-75) 132 CLR 373 per Gibbs J at 396) rather than those that apply in the common law. I will return to this issue when I discuss whether the allegation of wrongdoing has been pleaded properly.

Conscious wrongdoing and the Rules of Pleading

34 Order 20 r 9 and r 13 of the Rules of the Supreme Court recognise the principle that fraud must be pleaded and particularised with clarity and precision. The simplest way for me to enunciate the principle is to set out what was said on the subject in Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255 per Ipp J at [35]:

"More than 100 years ago, it was said that 'no rule was more clearly settled than that fraud must be distinctly alleged and as

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distinctly proved, and that it was not allowable to leave fraud to be inferred from the facts' (Davy v Garrett [1877] 7 Ch D 473 at 489 per Thesiger LJ). In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 268 Buckley LJ was concerned with whether the facts alleged in a statement of claim were sufficient to bring home to the defendants a charge that the object of an alleged conspiracy was a dishonest one and that they actually knew or must be taken to have known that that was so. He said:

'An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word 'fraud' or the word 'dishonesty' must necessarily be used … The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.' "

35 It is also instructive to look at what was said by Anderson J in the same case at [134] and [135]:

"On the pleadings as they stood, all imputations of dishonesty in the witness statements were irrelevant as being beyond the issues joined on the pleadings unless the word 'wrongfully' in the reply meant 'dishonestly'. Even so, the word 'wrongfully' in the plea related only to the giving of advice as to which tender was the lowest. It was not a plea of general impropriety. It could not provide any justification for the wide-ranging allegations made by counsel for Ortiz Investments Pty Ltd in his opening address, nor could it make relevant the wide-ranging allegations of improper conduct contained in the witness statement.

The rule is very strong in civil litigation that if a party wishes to allege dishonesty as a form of breach of duty, that party must make it clear in its formal pleadings that this is the party's case.

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As the authors of Odgers 'Principles of Pleading and Practice' tell us in the 21st edition at 113, under the heading 'Charges of Misconduct and Negligence':

'Particularity is especially needed where the pleading contains an imputation on the character of your opponent; as then it is only right and fair that he should know definitely before the trial what is the charge which is made against him. Justice requires you to define the accusation you bring against anyone; and this is a very different thing from setting out the evidence by which you intend to establish it. 'The court will require of him who makes the charge that he shall state that charge with as much definiteness and particularity as may be done, both as regards time and place' (per Lord Penzance in The Marriner v Bishop of Bath and Wells [1893] P 145 at p 146). It is no excuse for the omission of such details that the opponent must already be perfectly well-aware of the facts. Each party is entitled to know the outline of the case that his adversary is going to make against him, and to bind him down to a definite story.'

See also Davy v Garrett [1877] 7 Ch D 473 at 489; Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 268; W Scott, Fell and Company, Limited v F H Lloyd (1906) 4 CLR 572 at 576 - 577."

36 I have mentioned the dicta of Anderson J because I have always regarded anything his Honour has to say on matters of procedure as being particularly persuasive. And in this case the judgment contains a couple of matters that are directly relevant. First, his Honour pointed out that the pleadings in that case, although using the word "wrongfully", did not assert dishonesty or even general impropriety. The second point comes from Anderson J's adoption of the passage from Odgers. In that passage the author pointed out there is a difference between defining the allegation and setting out the evidence by which the asserting party intends to establish the allegation. I will return to these matters shortly.

37 The principle that I have outlined is not limited to fraud in the strict sense. It can apply, for example, to claims of undue influence: In re R deceased [1951] P 10 per Willmer J at 19; negligent misstatement: Fluor Australia Pty Ltd v State Energy Commission (WA), unreported; SCt of WA; Library No 6682; 10 April 1987 per Kennedy J at 3; statutory causes

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of action: Gold Coast City Council v Pioneer Concrete Pty Ltd (1998) 157 ALR 135 at 149; and to allegations of professional misconduct: Oldfield Knott per Ipp J at [38]. It follows that the principle will apply just as much to dishonesty that sounds "according to the plain principles of a court of equity" as it would to fully blown fraud.

Conscious Wrongdoing and These Pleadings

38 I have come to the view that 8ASC does not adequately plead a case of conscious wrongdoing against the banks that would comply with these principles. There are two main reasons for this conclusion. The first is that in a case that could involve elements that are objective, elements that are subjective and some that combine the two the requirement for specificity in the pleading takes on added significance. This pleading does not, in my view, reach the required level of specificity. The second reason is this: even if the case against "the banks" is adequately disclosed, the identification of individuals who are "the banks" for this purpose is not.

39 In dealing with the first of those reasons I will return to the two points that I took from the judgment of Anderson J in Oldfield Knott. The structure of the pleading in this case is to set out what the banks are said to have known (incorporating belief or suspicion) as a precursor to the claims of "wrongdoing", essentially those set out in pars 58, 59S, 59TA, 59TB, 59U and 65H. But the reader will not find anywhere in pars 50 to 59U or par 65H that what the banks are said have done, particularly in pars 58, 59S, 59TA or 59U, was done "dishonestly" or "wrongfully". Nor is there an express allegation of general impropriety in those paragraphs. The same can be said for the relevant particulars.

40 Conversely, the concept of impropriety (per medium of the phrase "failed to exercise powers properly") appears in pars 37 and 39A to 39D dealing with the duties of the directors and the breaches of duty on which the plaintiffs rely. In this respect the plaintiffs acknowledge that the notion of impropriety does not import an allegation of conscious wrongdoing by the directors. Reference could also be made to the particulars to par 46, once again dealing with the conduct of the directors, and the allegations in the LDTC claim (pars 114 and 115) concerning the alleged failure by the directors to conduct the affairs of the companies in a proper and efficient manner.

41 I acknowledge that par 65H is a conventional statement of a Barnes v Addy wrong, and it is an equitable wrong. But that is not in itself the point. If Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378

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represents the law in Australia a Barnes v Addy claim can be made out from a set of circumstances at least one essential element of which (namely, the breach of duty) does not necessarily involve conscious wrongdoing. If it also be the law that a Barnes v Addy claim could be established without conscious wrongdoing on the part of the third party then, in the absence of an express statement that the impugned conduct is alleged to have been consciously dishonest, that aspect of the claim would have to arise by implication from what is said.

42 I am not saying that the pleading does not disclose wrongdoing of the type that would sound according to "the plain principles of a court of equity". Nor am I suggesting that words such as "fraud", "dishonesty", "wrongful conduct" or "impropriety" have to be used. The authorities make it clear that they do not. But the import or intent of the pleader must be readily apparent. In this case, I believe the pleading is deficient.

43 I also remarked earlier that in Oldfield Knott Anderson J recited a passage from Odgers. In that passage the author pointed out there is a difference between defining the allegation and setting out the evidence by which the asserting party intends to establish the allegation. The particulars to pars 50 to 59U contain voluminous references to documents, notes of meetings and the like. But these would properly be described as the evidence from which the plaintiffs seek to make good the allegation rather than a definition of the allegation itself. So it is, then, that I conclude that any deficiencies that might appear in 8ASC in this respect are not cured by reference to the particulars.

44 I have no difficulty with the pleading of knowledge, belief or suspicion of circumstances or facts in pars 50 to 59U. It is essential (whether the claim is based on an objective assessment of what the honest and reasonable person would do or conclude or on a subjective assessment of the state of mind actually held by the third party) to establish what the third party knew (or believed or suspected). But if, within the allegations of calculated abstention in par 58, knowledge that the transaction would be set aside due to breach of duty in par 59S, or refraining from seeking the information referred to in par 59TA, there is a resort to subjective wrongdoing by the banks' officers it ought to have been spelled out clearly. At present it is, at best, equivocal and, as Buckley LJ pointed out in Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 268 "this will be fatal".

45 Earlier in these reasons I set out the submissions of Senior Counsel for the plaintiffs which appear at [Tra: 18273]. I understood that

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submission to mean that the pleading that the banks "knew" certain things and then entered into the transactions with that knowledge and with knowledge of certain consequences or possible consequences is sufficient to convey the allegation that the banks "knew or suspected they might be doing the wrong thing". As I understood the submission the plaintiffs contend that this carries with it a sufficiently clear statement of conscious wrongdoing. But in the context of this case the resort purely to "knowledge" is problematic. It must be remembered that the plaintiffs also plead that the directors "knew" certain things and then entered into the transactions with that knowledge and with knowledge of certain consequences or possible consequences: see 8ASC par 34(b). The plaintiffs acknowledge that this does not involve an allegation of conscious wrongdoing by the directors. A reader of 8ASC is therefore left to infer that "knowledge" has one consequence in one part of the pleading and a different consequence in another. This is a further reason why I regard the plea, insofar as it attacks the conduct of bank officers, as equivocal.

46 The second broad reason why I have concerns about the pleading is that, if the plaintiffs are right, they are alleging conscious dishonesty by individual bank officers. This must be the case because the 20 banks are corporate entities. They cannot "know, believe or suspect" something separately and apart from the knowledge, belief or suspicion of human beings who are, for relevant purposes, the persona of the corporate entities. The seriousness of an allegation that a bank officer acted in a way that was consciously wrongful needs no amplification. It has, at least arguably, added seriousness in the circumstances of this case. This is because there is no allegation of conscious wrongdoing on the part of the directors. An extreme way of looking at it (and this is not intended to reflect the way the plaintiffs would put their case) is that an individual bank officer may be said consciously, that is appreciating that what he or she was doing was wrong, to have taken advantage of a director acting innocently and thereby assisted in that innocent director's breach of duty.

47 It must be borne in mind that the defendants in these proceedings are the banks, that is, the corporate entities. It is the banks, not individual bank officers, against whom relief is sought. There are two related aspects to this problem. The first concerns the circumstances in which the knowledge of an individual is to be attributed to a corporate entity. The second is the circumstances in which the subjective wrongdoing of an individual might become the wrongdoing of a corporate entity with which the individual is associated thus rendering the corporate entity liable to a remedy at law or in equity at the behest of another person.

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48 As I have already said, the circumstances in which knowledge of an individual is to be imputed to a corporate entity and in which reliance on that knowledge to sheet home liability to the corporate entity are issues about which the parties are in dispute. This is particularly so in relation to the aggregation of the knowledge of several individuals. I have not yet heard argument on them. But for present purposes I am content to assume that the position is as stated in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 (approving Brambles Holdings Ltd v Carey (1976) 15 SASR 270). I take those principles to be as follows:

1. If mental states like knowledge or belief are to be attributed to a notional and metaphysical entity like a corporation, this can only be done by attributing to it the knowledge or belief actually possessed by some one or more of its officers or employees.

2. Very difficult questions can arise in this connection. But it is a fallacy to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer or employee alone and that the corporation can never know or believe more than that one person knows or believes.

3. It is the company's belief that is important. The belief of any officer or employee is relevant only insofar as that belief may be imputed to the company.

4. When beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company.

5. Thus, a division of functions among officers or employees of a company responsible for different aspects of a transaction does not relieve the company from responsibility determined by reference to the knowledge possessed by each of them.

49 Nowhere does 8ASC nominate the individual bank officers whose knowledge is said to be the knowledge of the banks. It is true that the voluminous particulars to par 50 to par 59U make reference to many bank

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officers and to solicitors engaged by the banks. Many of the documents referred to in the particulars disclose, on their face, the identity of some individuals through whose hands they passed and who, or at least some of whom, appear to have considered the contents. It is true also that as part of their opening the plaintiffs prepared a dramatis persona for each bank. In what is admittedly a slightly different context (one to which I will return in due course) Mr Peters, Senior Counsel for the plaintiffs, put their position on this issue in this way at [Tra: 17473]:

"Your Honour referred to the dramatis personae and Mr Jucovic referred to that. Your Honour, we are of the view that we have particularised a bank knowledge case in our particulars by reference to the very documents and the facts which we say give rise to the knowledge. It's not up to the plaintiffs, your Honour, to go and point to a particular bank officer, as Krakowski v Eurolynx says. Krakowski v Eurolynx says there can be different levels of knowledge between different bank officers for the same transaction. That's one of the issues in the case.

My learned friend took your Honour to the paragraph in Krakowski v Eurolynx which dealt with knowledge, but then the very next paragraph goes on to the fact that there might be different officers within a bank who have knowledge of relevant circumstances that can be aggregated. It's not a simple matter, your Honour, to say we've never particularised it. We have particularised it in detail in the particulars to paragraph 50 through to 59U, so we say we have particularised the knowledge."

50 It will be apparent from what I have already said that I do not accept that the particulars cure the problem but that (subject to later argument) I do accept that knowledge of several individuals can be aggregated. But this does not answer the questions with which I am now confronted. Who do the plaintiffs say are the individuals whose knowledge is, relevantly, the knowledge of the banks and why do they say so? Who do the plaintiffs say are the individuals who acted in a way that was consciously dishonest and why is it that the plaintiffs say the dishonesty of those individuals is, relevantly, the dishonesty of the banks?

51 It cannot be the case that every person through whose hands a document passed is a person said to have knowledge that would be imputed to the bank. In exchanges with counsel I have used the example

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of the tea person or the mail room attendant who may have opened a letter. This elicited a response from counsel to the effect that the plaintiffs were not ascribing knowledge to the tea person or the mail room attendant. But I am none the wiser as to the identity of the individuals on whose knowledge the plaintiffs do rely.

52 I do not think the dramatis persona prepared by the plaintiffs in relation to each bank constitutes sufficient identification. As I said at one stage of the hearing it may be that the individuals whose knowledge is to be attributed to the banks are named in those documents. But is it all of them? And it must also be remembered that the dramatis personae were produced well after the banks had settled their witness list. Not all of the bank officers named in the dramatis personae are persons whom the defendants intend to call and in respect of whom statements have been prepared and exchanged: see [Tra: 17442]. This could have obvious consequences in the absence of a clear statement identifying individuals said to have been guilty of conscious wrongdoing.

53 These are questions that go well beyond purely technical points of pleading. In my view, and given the context of this case, they are matters of substance. I will explain why.

54 One of the (myriad) complaints made by the defendants is that the plaintiffs are constantly referring to "the banks" and that this overlooks the fact that the 20 banks are separate entities and each has to be looked at individually. This is yet another issue that will arise in due course and I doubt that all of the complaints made by the defendants in relation to it will be made good. But in this respect I think the banks have a point. Each bank is structured differently. There are variations in the decision-making process. I cite, by way of example only, the reporting and authority structure that is outlined for several banks in the defendants written outlines of opening as follows:

• Dresdner Bank AG: MISD.00004.077 par 52

• Credit Agricole: MISD.00004.086 par 23

• Bank Austria AG: MISD.00004.068 par 50

• BfG Bank AG: MISD.00004.065 par 50

55 Many banks incorporated within their decision-making structures authority to approve financing facilities up to a monetary limit. Applications in excess of that limit had to go further up the chain of command. In some instances, a negative decision at a particular level was fatal to the application. In some, an application could not go to a higher

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level without a recommendation from the referring body or person. Some banks appear to have used credit analysts to assist in the approval process. In some instances the credit analyst had no role to play in the decision-making itself. He or she merely prepared a report.

56 To use the words of Bright J in Brambles Holdings at 279 the search must be for "some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company". Who do the plaintiffs say, in relation to each bank, is the individual or individuals who satisfy that description and why? What marks out the "close and relevant connection" which would make any particular individual "the bank" for relevant purposes? It might be, for example, that the persons said to constitute the persona of the banks are only those who were involved in the actual and final decision to commit to the transactions. Or it might be said that the class of such persons includes every person who was in any way concerned with the decision-making process. In between those extremes there are numerous possibilities, including that the class catches anyone who was involved and who made recommendations that assisted in the final decision. What is the position of the credit analyst who merely prepared reports? What is the role (in this respect) of solicitors engaged to advise on various aspects of the proposed transactions?

57 This of course, raises other questions. If the making of decisions is the test, why is it so and where is the "cut-off point"? If the power to make decisions is not the test, what is? Is it enough, for example, to look at the description of offices held within the banks and infer that the bank must be taken to know what the holder of certain nominated offices knows?

58 Having read 8ASC and the particulars and listened to the plaintiffs' opening I confess that I am not sure that I know the answers to these questions. I have on several occasions indicated that I am concerned about the lack of specificity as to whose knowledge is to be attributed to the banks. But I did so not directly in relation to a pleading issue. On those instances I indicated that a possible solution was to require the plaintiffs to deliver chapter and verse on the attribution of the knowledge of individuals towards the end of the case but before the defendants were required to embark on closing submissions. This is the context in which the exchange with Mr Peters at [Tra: 17473] set out above occurred.

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59 The issue with which I am now confronted is different. It is quintessentially a pleading point. The defendants have commenced making their opening statements. They have reached the point in that opening where they propose to outline evidence going to matters that are directly relevant to the state of mind of individual bank officers. It goes without saying that the approach taken to a case that accuses individuals of conscious wrongdoing may be quite different to one where the issue is whether a corporate entity committed an equitable wrong but without involving conscious wrongdoing on the part of individuals.

60 What has now become clear is that the plaintiffs are alleging conscious wrongdoing by individuals. As the extracts from the transcript to which I have made reference reveal, that came as something of a surprise to me. And I accept what has been put to me on behalf of the defendants, namely that they are at least equally taken by surprise and they feel they are prejudiced by it.

61 There is a further complicating factor. Will it be alleged, for example, that everyone who possessed knowledge of a single fact that goes, or a number of facts that go, into the factual matrix from which the guilty mind of a bank or the banks is said to arise has acted with conscious impropriety?

62 For all of these reasons I believe the pleadings as presently drafted do not permit the plaintiffs to raise a case of conscious wrongdoing against unspecified bank officers. I will return to discuss the ramifications of this conclusion a little later.

An Aside

63 There is a curious side wind to this problem. This case originated in the Federal Court. In fact, it was listed for hearing before Carr J in June 1998. For reasons that I need not explain (because they are not relevant and for fear of precipitating a war of words, accusations and counter-accusations between the parties that would be entirely fruitless) the hearing dates were vacated. But the pleadings as they stood in June 1998 contained a calculated abstention plea almost identical to the one now appearing in par 58 and a plea alleging that the banks knew the transactions might be set aside for breach of duty (now found in par 59S(b)). Similarly, in relation to the calculated abstention plea, the particulars contained the statements that are relevantly in the same terms as pars (e) and (f) of the particulars to the present par 58.

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64 So far as I can see, what now appears in par 59TA and par 59U had no direct equivalent in the pleadings as they stood in June 1998. They were the subject of the 2000 amendment application. But at least in the respects set out in the previous paragraph those matters that have caused me concern (insofar as the plaintiffs rely on them to support the allegations of conscious wrongdoing against individual bank officers) have been in the pleadings for some time.

65 I do not know what would have happened had the parties gone to trial on those pleadings in 1998. I raised the question with the parties because I was concerned that Carr J may have made a decision on the very point that now confronts me. If so, this may arguably have been a collateral attack on Carr J's decision. I say "arguably" because the pleadings as they now stand are somewhat different from those that were before his Honour. In any event, there is no evidence before me that Carr J was asked to, or did, address this particular issue.

66 I was shown some pages from the transcript of a directions hearing in the Federal Court on 1 October 1997 and 2 October 1997. I have perused them very briefly. They do not appear to me (at least on a cursory glance) to bear on the matters on which I am now opining.

The Concession

67 As I have said, the defendants pressed strongly that I decide the question whether the plaintiffs had made a concession that amounted to a waiver of their right to advance a case based on conscious wrongdoing of bank officers or that would ground an estoppel in that respect.

68 I do not propose to decide that question. This is because, for me, the question falls to be answered by reference to the deficiencies in the pleadings. I do not, therefore, feel it necessary to resolve an issue that, even if it were resolved in favour of the plaintiffs (against whom the waiver or estoppel is pressed) would not alter the ultimate result.

69 There is another, perhaps selfish, reason. I want to get these reasons out quickly so that the parties can consider their respective positions. I do not wish to spend time on something that is not absolutely necessary in order to answer the essential question. In fact there are so many issues, sub-issues and sub-sub issues in this case that I have decided as a matter of policy to adopt that course for the remainder of the trial. If issues in this case were rabbits and the ratiocination needed to resolve them were equated to burrows and if I were to chase every rabbit down the relevant burrow (and assuming I was successful in catching and disposing of each

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rabbit) there would be no need for further research into a replacement for Myxomatosis or the Calicivirus. I would be the toast of rural Australia.

70 But earlier in these reasons I said that the disclosure by the plaintiffs that there was a case involving conscious wrongdoing by individual bank officers came as a surprise to me and I do need to explain, very briefly, why.

71 Both the written materials adduced for the purposes of the October 2000 amendment application and the transcript of those hearings contain references of which the following (taken from par 618 of the plaintiffs' submissions dated 8 November 2000) is an example:

"The plaintiffs have made it clear that they do not allege actual dishonesty by the directors and have made submissions … as to why there is no requirement on them to allege actual dishonesty (or conscious impropriety) by the directors of which the banks knew. … As there is no allegation of actual dishonesty made, of which the banks knew, many of the banks' complaints fall away." [my italics]

72 In the judgment I delivered following the amendment application, The Bell Group Ltd (In Liq) & Ors v Westpac Banking Corporation & Ors [2001] WASC 315. I said at [124] to [128]:

"Counsel for the Banks submitted that this aspect of 8ASC leaves open a number of possibilities as to the case that will be made on the relevant state of mind and intent on the part of the directors. He said that the plaintiffs left the new pleading in a state of embarrassment as to exactly what they are saying. It could be that the plaintiffs are asserting a case that the conduct was in excess of the objective limits of the directors' powers and/or that the directors consciously acted knowing that they were not properly exercising their powers, or that the transaction was not in the best interests of the company, its creditors, its future creditors and shareholders or that they held no belief at all. Counsel for the Banks contended that the pleading leaves the Banks in the position where they do not know what it is that will have to be negatived both in relation to the directors and in relation to the knowledge of the Banks. Where the allegation is made that the Banks were knowingly concerned in the conduct amounting to the breach, the Banks are entitled to know with precision what allegation is made in

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relation to the conduct to which the defendants are said to be concerned, so that the Banks know the case that will be put and which the defendants have to answer.

On such an important issue as this the Banks are entitled to know exactly what it is that is alleged to be the state of mind and intention with which the directors acted. I agree with the submission that the Banks are entitled to know if, and to what extent, the plaintiffs are alleging that there was conscious wrongdoing by the directors. After all, the Banks are alleged to have participated knowingly in the breaches of duty. In some instances this is clear. For example, par (c) contains both subjective and objective elements. But counsel for the Banks submitted it did not emerge clearly from, for example, pars (g), (h), (i), (k), (m) and (n) whether conscious wrongdoing is being alleged. The problems are highlighted by pars (o) and (p). It could be the case that the allegation is that the directors knew and intended to do what is alleged in those paragraphs either believing it was in the best interests of the companies or not believing it was in the best interests of the companies either because they had no belief as to the interests of the companies or they actually believed it was not in the interests of the companies.

There may be a simple answer to this. In the plaintiffs' further written submissions dated 30 November 2000 this is said:


'The plaintiffs have made it clear that they do not allege actual dishonesty by the directors and have made submissions at Tr 971-989 as to why there is no requirement upon them to allege actual dishonesty (or conscious impropriety) by the directors, which the Banks knew of.

Expressions in the particulars such as 'no genuine belief', 'improper regard', etc must be understood in this context. It is simply incorrect for the Banks to assert that they do not know the case they have to meet in this regard.

As there is no allegation of actual dishonesty made, of which the Banks knew, many of the Banks' complaints fall away.'

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I will deal in the next section with the argument that it is not necessary to allege or establish actual dishonesty. I am proceeding on the basis that the plaintiffs' case does not rely on allegations of conscious wrongdoing."

73 Immediately prior to the commencement of the trial in July 2003 I directed the parties to bring in a short outline of their respective cases. In par 59 of the defendants' outline they say: "No banker has been identified who was conscious of or who had knowledge of the subjective purposes of the directors. None had, and no dishonesty is alleged against the bank officers". Again, I have added the italics. Nothing said during the plaintiffs' opening or at any other time before 1 December 2004 alerted me to the fact that the apprehension set out in the italicised portion appearing at the end of the judgment extract set out above was wrong.

74 It is true that there is no express statement in the materials categorically and in words of one syllable extending the concession beyond the directors so as to apply also to bank officers. It is also true that the plaintiffs in their oral submissions on 6 December 2004 explained in some detail why they say the concession did not extend to bank officers. I have already said that I do not need to, and nor do I intend to, decide the issue. The reason why I have set out the extracts from the materials is not to decide by subterfuge what I am not prepared to decide explicitly. That would be unfair. But I think it is important that an outside observer reading these reasons should have some idea how and why an issue as important to the case as this did not emerge until the 204th day of the hearing. I have little doubt that had I, in 2000, understood the plaintiffs' case to be as it is now put, I would have directed that the pleadings take a different form.

The Ramifications of these Conclusions

75 One of the great fears I have is that this case might eventually "go off" on a pleading point. It is likely that the hearing will extend between two and three years. The prospect that the unsuccessful party (or parties) might appeal cannot be discounted. The further prospect that an appeal court might take a different view from that of the trial judge cannot be discounted. If the pleading point were such that it limited the evidence and thus left the appeal court without material from which it could substitute its own findings, the consequences would be too horrific to contemplate.

76 Be that as it may in my view the pleadings bear the meaning that I have ascribed to them and I am compelled to the conclusion that I have

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announced. The prejudice that would accrue to the defendants if I were to permit the plaintiffs to advance the case based on conscious wrongdoing by individuals without a radical change to the pleadings is manifest. I do not have to deal with difficult issues of prejudice and the like that might have arisen had the plaintiffs applied for leave to make further amendments. No such application has been made. The trial must be conducted in accordance with the conclusions I have announced.

77 I am conscious of the difficulties that this will create. The plaintiffs' case on knowledge has not been disturbed because all of pars 50 to 59U and their accompanying particulars remain in place. They have not been struck out. They must mean something. But they will be construed by me in accordance with these conclusions and applied accordingly. Some very fine distinctions will no doubt be made as to the meaning of parts of the pleading in the context of a case that is largely objective in nature.

78 I have tried to think of ways to give the parties guidance as to the ramifications in what will inevitably be contentious areas. I do not think I can. Much will depend on the questions that are posed from time to time and the documents that parties seek to tender. And, as Mr Robson pointed out, there are some parts of the defence in which the banks assert a state of knowledge. This too may affect the ambit of cross-examination

79 All I can say is that the knowing assistance case is largely an objective one. But I can envisage submissions being made that no questions in cross-examination are permissible on the subject matter of the calculated abstention plea in par 58 (including particulars (e) and (f)), the plea in par 59S(b), the plea in par 59TA about refraining from inquiry and the "no worse off" thesis in par 59U because they would be relevant to, and only to, the subjective state of mind of the witness. I doubt that such a submission would succeed. It will depend on the extent that the questions go directly or indirectly to the knowledge, belief or suspicion of the witness so as to be relevant to the factual matrix from which the conduct is to be assessed.

80 In the end, some uncomfortable decisions will have to be made. And no doubt I will be accused from time to time of permitting the cross-examiner to act in a way that demonstrates that he or she is "willing to wound but afraid to strike". I will cross those bridges when I come to them.

81 I may well be in the position where I have to make discrete findings that would ordinarily be links in a chain of reasoning leading to a

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conclusion of conscious wrongdoing. But what I can say with certainty is that, in accordance with the pleadings as I have read them, there will be no conclusions of conscious wrongdoing directed at individuals.

Conclusion

82 I have already come to the view that 2005 is likely to be unpleasant. I suppose an additional cross or two will be of little consequence. The trial should now proceed. So far as concerns the Barnes v Addy case and (to the extent that it relies on a similar base) the equitable fraud case, it must proceed according to the conclusions I have outlined.

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SCHEDULE

83 EDITED EXTRACT FROM THE TRANSCRIPT OF 2 DECEMBER 2004 [TRA: 18228-31]

"I am not happy with the way we left this question of accessorial liability and conscious wrongdoing yesterday. I thought I should say some further things about it so that my position and my concerns are clear.

It seems to me that there are two separate but related questions. First, can a third party be liable for knowing participation in a breach of trust where the trustee has not acted dishonestly? Secondly, when the second limb of Barnes v Addy as explained by Gibbs J in Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974-75) 132 CLR 373 at 397 refers to 'knowing participation in a breach of fiduciary duty', what is meant by 'knowing' or 'knowledge' in this context? In particular is it necessary for the level of knowledge to involve dishonesty on the part of the third party or could non-dishonest conduct suffice?

The starting point is undoubtedly the decision in Consul Developments. It is the authority that is binding on me but it is appropriate to look at other authorities to help explain Consul or to assist with matters with which Consul did not deal.

In what I am going to say this morning, and unless the context otherwise dictates, I will use the phrases 'dishonest' or 'dishonesty' in the same way that I have used the phrases 'conscious wrongdoing' or 'conscious dishonesty' in past exchanges on this same topic; that is, that dishonesty includes a subjective element, namely, that the person appreciated that what he or she was doing was wrong. I am also going to use as the antonym for dishonest the word or phrase 'non-dishonest'. This reflects the fact that in my view 'honest' and 'dishonest' are not absolutes and that something that is not found to be dishonest may not necessarily be honest.

Let me turn to that first question. The plaintiffs wish to argue that for accessorial liability it is not necessary to establish that the breach of trust in which the third party is said to have

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participated was brought about by dishonest conduct on the part of the trustee. That is not something to which Consul adverts specifically because there the trustee did not defend the suit and was not involved in the appeal. The trustee's conduct was characterised simply as a breach of fiduciary duty. I know of no other Australian authority directly on that point.

The plaintiffs rely on the Royal Brunei Airlines Sdn Bhd v Tan (1995) 2 AC 378. The plaintiffs' position is clearly arguable. No pleading issue arises in relation to it and it remains a matter for closing submissions. I am not sure whether the defendants, as a matter of law, argue to the contrary on that proposition.

The second question is the more difficult one. It raises, potentially at least, pleading issues.

Speaking generally there are four possible scenarios. The first scenario is knowing (dishonest) participation by a third party in a breach of duty involving dishonesty on the part of the person responsible for the performance of the duty. The second scenario is knowing but non-dishonest participation by a third party in a breach of duty involving dishonesty on the part of the person responsible for the performance of the duty. The third scenario is knowing (dishonest) participation by a third party in a breach of a duty not involving dishonesty on the part of the person responsible for the performance of the duty. The fourth scenario is knowing but non-dishonest participation by a third party in a breach of duty not involving dishonesty on the part of the person responsible for the performance of the duty.

I think it is fair to say that the banks' case is that the stated law in Australia would permit a finding of accessorial liability only if one or other of the first or third scenarios were made out.

The plaintiffs do not advance the case on either the first or second scenario. But the question about which I am left in a state of uncertainty is whether the plaintiffs rely on the third scenario. I want to say immediately that I am not saying that I accept the banks' position that only dishonesty can found accessorial liability. That is something that has to be worked through and, if the plaintiffs rely on the fourth scenario, it will be one of the major matters that I will have to decide after

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hearing full and considered submissions from both sides in their respective closings.

That statement needs, I think, a little explanation. I do not wish to go in any detail into what was said by the majority judges in Consul Developments about the issue of knowledge. I interpret what the majority said as meaning that knowledge must be actual as opposed to constructive, but that abstention from inquiry was not a species of constructive knowledge but that it somehow folded into actual knowledge.

I now turn to the two major English decisions to which reference has been made. In Royal Brunei Airlines the Privy Council held that for knowing participation in a breach of trust, it was not necessary to establish that the trustee acted dishonestly. [But in dealing with dishonesty on the part of the third party] Lord Nicholls defined 'dishonesty' in a way that was arguably purely objective. If that is correct, it would be irrelevant whether or not the [subjective] state of mind of the third party involved dishonesty.

In Twinsectra Ltd v Yardley (2002) 2 AC 164 the House of Lords affirmed the view taken in Royal Brunei that it was not necessary to establish dishonesty on the part of the defaulting trustee. But their Lordships gave further consideration to the meaning of the term 'dishonesty' insofar as it would apply to the third party. The majority opted for what Lord Hutton called the combined test; that is, one that combined both objective and subjective elements of dishonesty. Lord Millett dissented and opined that the test was purely objective.

As I have already said, it's clear that the plaintiffs do not allege that the breaches of fiduciary duties for which they contend were attended by dishonesty on the part of the directors. But there is doubt, at least in my mind, as to whether the allegations of knowing participation by the banks in those breaches of duty [are said to involve] dishonesty.

If they do, then I have proceeded to date on a misapprehension about the plaintiffs' case which may have been entirely my fault. But it is nonetheless a misapprehension which might have had an impact on the view that I took in 2000 and since to the adequacy of the pleadings.

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I have read cases such as Lurgi (Australia) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd (2000) VSC 277 per Byrne J at [45], Cadwallader v Bajco Pty Ltd (2002) NSWSC 328 per Heydon JA at [198] and NCR Australia v Credit Connection Pty Ltd (In Liq) (2004) NSWSC 1 per Austin J at [164] and following. I have also read several articles appearing in the Australian Law Journal after the decision in Twinsectra that comment on these issues. I am therefore aware that there is a very real question as to whether the dissent of Lord Millett in Twinsectra more accurately reflects the Australian position as set out in Consul. If so, the emphasis would be on the state of knowledge of the third party rather than the third party's state of mind in the sense of dishonesty. It is for this reason that I said earlier that I did not want to be taken as having formed a view that the banks' position ought to be upheld. It may not be, but that is a matter for another day.

I am not saying a case put by the plaintiffs on the fourth scenario is not arguable but rather that if the plaintiffs wish to bring a case based on the third scenario, then a significant pleading issue may arise. These questions are raised.

1. Do the plaintiffs either expressly or by necessary implication (which has sometimes been referred to as subterfuge) wish to advance a case or press on me a finding that if the state of the law requires dishonesty on the part of the third party that I should so find? If so, then given the comments that I made in the 2001 judgment about the need for particularity of allegations, do the plaintiffs now contend that the case is sufficiently pleaded and particularised in 8ASC and the particulars so as to put the defendants and the court on notice of what it is that is alleged to constitute dishonest conduct by corporate entities that could only be brought about by human instrumentalities of those corporate entities?

2. If the pleadings and the particulars do not properly and comprehensively plead a case based on subjective dishonesty, then assuming that I was prepared to entertain a further application to amend, a question will arise as to how long the plaintiffs would need to bring in the proposed amendments. If leave is sought and granted to permit a further amended application, some consequences

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may flow. For example, what should happen about the banks' opening as it is presently being presented and what would be the status of the witness statements that the banks have served?"