Vantage Holdings Group Pty Ltd v Donnelly [No 4] - [2019] WASC 398

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   VANTAGE HOLDINGS GROUP PTY LTD -v- DONNELLY [No 4] [2019] WASC 398
CORAM:   SMITH J
HEARD:   20 JUNE 2019
DELIVERED          :   8 NOVEMBER 2019
FILE NO/S:   CIV 1086 of 2016
BETWEEN:   VANTAGE HOLDINGS GROUP PTY LTD
First Plaintiff
RELIANCE FRANCHISE PARTNERS PTY LTD
Second Plaintiff
AUSTRALIAN RELIANCE PTY LTD
Third Plaintiff
AUSTRALIAN RELIANCE GROUP PTY LTD
Fourth Plaintiff
AND
ANDREW PAUL DONNELLY
First Defendant
KIMBERLEY JAMES HANSON
Second Defendant
HAWKSTONE GROUP PTY LTD
Third Defendant
INSUBI PTY LTD
Fourth Defendant
PA AUDIT PTY LTD
Fifth Defendant
MARK ANTHONY ENGLISH
Sixth Defendant
DFK PA PARTNERS PTY LTD
Seventh Defendant

Catchwords:

Procedure - Application for leave to bring strike out application - Application brought 70 days out of time - Whether complexity of matters pleaded warrants the grant of leave to bring application to strike out

Procedure - Pleadings - Strike out application - Application to strike out writ and statement of claim on grounds claim is frivolous and vexatious or discloses no reasonable cause of action - Alternative application to strike out paragraphs of the statement of claim on grounds they fail to disclose a reasonably arguable cause of action, are frivolous and vexatious, or may prejudice, embarrass or delay the fair trial of the action - Whether pleadings raise arguable case that auditors, the fifth and sixth defendants, had accessorial liability under Corporations Act 2001 (Cth) s 79 - Whether fifth and sixth defendants had knowledge of or participated in the alleged wrongdoing

Do the pleadings raise arguable case of accessorial liability against the fifth and sixth defendants in respect of contraventions of the Corporations Act 2001 (Cth)

Do the pleadings raise an arguable case of loss and damage in respect of the alleged trust fund defalcations

Procedure - Application to strike out party and related action - Whether party to action should be struck from the record - Whether party to action pleads any cause of action or claims any relief - Where second plaintiff company in liquidation - Where liquidators indicated an intention to take no part in the action - Whether Corporations Act 2001 (Cth) s 471B precludes costs order where company in liquidation - Whether plaintiffs should jointly pay costs of removal of second plaintiff from action

Application for security of costs - Corporations Act 2001 (Cth) s 1335 and/or Rules of the Supreme Court 1971 (WA) O 25 r 1 - Whether threshold requirement of credible testimony that third plaintiff will be unable to meet an adverse costs order met - General principles - Whether public records revealing limited or no ownership of assets are of evidentiary value - Where party subject of application provides no answering affidavit evidence - Whether court should exercise its discretion to grant a security for costs application and amount of security to be provided in circumstances of case

Legislation:

Corporations Act 2001 (Cth), s 79(a), s 79(c), s 79(d), s 311, s 324AF(1), s 471B, s 553(1), s 981B(1)(c), s 981C(b), s 990B, s 990K, s 1317H, s 1335
Corporations Regulations 2001 (Cth), reg 7.8.01(5), reg 7.8.02
Legal Profession (Supreme and District Courts) (Contentious Business) Determination 2018 (WA)
Rules of the Supreme Court 1971 (WA), O 1 r 4A, O 1 r 4B, O 8 r 7, O 18 r 6(2), O 20 r 8, O 20 r 13(1)(a), O 25 r 1, O 32 r 2(1)

Result:

Leave to bring strike out application granted
Application to dismiss claim against fifth and sixth defendants dismissed
Application to strike out [13.4.1], [14.4.1], [45B.1(c)], [45B.1(d)] and part of [16], [16.1], [16.2], [19], [21], [21AL], [21Aii] and [45B.1] of the statement of claim granted
Application to remove second plaintiff as a party to the action granted
Application to strike out action by the second plaintiff granted
Application for security for costs against third plaintiff only granted

Category: B

Representation:

Counsel:

First Plaintiff	:	Mr M L Bennett
Second Plaintiff	:	No appearance
Third Plaintiff	:	Mr M L Bennett
Fourth Plaintiff	:	Mr M L Bennett
First Defendant	:	No appearance
Second Defendant	:	No appearance
Third Defendant	:	No appearance
Fourth Defendant	:	No appearance
Fifth Defendant	:	Mr M J Feutrill SC
Sixth Defendant	:	Mr M J Feutrill SC
Seventh Defendant	:	No appearance

Solicitors:

First Plaintiff	:	Bennett + Co
Second Plaintiff	:	No appearance
Third Plaintiff	:	Bennett + Co
Fourth Plaintiff	:	Bennett + Co
First Defendant	:	No appearance
Second Defendant	:	No appearance
Third Defendant	:	No appearance
Fourth Defendant	:	No appearance
Fifth Defendant	:	HWL Ebsworth Lawyers
Sixth Defendant	:	HWL Ebsworth Lawyers
Seventh Defendant	:	No appearance

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

Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552
Ailakis v Olivero [2013] WASCA 91
Ashbury v Reid [1961] WAR 49
Astway Pty Ltd v Council of the City of the Gold Coast [2008] QCA 73; (2008) 159 LGERA 335
Australian Reliance Group Pty Ltd v Coverforce Insurance Brokers Pty Ltd [No 5] [2017] WASC 171
Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) [2015] FCA 342; (2015) 235 FCR 181
Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [No 2] [2005] NSWSC 267; (2005) 53 ACSR 305
Automotive, Food, Metals, Engineering, Printing & Kindred Industries Union of Workers - Western Australian Branch v Bell-A-Bike Rottnest Pty Ltd [2005] WASCA 157
Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82
Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256
Betfair Pty Ltd v Racing New South Wales [2010] FCAFC 133; (2010) 189 FCR 356
BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339
Charlie Carter Pty Ltd v The Shop, Distributive & Allied Employees' Association of Western Australia (1987) 13 FCR 413
Commonwealth Bank of Australia v Kojic [2016] FCAFC 186; (2016) 249 FCR 421
Culleton v Permanent Custodians Ltd [2018] WASC 251
De Borrello v Friedman and Lurie (a firm) [2001] WASCA 348
Director General, Department of Training v MT [2006] NSWCA 270; (2006) 67 NSWLR 237
DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170
Edenham Pty Ltd v Meares [No 2] [2016] WASC 302
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23
Festa v The Queen [2001] HCA 72; (2001) 208 CLR 593
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Giorgianni v The Queen [1985] HCA 29; (1985) 156 CLR 473
Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431
Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121
Hart‑Roach v Public Trustee (Unreported, WASC, Library No 980044, 11 February 1998)
Huntingdale Village Pty Ltd (Receivers and Managers appointed) v Perpetual Nominees Ltd [No 2] [2014] WASC 217
Kidd v Mitchell Frederick Artus [2013] WASC 264
Leighton Contractors Pty Ltd v Construction Forestry, Mining and Energy Union [2006] WASC 144; (2006) 154 IR 228
Lindon v The Commonwealth [No 2] [1996] HCA 14; (1996) 70 ALJR 541
Lonsdale Investments v OM (Manganese) Ltd [2009] WASC 188
Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133
Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628
Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405
Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 63 ALJR 1
Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 2] [2014] WASCA 106
R v Associated Northern Collieries [1910] HCA 61; (1910) 11 CLR 738
R v Hillier [2007] HCA 13; (2007) 228 CLR 618
R v Nifadopolous (1988) 36 A Crim R 137
R v Tannous (1987) 10 NSWLR 303
Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1
Ron Hodgson (Trading) Pty Ltd v Belvedere Motors (Hurtsville) Pty Ltd [1971] 1 NSWLR 472
Rosebridge Nominees Pty Ltd v Commonwealth Bank of Australia [No 7] [2016] WASC 329
Skinner v Jeogla Pty Ltd [2001] NSWCA 15; (2001) 37 ACSR 106
Smith v Littlemore (1996) 15 WAR 289
Smits v Roach [2006] HCA 36; (2006) 227 CLR 423
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
The State of Western Australia v Marchesi [2005] WASCA 133; (2005) 30 WAR 359
Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 197
Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 43
Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd [2018] WASC 363
Wenlock v Moloney [1965] 1 WLR 1238
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
Westpac Banking Corporation v The Bell Group Ltd (in liq) [No 3] [2012] WASCA 157; (2012) 44 WAR 1
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661

TABLE OF CONTENTS

1. The fifth and sixth defendants' application and the result

2. Leave to bring strike out application

3. Relevant factual background

(a) The relationship between the plaintiff companies and Mr Donnelly and Mr Hanson and other related companies

(b) The pleaded relationship between PA Audit, Mr English and the plaintiff companies

4. Procedural background

5. An outline of the FRASOC

(a) Alleged duties and audit work

(b) Alleged trust defalcations

(d) Diversion of funds from Australian Reliance - the Austin loan

6. Common threads of the pleaded case against PA Audit and Mr English

(a) Statutory obligations of auditors

(b) Accessorial liability - section 79 of the Corporations Act

(i) Section 79 liability

(ii) Section 79(a) liability

(iii) Section 79(d) liability

7. Strike out application - principles

8. The trust fund defalcations

(a) The pleaded defalcations of Reliance Partners' and Australian Reliance's trust funds

(b) The pleaded breaches of Mr Hanson's and Mr Donnelly's statutory and common law directors' and officers' duties

(c) Do the pleadings raise an arguable case of accessorial liability against PA Audit and Mr English in respect of the alleged trust fund defalcations?

(i) Mr English's knowledge and liability

(ii) PA Audit's knowledge and liability

(iii) Liability under s 79(d)

(d) Do the pleadings raise an arguable case of contractual or tortious liability of PA Audit or tortious liability of Mr English?

(e) Do the pleadings raise an arguable case of loss and damage against PA Audit and Mr English in respect of the alleged trust fund defalcations?

9. Allotment of Steadfast shares to Hawkstone

(a) The pleaded case

(b) Do the pleadings raise an arguable case against PA Audit and/or Mr English in respect of the Steadfast shares?

(i) Whether it is arguable that Mr English and/or PA Audit had actual knowledge of the contravention(s)?

(ii) Whether it is arguable that Mr English and/or PA Audit participated in the alleged contravention(s)?

10. Diversion of funds - Austin loan forgiveness

(a) The pleaded case

(b) Do the pleadings raise an arguable case against PA Audit and/or Mr English in respect of the Austin loan?

(i) Mr English's knowledge

(ii) Mr English's participation

(iii) PA Audit's liability

11. Should Reliance Partners be struck out as a party to the proceedings and their action be dismissed?

12. What parts of the FRASOC should be struck out if Reliance Partners cease to be a party to the proceedings?

13. Application for security for costs

(a) Whether an order for security of costs should be made?

(b) The amount of security

SMITH J:

1. The fifth and sixth defendants' application and the result

The fifth defendant, PA Audit Pty Ltd (PA Audit), and the sixth defendant, Mr English, apply for orders:
(a)striking out the writ of summons and further re‑amended statement of claim filed on 15 January 2019 (FRASOC), insofar as relief is claimed against them, on grounds that they are frivolous or vexatious and/or disclose no reasonably arguable cause of action against them, and dismissing the action against them;[1] and
(b)alternatively to (a), striking out specific paragraphs of the FRASOC on one or more of the respective grounds that they fail to disclose a reasonably arguable cause of action, are frivolous or vexatious, or may prejudice, embarrass or delay the fair trial of the action.[2]
[1] Rules of the Supreme Court 1971 (WA) O 20 r 19(1)(a) and/or (b) and/or the court's inherent jurisdiction to prevent abuse of its process.
[2] Rules of the Supreme Court 1971 (WA) O 20 r 19(1)(a) - (c).
The application to strike out was filed 70 days out of time. Consequently, the applicants require leave to make the application more than 21 days after the statement of claim was served on them.[3]
[3] See Rules of the Supreme Court 1971 (WA) O 20 r 19(3).
In addition, PA Audit and Mr English apply for:
(a)an order that the second plaintiff, Reliance Franchise Partners Pty Ltd (Reliance Partners), cease to be a party to the action[4] because the solicitors on the record no longer have any instructions or authority to act for Reliance Partners and the liquidators of Reliance Partners have indicated that they will take no further active participation in the proceedings;[5] and
(b)for security for costs against the first plaintiff, Vantage Holdings Group Pty Ltd (Vantage), the third plaintiff, Australian Reliance Pty Ltd (Australian Reliance), and the fourth plaintiff, Australian Reliance Group Pty Ltd (Australian Reliance Group).
[4] Rules of the Supreme Court 1971 (WA) O 18 r 6(2).
[5] Affidavit of Jonathan Rex Shepherd, sworn 8 May 2019, JRS‑58, page 20.
For the reasons that follow, in my view:
(a)leave should be granted for PA Audit and Mr English to bring the strike out application;
(b)(only) the aspects of the FRASOC articulated at [73], [115], [176] and [201] below should be struck out;
(c)Reliance Partners should be removed as a party in the proceedings, their action against PA Audit and Mr English should be dismissed, and they should be struck as a plaintiff from the writ and the FRASOC; and
(d)security for costs up to and including entry for trial, in the amount of $125,000, should be ordered against Australian Reliance, and PA Audit and Mr English should have liberty to apply for Australian Reliance to pay additional security, thereafter.
After outlining relevant factual and procedural background, I deal, first, with the strike out application before turning to consider the applications for Reliance Partners to be removed as a party and for security for costs.

2. Leave to bring strike out application

PA Audit and Mr English delayed, by 70 days, in bringing the strike out application. Given the legally complex and factually dense nature of the pleading, and the fact that the plaintiffs raise no issue of prejudice, I am satisfied that an extension of time to bring this application is warranted.

3. Relevant factual background

(a) The relationship between the plaintiff companies and Mr Donnelly and Mr Hanson and other related companies[6]

[6] Except as otherwise noted, these facts are summarised from the facts pleaded in the FRASOC.

The plaintiff companies are part of a corporate group. Vantage is the parent company; it is the sole shareholder of Reliance Partners and Australian Reliance Group. In turn, Australian Reliance Group is the sole shareholder of Australian Reliance.
Vantage's shareholding has come under control of mortgagees in possession.[7]
[7] ts 237, 20 June 2019.
The plaintiff companies carried on some of their business as part of a group of Australian insurance brokers known as the Steadfast network.
Reliance Partners and Australian Reliance carried on business in insurance broking. They did so under Australian Financial Services licences. Both maintained trust accounts in which clients made deposits of funds as premiums of insurance which were to be paid to an insurer (after deduction of fees and agreed commissions).[8] Both also maintained separate operating accounts.
[8] ts 203, 20 June 2019.
The second defendant, Mr Hanson, was, at all material times, a director of each of the plaintiff companies and chief financial officer of their corporate group. The first defendant, Mr Donnelly, was, at all material times, a director of, and chief executive officer of, each of the plaintiff companies.
The proceedings against Mr Hanson and Mr Donnelly involve allegations of misapplication of funds from the trust accounts of Reliance Partners and Australian Reliance.
In addition to the plaintiff companies, Mr Donnelly and Mr Hanson had relationships with various other companies.
Mr Donnelly was the sole director and sole shareholder of the fourth defendant, Insubi Pty Ltd (Insubi).
Mr Donnelly was also a director of the third defendant, Hawkstone Group Pty Ltd (Hawkstone). Mr Hanson was a director, officer and company secretary of Hawkstone. Between them, Mr Hanson and Mr Donnelly each held half of Hawkstone's shareholding.
Further, Mr Donnelly and Mr Hanson were directors of two other companies: Austin Financial Services Pty Ltd (Austin) and Sunset Coast Nominees Pty Ltd (Sunset Coast).
The proceedings against Mr Hanson and Mr Donnelly also involve allegations of diverting an allotment of shares in Steadfast away from Australian Reliance to Hawkstone, and diverting funds away from Australian Reliance to Austin and Sunset.
By the time the proceedings had commenced, Mr Hanson and Mr Donnelly had ceased to be directors of each of the plaintiff companies, Mr Hanson had ceased to be chief executive officer of the plaintiff companies and Mr Donnelly had ceased to be chief financial officer of the group.
The current directors of Vantage, Australian Reliance and Australian Reliance Group were not directors of, nor involved in the management of, any of the plaintiff companies during the periods in which the trust fund defalcations, and Steadfast and Austin contraventions are alleged to have occurred.

(b) The pleaded relationship between PA Audit, Mr English and the plaintiff companies

The following facts are pleaded in [6C] and [6D] of the FRASOC.
PA Audit carries on a business as an accounting and advisory practice, providing accounting and audit assurance services. At all material times, from in or around mid‑2013 until on or about 13 July 2016, PA Audit was:
(a)(in conjunction with the seventh defendant, DFK PA Partners Pty Ltd (DFK)) the accountant for Reliance Partners and Australian Reliance; and
(b)the auditor, for relevant financial years, of Reliance Partners' and Australian Reliance's financial reports and financial statements and their compliance with the legislative requirements relating to their respective Australian financial services licence (AFSL).
PA Audit was, at all material times, liable for the acts of its employees within the scope of their employment, which included Mr English.
Mr English is a chartered accountant and an auditor. He was:
(a)a director of PA Audit between 27 June 2013 and 12 December 2016; and
(b)an employee of DFK, at all material times, from in or around 2013 to in or around 2016.
From in, or around, 2013 until in, or around, June 2016, Mr English provided auditing and accounting services to each of the plaintiff companies, on behalf of PA Audit and DFK. At all material times, Mr English was also an accountant for Mr Donnelly and Mr Hanson, and their related entities, and was the settlor of the A Donnelly Family Trust.

4. Procedural background

The proceedings were commenced on 18 January 2016, initially, by Vantage, Reliance Partners and Australian Reliance against Mr Donnelly and Mr Hanson.
Australian Reliance Group was added as a plaintiff in April 2016. Hawkstone and Insubi were added as defendants on 22 December 2016. On 27 September 2017, orders were made joining PA Audit, Mr English and the seventh defendant, DFK.

Reliance Partners was wound up by order of the Supreme Court of Victoria on 30 May 2018. At about that time, the solicitors for the other plaintiffs, Bennett + Co, ceased to act for Reliance Partners although they remained,[9] and continue to remain, their solicitors on the record.
[9] Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 197 [7].
On 28 January 2018, prior to Bennett + Co ceasing to act for Reliance Partners, the plaintiffs brought an application seeking orders for discovery from PA Audit, Mr English and DFK. The orders were sought prior to the plaintiffs pleading claims against these defendants. The application was heard by Chaney J on 30 May 2018. His Honour dismissed the application on 26 June 2018. In substance, his Honour's reasons for so dismissing the application were that the indorsement of claim on the writ of summons, at the time of the joinder of PA Audit, Mr English and DFK, did not sufficiently identify the case that these defendants were required to meet as they could not reasonably ascertain which of their duties, or their conduct, was said to provide a basis for the claims made against them.[10]
[10] Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 197.
On 20 December 2018, I made an order that Vantage, Australian Reliance and Australian Reliance Group file a further re‑amended statement of claim setting out their claim against PA Audit, Mr English and DFK. No order was made that Reliance Partners file a further re‑amended statement of claim because Reliance Partners' liquidators had informed PA Audit and Mr English, on 27 November 2018, that Reliance Partners was unfunded and that, accordingly, the liquidators did not propose to take any step in the proceedings.[11]
[11] Affidavit of Jonathan Rex Shepherd, sworn 19 December 2018, JRS-13, page 38.
The FRASOC was filed on behalf of Vantage, Australian Reliance and Australian Reliance Group on 15 January 2019. The FRASOC pleads claims made by Australian Reliance against PA Audit, Mr English and DFK.
The FRASOC also makes specific amendments to the pleadings to confine the relief sought such that there is now no pleaded relief sought by Reliance Partners against any defendant. Of importance to this strike out application, it is pleaded in the FRASOC that PA Audit and Mr English were involved in, or were otherwise accessories to, breaches of fiduciary duties owed to Reliance Partners and Australian Reliance; however, the only relief sought against PA Audit and Mr English is relief pleaded by Australian Reliance.

5. An outline of the FRASOC

Insofar as it is relevant to the determination of the strike out application, the cases pleaded in the FRASOC may be outlined as follows.

(a) Alleged duties and audit work

Pt A of the FRASOC pleads, among other things, various duties of Reliance Partners, Australian Reliance, Mr Donnelly, Mr Hanson, PA Audit and Mr English. In particular, it pleads:
(a)various trustee duties of Reliance Partners and Australian Reliance ([10]);
(b)various common law ([11]), and Corporations Act 2001 (Cth) ([12]), directors' and officers' duties of Mr Donnelly and Mr Hanson;
(c)various auditing obligations and standards of PA Audit, as an appointed auditor under s 990B of the Corporations Act, and of Mr English, as lead auditor within the meaning of s 324AF(1) of the Corporations Act ([12A] to [12AL]);
(d)a tortious duty of care ([12AT] to [12AU]) and a contractual duty, pursuant to alleged contracts made in 2014 and 2015 ([12AM] to [12AS]), of PA Audit; and
(e)a tortious duty of care of Mr English ([12AV] to [12AY]).
By [12AZ] to [12BI], it also pleads the audit work alleged to have been undertaken by Mr English and PA Audit. This includes:
(a)preparing the 2014 financial reports for Australian Reliance and Reliance Partners, including financial statements and audit reports; and
(b)providing unmodified audit opinions to the effect that the financial report of each company was in accordance with the Corporations Act.

(b) Alleged trust defalcations

Pt B of the FRASOC concerns alleged trust defalcations in respect of Reliance Partners' and Australian Reliance's trust accounts. It pleads:
(a)Reliance Partners' and Australian Reliance's breach of their trustee duties, and contraventions of the Corporations Act and Corporations Regulations 2001 (Cth), by misapplication of their respective trust funds ([13] to [15]) and their resultant damage ([16]);
(b)Mr Donnelly's and Mr Hanson's breach of their common law and Corporations Act directors' and officers' duties ([20]) by:
(i)failing to prevent, or inform the Australian Securities and Investments Commission (ASIC) of, Reliance Partners' and Australian Reliance's breaches, and contraventions, by misapplication of their trust funds ([18]); and
(ii)knowingly assisting in Reliance Partners' and Australian Reliance's breaches, and contraventions, by misapplication of their trust funds ([17] to [17B]);
and Reliance Partners' and Australian Reliance's resultant damage ([21]);
(c)PA Audit's and Mr English's involvement, under s 79I and/or (d) of the Corporations Act, in: ([21Aii], [21C] to [21AL])
(i)Reliance Partners' and Australian Reliance's contraventions of Corporations Act and/or Regulations by misapplication of their trust funds; and
(ii)Mr Donnelly's and Mr Hanson's breach of their Corporations Act directors' and officers' duties in respect of the misapplication of Reliance Partners' and Australian Reliance's trust funds;
and Australian Reliance's entitlement (including) as against PA Audit and Mr English for compensation, under s 1317H of the Corporations Act, and damages or an account of profits or equitable compensation ([21A] to [21B]);
(d)PA Audit's breach of its contractual duties and tortious duty of care, and Mr English's breach of his tortious duty of care ([21U] to [21Y], [21AI], [21AJ] to [21AK]) and their resultant damage ([16], [21AL]).

(c) Allotment of shares in Steadfast to Hawkstone

Pt C of the FRASOC relates to claims in respect of shares in the Steadfast Group Limited (Steadfast) to which it is alleged Australian Reliance was entitled but which were, instead, allotted to Hawkstone. It pleads that:
(a)Mr Donnelly and Mr Hanson breached their Corporations Act and common law directors' and officers' duties by diverting the shares for their and Hawkstone's use and benefit ([22] to [29]);
(b)PA Audit and Mr English:
(i)knowingly assisted in; and
(ii)were involved, under s 79I of the Corporations Act, in;
Mr Donnelly's and Mr Hanson's breach of their common law and Corporations Act directors' and officers' duties in respect of the Steadfast shares ([29CA] to [29CD]);
(c)Australian Reliance suffered damage as a result of Mr Donnelly's and Mr Hanson's breach of their Corporations Act and common law directors' and officers' duties in respect of the Steadfast shares and are entitled to relief, including compensation under s 1317H of the Corporations Act and damages as against PA Audit and Mr English ([29C] to [31B]);
(d)PA Audit breached its contractual duties and tortious duty of care, and Mr English breached his tortious duty of care, causing Australian Reliance damage ([31C] to [31D]).

(d) Diversion of funds from Australian Reliance - the Austin loan

Pt D of the FRASOC claims misappropriation of $2,340,682 of Australian Reliance's funds through loan arrangements Mr Donnelly and Mr Hanson caused Australian Reliance to make with Austin. It pleads that:
(a)Mr Donnelly and Mr Hanson breached their common law and Corporations Act directors' and officers' duties by misappropriating those funds, causing Australian Reliance damage ([35] to [45]);
(b)PA Audit and Mr English (and DFK):
(i)knowingly assisted; and
(ii)were involved, under s 79(a) and/or (c) of the Corporations Act, in;
Mr Donnelly's and Mr Hanson's breaches in respect of the Austin loan arrangements ([45A] to [45D]);
(c)PA Audit and Mr English (and DFK) are liable to Australian Reliance for compensation, pursuant to s 1317H of the Corporations Act, and damages;
(d)PA Audit breached its contractual duties and tortious duty of care, and Mr English breached his tortious duty of care, causing Australian Reliance damage ([45F] to [45G]).

6. Common threads of the pleaded case against PA Audit and Mr English

To determine the application to strike out the writ and FRASOC, in its entirety or particular paragraphs, it is, first, convenient to consider some of the common threads of the case put against PA Audit and Mr English in respect of the alleged trust defalcations, allotment of shares to Hawkstone and diversion of funds from Australian Reliance.
The claims made against PA Audit and Mr English relate solely to Reliance Partners and Australian Reliance. They stem from PA Audit's and Mr English's association in their respective alleged capacities as auditor and lead auditor. By [12H] of the FRASOC, it is pleaded that Australian Reliance and Reliance Partners appointed PA Audit as auditor, from in or about 2013 until on or about 13 July 2016, pursuant to s 990B of the Corporations Act. By [12K], it is pleaded that, at all material times, Mr English was the 'lead auditor' within the meaning of s 324AF(1) of the Corporations Act.
At the heart of the case put against PA Audit and Mr English is whether, on the pleadings, an arguable case is raised that Mr English (as lead auditor) had knowledge of breaches of the Corporations Act by:
(a)misapplication of funds from the trust accounts of Reliance Partners and Australian Reliance; and
(b)alleged breaches of Mr Hanson's and Mr Donnelly's statutory and common law directors' and officers' duties in respect of:
(i)the acquisition and sale of certain shares in Steadfast by Hawkstone; and
(ii)the write off of loans between Austin and Australian Reliance, and Austin and Sunset Coast;
so as to raise an obligation on PA Audit and Mr English, under the Corporations Act, to report these matters and, if so obligated, whether a failure to report and/or participate in these alleged contraventions of the Corporations Act and/or Regulations resulted in loss and damage to Australian Reliance.
It emerges, from the FRASOC, that many aspects of the claims against PA Audit and Mr English hang on their knowing assistance, or involvement under s 79 of the Corporations Act, in conduct of Australian Reliance and Reliance Partners or Mr Donnelly and Mr Hanson.[12] The focus of the argument in this strike out application has been on the claims alleging liability under s 79.
[12] See [32(c)], [33(b)] and [34(b)] of these reasons.
Consequently, it is necessary to consider:
(a)the relevant pleaded statutory obligations cast upon auditors in general and upon specifically appointed auditors of a financial services company; and
(b) the principles relevant to liability under s 79 of the Corporations Act.
I will deal with each in turn.

(a) Statutory obligations of auditors

By s 990B of the Corporations Act, a financial services licensee must appoint an auditor, which may include an authorised audit company,[13] in conformity with prescribed criteria. If an audit company conducts an audit of a company, the 'lead auditor' is the registered company auditor who is primarily responsible to the audit company for the conduct of the audit.[14]
[13] Corporations Act 2001 (Cth) s 990B(9).
[14] Corporations Act 2001 (Cth) s 324AF(1).
An audit company is in breach of s 311 of the Corporations Act if the lead auditor for an audit is aware of circumstances that the lead auditor has reasonable grounds to suspect amount to a significant contravention of the Corporations Act and the lead auditor fails to report those circumstances to ASIC in writing as soon as practicable, or in any case within 28 days, after the lead auditor becomes aware of those circumstances.[15]
[15] Corporations Act 2001 (Cth) s 311(2).
By operation of s 311(3) of the Corporations Act, the same circumstances gives rise to a contravention by the lead auditor.
Auditing Standard ASA 705 requires an auditor to express a modified opinion in its auditor's report if it:
(a)concludes that, based on the audit evidence obtained, the relevant financial report as a whole was not free from material misstatement; or
(b)was unable to obtain sufficient appropriate audit evidence to conclude that the relevant financial report as a whole was free from material misstatement.[16]
[16] Auditing Standard ASA 705 (Cth) [6].
Pursuant to s 990K of the Corporations Act, an auditor of a financial services licensee commits an offence if they fail to report certain matters to ASIC within seven days of becoming aware of them. Those matters include a matter that, in the opinion of the auditor, may constitute a contravention of s 981B of the Corporations Act.[17]
[17] Corporations Act 2001 (Cth) s 990K(1), (2)(b)(i).
Section 981B of the Corporations Act provides:
981B Obligation to pay money into an account
(1)The licensee must ensure that money to which this Subdivision applies is paid into an account that satisfies these requirements:
(a)the account is:
(i)with an Australian ADI; or
(ii)of a kind prescribed by regulations made for the purposes of this paragraph;
and is designated as an account for the purposes of this section of this Act; and
(b)the only money paid into the account is:
(i)money to which this Subdivision applies (which may be money paid by, on behalf of, or for the benefit of, several different clients); or
(ii)interest on the amount from time to time standing to the credit of the account; or
(iii)interest, or other similar payments, on an investment made in accordance with regulations referred to in section 981C, or the proceeds of the realisation of such an investment; or
(iv)other money permitted to be paid into the account by the regulations; and
(c)if regulations made for the purposes of this paragraph impose additional requirements ‑ the requirements so imposed by the regulations; and
(d)if the licence conditions of the licensee's licence impose additional requirements ‑ the requirements so imposed by the licence conditions.
The money must be paid into such an account on the day it is received by the licensee, or on the next business day.
(2)The licensee may, for the purposes of this section, maintain a single account or 2 or more accounts.
(3)A person contravenes this subsection if the person contravenes subsection (1).
Section 981C of the Corporations Act provides for regulations to be made for the purposes of s 981B, including the minimum balance to be maintained in an account.[18]
[18] Corporations Act 2001 (Cth) s 981C(b).
The following requirements have been prescribed under the Corporations Regulations for the purposes of s 981B(1)I of the Corporations Act:
(a)By reg 7.8.01(5):
[A] financial licensee must:
(a)operate an account to which that paragraph applies as a trust account; and
(b)designate the account to be a trust account; and
(c)hold all moneys paid into the account (other than moneys paid to the financial services licensee under the financial services licensee's obligation to call margins from clients under the market integrity rules, the operating rules of a licensed market or the operating rules of a licensed CS facility) on trust for the benefit of the person who is entitled to the moneys. (emphasis added)
(b)By reg 7.8.02(6):
[I]n relation to moneys received in relation to insurance products, the financial services licensee must ensure that:
(a)the balance of moneys in an account maintained by the financial services licensee under section 981B of the [Corporations] Act; and
(b)the total amount previously withdrawn from the account and currently invested under subregulation (2);
is at least the sum of:
(c)any amounts that an insurer is entitled to receive from the account; and
(d)any amounts that an insured or intending insured is entitled to received from the account.

(b) Accessorial liability - section 79 of the Corporations Act

Section 79 of the Corporations Act provides:
79 Involvement in contraventions
A person is involved in a contravention if, and only if, the person:
(a)has aided, abetted, counselled or procured the contravention; or
(b)has induced, whether by threats or promises or otherwise, the contravention; or
(c)has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention.
The plaintiffs plead claims, variously, based on s 79(a), (c) and (d) liability.

(i) Section 79 liability

For a party to be involved in a contravention, within s 79 of the Corporations Act, it must be established that the party has full knowledge of the essential facts or matters constituting the contravention and is an intentional participant by virtue of some act or conduct on his or her part which contributes to the commission of the contravention.[19] As such, three elements to accessorial liability arise under s 79.
[19] Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661, 670; Leighton Contractors Pty Ltd v Construction Forestry, Mining and Energy Union [2006] WASC 144; (2006) 154 IR 228 [25] - [27].
The first element is actual knowledge of each of the material facts constituting the contravention (by the principal). Proof of actual knowledge of the elements of the contravention may be found by direct evidence or may be inferred. It may be inferred from suspicious circumstances and a failure to make an inquiry; this has been described as 'wilful blindness'. However, what is required is actual knowledge; constructive knowledge is not sufficient, nor is recklessness or negligence.[20]
[20] Giorgianni v The Queen [1985] HCA 29; (1985) 156 CLR 473, 504 ‑ 507; Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 63 ALJR 1, 3; Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1 [261].
The latter points were made clear by Burchett J in Richardson & Wrench (Holdings) Pty Ltd v Ligon No 174 Pty Ltd when his Honour discussed 'wilful blindness' as follows:[21]
[A] reference to a person's shutting his eyes to the obvious, or being wilfully blind, is ambiguous, in so far as it suggests a possible view that something less than actual knowledge will do[.] … The passage which was cited in Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 371; 110 ALR 484 at 492 from the advice of Lord Sumner in The Zamora No 2 [1921] 1 AC 801 at 812 - 13, distinguishing between the senses in which 'a man is said not to know something because he does not want to know it', is instructive. The sense which condemns, according to Lord Sumner, is that which indicates that the man really does know, but wishes to avoid:
'full details or precise proofs … because they may embarrass his denials or compromise his protests. In such a case he flatters himself that where ignorance is safe, 'tis folly to be wise, but there he is wrong, for he has been put upon notice and his further ignorance, even though actual and complete, is a mere affectation and disguise … Mr Banck understood it very well, so well that he knew where to draw the judicious line between scanty but sufficient information and undeniable complicity. Knowledge being proved, no opinion need be expressed as to the effect of presumptions in the present case. (original emphasis)'
This is not constructive, nor is it imputed, knowledge; it is actual knowledge reduced to a minimum by the defendant's wilful act, and the point of the case was that the minimum of actual knowledge was enough: see also R v Crabbe (1985) 156 CLR 464 at 470 - 1; 58 ALR 417.
It would be tedious to go through all the authorities which have discussed these concepts, unfortunately not always consistently. It would also be unnecessary, since the High Court has returned to the subject in a joint judgment of Mason CJ, Deane, Dawson, Toohey and Gaudron JJ. The case is Pereira v Director of Public Prosecutions (1988) 82 ALR 217; 63 ALJR 1. (See also Kural v R (1987) 162 CLR 502 at 507; 70 ALR 658.) Their Honours said in Pereira (at ALR 219 ‑ 20; ALJR 3):
'Even where … actual knowledge is either a specified element of the offence charged or a necessary element of the guilty mind required for the offence, it may be established as a matter of inference from the circumstances surrounding the commission of the alleged offence. However, three matters should be noted. First, in such cases the question remains one of actual knowledge: Giorgianni v R (1985) 156 CLR 473 at 504 ‑ 7; 58 ALR 641; HeKaw I v R (1985) 157 CLR 523 at 570; 60 ALR 449. It is never the case that something less than knowledge may be treated as satisfying a requirement of actual knowledge … All that having been said, the fact remains that a combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter.'
The effect of Kural and Pereira has been stated extra-curially by Dawson J in an article, 'Recent Common Law Developments in Criminal Law', in (1991) 15 Crim LJ 5 at 15:
'It was made clear in those two cases that, whilst knowledge as an ingredient of an offence may be established by inference, it must be established as a fact. If the term "wilful blindness" is used merely as a shorthand expression to indicate circumstances which warrant the drawing of the necessary inference, then it is acceptable. But it is unacceptable if it is used as a basis for imputing knowledge where actual knowledge is not proved.'
[21] Richardson & Wrench (Holdings) Pty Ltd v Ligon No 174 Pty Ltd (1994) 123 ALR 681, 693 - 694.

In this particular matter, what is pleaded, or relied upon, is not only wilful blindness but also action or inaction of PA Audit and Mr English.
Proof of actual knowledge must be knowledge of each of the material facts at the time of the contravention. Acquisition of actual knowledge after the fact is not sufficient.[22] However, where a contravention or contraventions are alleged to be continuing it may be sufficient to acquire knowledge before a contravention, or contraventions, are complete.
[22] Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [No 2] [2005] NSWSC 267; (2005) 53 ACSR 305 [113] ‑ [118].
The second element is participation. A person is not involved in a contravention unless he assents to, or concurs in, the conduct which constitutes the contravention.[23] Over and above the element of actual knowledge, the person must have engaged in conduct, by some act or omission, that implicates, or involves, the person in the contravention by establishing a practical connection between that person and the contravention.[24] However, it is not necessary that the person physically do anything to further the contravention. It is sufficient if the person, by what he or she said and agreed to do, in fact became associated with and thus involved, in the relevant sense, in the conduct constituting the contravention.[25]
[23] Leighton Contractors Pty Ltd v Construction Forestry, Mining and Energy Union [2006] WASC 144; (2006) 154 IR 228 [29].
[24] Ashbury v Reid [1961] WAR 49, 51; R v Nifadopolous (1988) 36 A Crim R 137, 140 (Kirby ACJ, Maxwell & Carruthers JJ agreeing); Leighton Contractors v Construction Forestry, Mining and Energy Union [2006] WASC 144; (2006) 154 IR 228 [27], [29].
[25] Leighton Contractors Pty Ltd v Construction Forestry, Mining and Energy Union [2006] WASC 144; (2006) 154 IR 228 [29]; R v Tannous (1987) 10 NSWLR 303, 308.
The third element is the mental element; that is, the accessory must be an intentional participant. In Australian Securities and Investment Commission v ActiveSuper Pty Ltd (in liq), White J explained as follows, and I agree, that this is a distinct element to that of actual knowledge:[26]
[26] Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) [2015] FCA 342; (2015) 235 FCR 181 [429] - [433].
In Yorke v Lucas, the question was the state of mind required of an accessory to a contravention of s 52 of the TPA. The court held that the accessory liability provisions in s 75B, being drawn from the criminal law, should be given the same meaning which they have in the criminal law. This required that the accessory have the requisite mental element. This led the plurality to conclude (at CLR 670):
'There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention.
…
In our view, the proper construction of par I requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.'
…
Brennan J wrote a separate judgment but expressing the same conclusion. His Honour said (at 673 - 674):
'Civil liability is … imposed only on those who engage in the conduct prescribed by s 75B with the state of mind which the criminal law calls mens rea … A person whose act or omission brings him within the literal terms of the provision is not held liable, however, unless he engaged in the conduct therein specified (aiding, abetting, etc) with a state of mind that amounts to mens rea. …
In Giorgianni v The Queen, this Court decided that a person cannot be held liable for aiding, abetting, counselling or procuring the commission of an offence, even a statutory offence involving strict liability, without intent based upon knowledge of the essential facts which constitute the offence.'
In Giorgianni, Wilson, Deane and Dawson JJ had stated the mental element required for an accessory to a crime in the following passage (at 506):
'[T]he offences of aiding and abetting and counselling and procuring … require intentional participation in a crime by lending assistance or encouragement. They do not, of course, require knowledge of the law and it is necessary to distinguish between knowledge of or belief in the existence of facts which constitute a criminal offence and knowledge or belief that those facts are made a criminal offence under the law. The necessary intent is absent if the person alleged to be a secondary participant does not know or believe that what he is assisting or encouraging is something which goes to make up the facts which constitute the commission of the relevant criminal offence. He need not recognise the criminal offence as such, but his participation must be intentionally aimed at the commission of the acts which constitute it.'
Similarly, Gibbs CJ said (at 482):
'[T]he person charged must have intended to help, encourage or induce the principal offender to bring about the forbidden result. In other words, both knowledge of the circumstances and intention to aid, abet, counsel or procure are necessary to render a person liable as a secondary party …'
These statements of principle indicate that both intention and knowledge of the essential elements of the contravention are necessary for accessorial liability. (emphasis added by White J)
Intention can be inferred from circumstantial evidence. Circumstantial evidence is evidence which (if accepted) is evidence of a fact from which a finder of fact may infer the existence of a fact in issue.[27] A circumstantial case is not, however, to be considered on a piecemeal basis or by considering the acceptance or rejection of one circumstance alone.[28] Circumstantial evidence may include retrospectant circumstantial evidence; that is, evidence of subsequent occurrence of a state of mind may be relied upon to support an inference that the state of mind existed at an earlier point in time.[29]

(ii) Section 79(a) liability

[27] Festa v The Queen [2001] HCA 72; (2001) 208 CLR 593, 597 (Gleeson CJ).

[28] R v Hillier [2007] HCA 13; (2007) 228 CLR 618 [46] ‑ [48] (Gummow, Hayne & Heydon JJ).

[29] Astway Pty Ltd v Council of the City of the Gold Coast [2008] QCA 73; (2008) 159 LGERA 335 [43].

To be involved in a contravention for the purposes of s 79(a), through aiding, abetting, counselling or procuring, a person must have intentionally participated in the contravention with actual knowledge of all the essential facts or matters which constitute the contravention.[30] Section 79(a) contemplates acts carried out at the time a contravention occurs, and also, by the use of the words 'counselling or procuring', catches acts of an accessory prior to a contravention.[31]

(iii) Section 79(d) liability

[30] Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661, 667 ‑ 668, 673, 674; Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1 [261].

[31] Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [No 2] [2005] NSWSC 267; (2005) 53 ACSR 305 [115].

For a person to have conspired to effect a contravention, within the meaning of s 79(d), it must be proved that that person is a party to an (expressed or implied) agreement to carry out an unlawful act.[32] Section 79(d) incorporates a notion of accessorial liability prior to a contravention, that is a conspiracy to effect the contravention, by an agreement with another or others to do something to bring about the contravention as an accessory before the contravention.[33]
[32] The State of Western Australia v Marchesi [2005] WASCA 133; (2005) 30 WAR 359 [13] ‑ [22].
[33] Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd [2005] NSWSC 267; (2005) 53 ACSR 305 [117].

7. Strike out application - principles

The principles relevant to the strike out application are as follows:
(a)the essential functions of a pleading are to define and limit the issues for decision, to provide the basis for determining discovery and the admissibility of evidence for trial, and to ensure a fair trial by putting the other side on notice of the case it must meet;[34]
[34] EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 [124] (Buss JA, Owen & Newnes JJA agreeing); Betfair Pty Ltd v Racing New South Wales [2010] FCAFC 133; (2010) 189 FCR 356 [49] (Keane CJ, Lander & Buchanan JJ); Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431 [28] - [29] (Beech J).
(b)a statement of claim must not plead allegations at too high a level of generality. A pleading must be sufficiently particular to conform with one of the primary objects of pleadings, to inform the opposing party of the case that it must meet;[35]
[35] DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170 [32], applying Charlie Carter Pty Ltd v The Shop, Distributive & Allied Employees' Association of Western Australia (1987) 13 FCR 413, 417, Lonsdale Investments v OM (Manganese) Ltd [2009] WASC 188 [5].
(c)a statement of claim must state specifically the relief or remedy claimed;[36]
[36] Rules of the Supreme Court 1971 (WA) O 20 r 2(1).
(d)the court should proceed with caution before striking out a pleading on the ground that it does not disclose a reasonable cause of action.[37] While the court may determine a difficult question of law on such an application, it would usually be appropriate to leave the determination of such questions for trial;[38]
[37] Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431 [26] (Beech J) applying Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552 [57] (Gaudron, McHugh, Gummow & Hayne JJ); Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 [46] (Gleeson CJ, Gummow, Hayne & Crennan JJ).
[38] Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431 [26] (Beech J).
(e)in alleging no reasonable cause of action:
(i)the question to be decided is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action. Rather, the question is whether it would be open to the party (on its pleadings) to prove facts at the trial which would constitute a cause of action;[39] and
(ii)'reasonable' means reasonable according to law. If the facts pleaded conceivably give rise to relief, then the cause of action should be held to be reasonable;[40]
(f)the mere fact that a case appears weak is not of itself sufficient to strike out the action;[41]
(g)in considering a strike out application, it is now necessary to consider the role of pleadings in the context of case management techniques. Case management considerations are not, however, necessarily antithetical to the observance of pleading rules. The objects of O 1 r 4A and 4B of the Rules of the Supreme Court 1971 (WA) are often promoted by a clear and precise statement of the issues for decision;[42]
(h)provided a pleading fulfils its basic functions of identifying the issues, disclosing an arguable cause of action (or defence), and apprising the parties of the case that has to be met, the court ought properly be reluctant to allow the time and resources of the parties and the limited resources of the court to be spent extensively debating the application of technical pleading rules that evolved in, and derive from, a very different case management environment;[43]
(i)pleadings may be struck out on the ground that they may prejudice, embarrass or delay the fair trial of the action because they are evasive, they conceal or obscure the real questions in controversy, they are ambiguous or not reasonably intelligible, they raise immaterial or irrelevant issues, they fail to confine the issues or state the case of the party in question with reasonable particularity, or they raise a case in terms which are simply too general;[44] and
(j)irrelevant or unnecessary pleas in a statement of claim will be struck out on the grounds that they will prejudice, embarrass or delay the fair trial of the action where the defendant must traverse the allegations and, thereby, raise false issues.[45]
[39] Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628, 631; Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405, 414; Automotive, Food, Metals, Engineering, Printing & Kindred Industries Union of Workers - Western Australian Branch v Bell-A-Bike Rottnest Pty Ltd [2005] WASCA 157 [54] (Roberts-Smith JA).
[40] Automotive, Food, Metals, Engineering, Printing & Kindred Industries Union of Workers - Western Australian Branch v Bell-A-Bike Rottnest Pty Ltd [2005] WASCA 157 [54] (Roberts-Smith JA).
[41] Wenlock v Moloney [1965] 1 WLR 1238, 1243 - 1244 (Danckwerts LJ); Lindon v The Commonwealth [No 2] [1996] HCA 14; (1996) 70 ALJR 541, 545 (Kirby J); Del Borrello v Friedman and Lurie (a firm) [2001] WASCA 348 [61] (Kennedy J).
[42] Culleton v Permanent Custodians Ltd [2018] WASC 251 [33] (Allanson J).
[43] Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82 [7] (Martin CJ).
[44] DM Drainage & Constructions Pty Ltd v Karara Mining Ltd [2014] WASC 170 [34], applying Hart‑Roach v Public Trustee (Unreported, WASC, Library No 980044, 11 February 1998) 8 - 9, Kidd v Mitchell Frederick Artus t/as Downings Legal [2013] WASC 264 [26].
[45] Ron Hodgson (Trading) Pty Ltd v Belvedere Motors (Hurtsville) Pty Ltd [1971] 1 NSWLR 472, 477.

8. The trust fund defalcations

The FRASOC claims liability of PA Audit and Mr English on the grounds of s 79(c) and/or (d) involvement in contraventions of the Corporations Act, of contractual and tortious liability of PA Audit, and of tortious liability of Mr English.
The reasons PA Audit and Mr English advance as to why the FRASOC should be struck out as it relates to the alleged trust defalcations may be grouped into three categories as follows.
First, they submit that, to the extent that PA Audit's and Mr English's liability is claimed (by [21Aii]) to arise from their 'involvement' under s 79(c) and/or (d) of the Corporations Act, the pleaded basis for such accessorial liability (in [21C] to [21AL]) provides no foundation for it; in particular, there is no foundation for PA Audit's and Mr English's actual knowledge of the facts or matters constituting the alleged contraventions of the Corporations Act.
Secondly, and relatedly, they submit that there is no pleaded foundation for the alleged breaches of contractual and tortious duties of PA Audit and Mr English (in [21AJ]) as there is no foundation for the asserted basis for those claims (in [21U] to [21Y], [21AI]). They also argue that there is no foundation for a respective claim of loss or damage (in [21AK] and [21AL]).
Thirdly, they submit that, as Australian Reliance and Reliance Partners bring the proceedings in their personal capacity (rather than trustee capacity), the loss they can claim is limited to loss of funds to which they are legally entitled, namely funds paid from their accounts to third parties for non-genuine purposes. They submit that the particulars of the alleged trust defalcations provide no reasonably arguable case that such loss has been incurred.
In addition, PA Audit and Mr English contend that, insofar as the paragraphs of the FRASOC relating to the trust defalcations contain allegations concerning the audit of Reliance Partners, they are irrelevant, embarrassing, and ought to be struck out on grounds that Reliance Partners is not a proper party to the proceeding, as it does not plead any cause of action or claim any relief against PA Audit or Mr English, and it is not a co-plaintiff with Australian Reliance, in the sense that it has a joint cause of action with Australian Reliance. PA Audit and Mr English also contend that, in substance, Reliance Partners has given written notice that it has discontinued its action against all defendants including PA Audit and Mr English. I return to these latter points in pts 11 and 12.
Before turning to deal with the three categories of PA Audit's and Mr English's contentions, it is convenient to outline the pleaded trust fund defalcations, including the allegations against Reliance Partners and Australian Reliance, and Mr Donnelly and Mr Hanson.

(a) The pleaded defalcations of Reliance Partners' and Australian Reliance's trust funds

It is pleaded in [13.1] to [13.4] of the FRASOC that the misapplication of clients' funds from Reliance Partners' trust account commenced as and from April 2014. In particular:
(a)funds were withdrawn from Reliance Partners' trust account, other than to make payments to insurers of policy premiums or instalments or otherwise as permitted by reg 7.8.02(1) and (1A), reg 7.8.02(2) to reg 7.8.09(5) of the Corporations Regulations, and were used for Reliance Partners' own benefit (and for the benefit of other persons and entities), rather than for the benefit of persons entitled to the monies; and
(b)Reliance Partners' trust account fell below the minimum balance required by reg 7.8.02(6) of the Corporations Regulations and the terms of Reliance Partners' Australian financial services licence.
In [14], a similar plea is made of misuse of clients' funds in Australian Reliance's trust account. However, it is pleaded that the alleged trust fund defalcations did not commence until as and from September 2014.
In [15], it is pleaded that Reliance Partners' conduct (pleaded in [13]) and Australian Reliance's conduct (pleaded in [14]) was in breach of their trustee duties (pleaded in [10]), was in contravention of s 981B(1)(c) of the Corporations Act or reg 7.8.01(5) of the Corporations Regulations, and was in contravention of s 981C(b) of the Corporations Act or reg 7.8.02(6) of the Corporations Regulations.
Particulars of Reliance Partners' and Australian Reliance's alleged breaches are stated in [13.4.1] and [14.4.1] to be provided in a document prepared by Mr Hanson in January 2015, annexed to an affidavit of Keith Joseph Muller sworn 18 January 2016. In amended further and better particulars to the plaintiffs' statement of claim dated 22 December 2016 (the 2017 amended further and better particulars)[46] it is alleged that various payments were made from the trust accounts of Australian Reliance and Reliance Franchise between particular dates which were not made for the benefit of the persons entitled to the monies, for the payment of insurers of policy premiums or instalments or as otherwise permitted by the Corporations Regulations.
[46] Filed prior to PA Audit, Mr English and DFK being joined as defendants to the action.
Excessive detail is contained in the document prepared by Mr Hanson which detail renders the pleadings in [13.4.1] and [14.4.1] uninformative. The document appears to contain confessional evidence that withdrawals were made from the Reliance Partners trust fund from April 2014 that were not permitted. It is a fundamental rule of pleading that evidence should not be pleaded. If the document is to be referred to, only the material facts that are found in that document should be particularised. Order 20 r 8 of the Rules of the Supreme Court requires that the effect of any document must, if material, be briefly stated and the precise words of the document should not be stated, except in so far as those words are themselves material.
I am not satisfied that this point would justify striking out the entire FRASOC as failing to disclose any reasonable arguable cause of action. However, [13.4.1] and [14.4.1] should be struck out.

(b) The pleaded breaches of Mr Hanson's and Mr Donnelly's statutory and common law directors' and officers' duties

The common law directors' and officers' duties of Mr Hanson and Mr Donnelly are pleaded in [11] of the FRASOC to include:
(a)a duty to act honestly;
(b)a duty not to place the interests of each plaintiff in conflict with the interests of another person or entity or themselves; and
(c)a duty not to use their position to gain a benefit for another person or entity or cause a detriment to each plaintiff.

Their statutory directors' and officers' duties are pleaded in [12] of the FRASOC to be duties owed to each of the plaintiffs under the Corporations Act, including:
(a)a duty to act with the degree of care and diligence that a reasonable person in their position would exercise;
(b)a duty to act:
(i)in good faith in the best interests of each plaintiff; and
(ii)for a proper purpose;
(c)a duty not to use their position improperly:
(i)to gain an advantage for themselves or someone else; or
(ii)to cause detriment to each plaintiff;
(d)a duty not to use information obtained by virtue of their positions:
(i)to gain an advantage for themselves or someone else; or
(ii)to cause detriment to each plaintiff.
In [16A] to [17B], it is alleged that Mr Donnelly and Mr Hanson knew of Reliance Partners' and Australian Reliance's alleged breaches of trustee duties and contraventions of the Corporations Act pleaded in [13] ‑ [15] and assisted in those breaches and contraventions.
In [18], it is alleged that Mr Donnelly and Mr Hanson failed to act in the best interests of Reliance Partners and Australian Reliance, and in good faith and for proper purposes of those companies, in failing to prevent those companies from breaching their trustees' duties and for not informing ASIC of the deficits in the minimum balances in those companies' trust accounts. In [8.6], it is alleged that Reliance Partners and Australian Reliance had obligations to inform ASIC if there was a breach of ch 7 of the Corporations Act or the terms of their AFSL. In [17B.10], it is alleged that Mr Donnelly and Mr Hanson failed to inform or cause anyone to inform ASIC of the deficits in the minimum balance of the trust accounts.
In [20], it is alleged that Mr Donnelly and Mr Hanson breached their common law and Corporations Act directors' and officers' duties by virtue of their knowing assistance (pleaded in [16A] to [17B]) and their failures (pleaded in [18]).

(c) Do the pleadings raise an arguable case of accessorial liability against PA Audit and Mr English in respect of the alleged trust fund defalcations?

Paragraph 21Aii of the FRASOC pleads:
PA Audit and Mr English … were involved, within the meaning of that expression in section 79(c) and/or (d) of the Corporations Act, in Reliance Partners' and Australian Reliance's contraventions of the Corporations Act, further or alternatively the Corporations Regulations, pleaded at paragraphs 13 to 16 hereof and in Mr Donnelly's and Mr Hanson's contraventions of their [s]tatutory [d]irectors' and [o]fficers' [d]uties pleaded at paragraph 20 hereof, by reason of the matters pleaded in paragraphs 21C to 21AL hereof.
In [21L], it is pleaded that Reliance Partners' trust account was in fact in deficit in April 2014, which fact a reasonable auditor would have ascertained in the conduct of its audit, and a reasonable auditor would have, thereby, been put on inquiry that Australian Reliance's trust account may have been in deficit and that funds may have been misapplied from both of Australian Reliance's and Reliance Partners' trust account or either of them, in breach of their trustees' duties. In [21M], a similar pleading is made in respect of Australian Reliance's trust account except that the pleading alleges that Australian Reliance's trust account was in fact in deficit in September 2014.
By [21N], it is also pleaded that, in October 2014, Mr English and PA Audit were put on inquiry that Reliance Partners' trust account may have been in deficit and that funds may have been misapplied from the trust fund account of Australian Reliance and/or Reliance Partners as follows:
(a)Mr Sneddon (an employee of Australian Reliance Group)[47] verbally informed Mr English, on or about 24 October 2014, that there was a deficit in the minimum balance required to be held in the Reliance Partners trust account and showed him a number of documents ([46DA]);
(b)on 26 October 2014, Mr Sneddon arranged a meeting for 27 October 2014 with Mr Donnelly, Mr Hanson and Mr English to discuss the deficit in the Reliance Partners trust account and to discuss the terms of his (Mr Sneddon's) termination of employment ([46D] to [46E]); and
(c)at the meeting, on or about 27 October 2014, Mr Sneddon informed Mr Donnelly, Mr Hanson and Mr English of the deficit in the minimum balance required to be held in Reliance Partners' trust account and showed each of them a copy of a Winbeat printout showing the deficit and Mr Donnelly, Mr Hanson and Mr English acknowledged the deficit in the Reliance Partners trust account ([46F] to [46G]).
It might be observed that (a) - (c) appear to relate only to Reliance Partners' trust account.
[47] FRASOC [46].
By [21Q], it is further pleaded that PA Audit and Mr English were put on inquiry that funds may have been misapplied from the trust fund account of Australian Reliance and/or Reliance Partners as follows:
(a)in or about October 2014, Ms Ferrier (the administrative manager for both Reliance Partners and Australian Reliance)[48] verbally informed Ms Jaz Noordeen (a senior auditor of PA Audit) that the balances of the trust accounts, or one of them, had fallen below the minimum balance required by the Corporations Regulations and Ms Noordeen told Ms Ferrier that she would inform Mr English ([21O]); and
(b)in or about October 2014, Ms Jowett‑Blinman (an accounts employee for Reliance Partners and Australian Reliance)[49] informed Ms Noordeen that the balances of the trust accounts, or one of them, had fallen below the minimum balance required by the Corporations Regulations ([21P]).
[48] FRASOC [17B.6.2].
[49] FRASOC [17A.5].
Mr English and PA Audit put the following contentions:
(a)the pleaded facts cannot sustain a plea of Mr English's actual knowledge of the alleged contraventions of the Corporations Act (at the time of the alleged contraventions); in essence, it is said that the knowledge pleaded, including by [21N] and [21Q], appears to raise an argument of constructive knowledge which cannot amount to actual knowledge;[50]
(b)at most, the allegations support an inference that Mr English was put on inquiry of withdrawal of funds from Reliance Partners' trust account, contrary to the Corporations Act and Regulations. It is said, however, that such an allegation is irrelevant as Reliance Partners does not plead any positive case or claim any relief against Mr English or PA Audit;[51]
(c)PA Audit's knowledge depends on Mr English's knowledge. Notwithstanding, not all acts and knowledge of employees or agents of a company are attributable to a company so as to make PA Audit directly liable for the acts of, and affixed directly with the knowledge of, its employees, including Mr English. They acknowledge, however, that knowledge and/or acts of an individual may be attributed to a company if the person was part of a directing mind and will of the company;[52]
(d)it is not alleged that Ms Noordeen passed on the information to Mr English and, in the absence of a special statutory rule of attribution (of which it is said there is none), knowledge and intention of multiple individual agents and employees of a corporation cannot be aggregated to demonstrate knowledge and intention of that corporation as a whole (ie PA Audit). Thus, it is said there is no foundation for the assertion in [21Q] that, by reason of the matters pleaded in [21O] and [21P], Mr English and PA Audit were put on inquiry that funds may have been misapplied from the trust accounts in breach of the trustee duties;[53]
(e)the allegations in [21O] and [21P] that employees of PA Audit were informed that the balance of the trust accounts, or one of them, had fallen below the minimum balance required by the Corporations Regulations are embarrassing as which of the trust accounts were the subject of the information is not identified;[54] and
(f)the matters pleaded in [21Z] to [21AI] are based upon the unfounded assertion that a reasonable auditor would have ascertained the matters pleaded in [21R]. Thus, it said there is no basis for the assertion that PA Audit should have expressed a modified audit opinion.[55]
[50] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [4] - [6], [62], [68], [72]. See, generally, fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [61] - [77].
[51] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [69]. See, generally, fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [63] - [68].
[52] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [4], [42] - [45]. See Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170 ‑ 171, 180 ‑ 181; Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121, 127.
[53] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [71] - [72].
[54] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [70].
[55] Fifth and sixth defendants' outline of submissions in support of application to dismiss and (or) strike out the plaintiffs' claims, filed 8 May 2019 [78] - [83].
In [21R], it is pleaded that:
21RA reasonable auditor auditing Reliance Partners' and Australian Reliance's financial reports and AFSL [c]ompliance for the 2014 and 2015 financial years would have investigated when put on inquiry the circumstances pleaded in paragraphs 21L to 21P above and would have:
21R.1ascertained the circumstances giving rise to:
21R.1.1 Reliance Partners' and Australian Reliance's breaches of their [t]rustee [d]uties and contraventions of the Corporations Act, further or alternatively the Corporations Regulations, pleaded at paragraphs 13 to 16 hereof; and
21R.1.2Mr Donnelly's and Mr Hanson's apparent contraventions of their [s]tatutory [d]irectors' and [o]fficers' [d]uties pleaded at paragraph 20 hereof; and
21R.2concluded that:
21R.2.1the [t]rust [a]ccounts had not been operated in accordance with the Corporations Act and the Corporations Regulations;
21R.2.2funds had been misapplied from the [t]rust [a]ccounts; and
21R.2.3management had manipulated internal controls to conceal the misapplication of funds from the [t]rust [a]ccounts in the circumstances pleaded in paragraphs 16A to 18 herein, and as a result, Reliance Partners' and Australian Reliance's trust account records were misstated.
As emerges from the above, PA Audit's and Mr English's principal contention is that there is no arguable case of their accessorial liability in respect of the trust defalcations as it is not arguable, on the pleadings, that Mr English had actual knowledge of the pleaded contraventions of the Corporations Act and/or Regulations.
Australian Reliance submits that the pleadings raise an arguable case that PA Audit and Mr English had actual knowledge or, alternatively, that it can be inferred from the matters pleaded, particularly those in [21C] to [21AL], that they had actual knowledge.
Before turning to deal with the substance of the balance of PA Audit's and Mr English's contentions, it is convenient to first deal with the contention at [82](d) above. I do not agree that the allegations in [21O] and [21P] do not identify which of the trust fund accounts were the subject of the information conveyed to Ms Noordeen. The allegations made in each paragraph are that it was, alternatively, both or one of the trust fund accounts of Australian Reliance and Reliance Partners. An opposing party is entitled to sufficient information to apprise them of the nature of the case to be met and be placed in possession of the broad outline and constitutive facts said to raise legal liability, but not the mode by which the case is to be proved against it.[56] These pleadings cannot, in the circumstances, be said to allege a matter that leaves PA Audit and Mr English in doubt as to what is alleged about the conversations between Ms Noordeen and Ms Ferrier and Ms Noordeen and Ms Jowett‑Blinman.
[56] R v Associated Northern Collieries [1910] HCA 61; (1910) 11 CLR 738, 740 ‑ 741 (Isaacs J).
It is also convenient to record that, given the pleaded statutory auditing duties cast upon PA Audit and Mr English (as lead auditor), an issue raised on the pleadings is the extent of involvement in the contraventions required to establish that Mr English and PA Audit were knowingly concerned in, or a party to, a contravention by Mr Donnelly or Mr Hanson. It is pointed out, on behalf of PA Audit and Mr English, that a state of mind which merely amounts to a person being interested in or concerned about a 'venture', for whatever reason, is not sufficient to constitute the 'concern' of which s 79(c) speaks.[57] This general principle may have little application where the person argued to be an accessory is subject to statutory duties to report and enquire. Whether this principle requires modification in such a case is not an issue that is appropriate to be dealt with on an application to strike out a pleading in this matter, but is a matter for consideration and determination in a trial.

(i) Mr English's knowledge and liability

[57] R v Tannous (1987) 10 NSWLR 303, 308.

In substance, PA Audit and Mr English argue that:
(a)the pleadings (in [21L] - [21Q]) amount to an allegation that, in October 2014, Mr English acquired knowledge that Reliance Partners trust account was in deficit; and
(b)that fact is not capable of properly raising an inference that funds had been used from the trust funds of Australian Reliance or Reliance Partners for the benefit of persons not entitled to those funds or for unauthorised purposes.
It is pleaded that:
(a)PA Audit, and Mr English as lead auditor, conducted audits in 2014 and 2015 of Reliance Partners' and Australian Reliance's financial reports and AFSL compliance.
(b)PA Audit prepared the 2014 financial reports for Reliance Partners and Australian Reliance in or about July 2014 until October 2014.[58]
(c)Defalcations of the trust funds of Reliance Partners occurred as and from April 2014, and of Australian Reliance occurred as and from September 2014.[59]
(d)On or about 31 October 2014, Mr English as lead auditor, on behalf of PA Audit, signed the independent auditor's report to the members of Reliance Partners and Australian Reliance and ASIC in relation to the 2014 financial year.[60]
(e)Mr English owed a duty to carry out the audits in accordance with PA Audit's contractual duties, PA Audit's duty of care and all applicable legislative provisions and auditing standards.[61]
[58] FRASOC [12AZ].
[59] FRASOC [13], [14]; amended further and better particulars to the plaintiffs' statement of claim dated 22 December 2016 state that defalcations occurred from 4 September 2014.
[60] FRASOC [12AO(iv)], [12AO(v)], [12BD].
[61] FRASOC [12AY].
In my view, it is arguable, on the pleadings, that it can be inferred that Mr English had actual knowledge of the alleged contraventions of the Corporations Act and/or Regulations from pleaded suspicious circumstances and his failure to make an inquiry; in other words, there is an arguable case that Mr English was 'wilfully blind'. That is so, having regard to the following pleaded matters which it is arguable are suspicious because they appear to reveal that the Corporations Act and/or Regulations have not been complied with:
(a)the fact that the Reliance Partners trust account was in deficit in April 2014;
(b)the fact that the Australian Reliance trust account was in deficit in September 2014; and
(c)the matters reported to Ms Noordeen and Mr English in October 2014 (being shortly before the 2014 independent auditor's reports were completed) that the balances of Reliance Partners' and Australian Reliance's trust funds, or one of them, had fallen below the minimum balance.
It is arguable that Mr English had a duty to enquire into those matters, having regard to PA Audit's contractual duties, and Mr English's and PA Audit's statutory duties.[62]
[62] Corporations Act 2001 (Cth) s 311(3) s 989CA(1) and (2), s 990K.
In part, PA Audit's and Mr English's arguments appear to rely upon a contention that, by 31 October 2014, their functions as auditors (for the 2014 financial year) had ended and that it was not until six months later, on 29 May 2015, that it is alleged that PA Audit entered into a contract to prepare audit reports for the 2015 financial year, which was not performed.[63]
[63] ts 182 - 184, 20 June 2019; see FRASOC [12AO], [12AP], [12BH] and [12BI].
It is pleaded that, in order to meet the requirement in s 990B of the Corporations Act, Reliance Partners and Australian Reliance were required to appoint an auditor and to fill that position within 14 days of a vacancy in the office of audit. Further, that, from in or about 2013 until on or about 13 July 2016, PA Audit was registered with ASIC as the auditor appointed by each of Australian Reliance and Reliance Partners pursuant to s 990B. It is also pleaded that, at all relevant times, Mr English was the lead auditor, within the meaning of that expression in s 324AF(1) of the Corporations Act, for PA Audit, in relation to the audit of each of Reliance Partners' and Australian Reliance's financial reports and the compliance with the legislative requirements relating to their respective AFSLs for the 2014 and 2015 financial years. It is further pleaded that Mr English owed a duty to carry out the audits in accordance with Auditing Standard ASA 560 which required an auditor to report subsequent events that occur before and after the financial report is issued.[64]
[64] FRASOC [12N.9].
I am not so satisfied that these pleadings do not raise an arguable case that the duties of the auditor, and Mr English as lead auditor, were ongoing and were not confined to the periods when specific contracts were entered into between PA Audit and Reliance Partners and Australian Reliance to prepare an audit of AFSL compliance, and prepare special purpose financial reports for the financial year and tax calculations.
For these reasons, I am satisfied that there is an arguable case that Mr English had, by at least the end of October 2014, actual knowledge of misapplication of funds from Australian Reliance's and/or Reliance Partners' trust account such as to underpin an arguable case of his accessorial liability in respect of the alleged contraventions of the Corporations Act and/or Regulations.
Although not the primary focus of the argument, I am also satisfied that it is arguable that Mr English participated in those alleged contraventions. That is because it is arguable that there was a statutory duty on Mr English (as lead auditor) to report to ASIC and communicate any identified or suspected significant non-compliance by Australian Reliance or Reliance Partners with the requirements of the Corporations Act and Regulations.[65] Whether the pleaded circumstances can be, in fact, characterised as significant so as to require a report to have been made is a matter of the assessment of evidence and cannot be determined in an application to strike out.

(ii) PA Audit's knowledge and liability

[65] FRASOC [21T] ‑ [21V]. In particular the obligations pursuant to s 311 and s 990K of the Corporations Act, as pleaded in FRASOC [21T] - [21V], and the obligations of a lead auditor under s 989CA of the Corporations Act, as pleaded in [12L] ‑ [12M], to conduct each of the audits in accordance with the Auditing Standards which included those named in [12N], [12AD] ‑ [12AJ].

I am satisfied that the threshold has been met. Whilst it is argued on behalf of Australian Reliance that there is insufficient credible testimony that Australian Reliance will be unable to meet an adverse costs order,[126] the threshold is low.
[126] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [13].
Australian Reliance has led no evidence about its current financial position.
Although there is no evidentiary burden placed on a party seeking an order to show that the threshold has been met,[127] there is evidence before the court that Australian Reliance is no longer trading,[128] and that the only property it appears to have are motor vehicles that are subject to a security interest (a novated lease to which Macquarie Leasing Pty Ltd is a party).[129]
[127] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [24] (Pidgeon & Owen JJ); Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [68] - [69] (Kenneth Martin J, Pullin JA agreeing).
[128] Affidavit of Jonathan Neil Asquith, sworn 12 April 2018 [6].
[129] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS-19, pages 70 - 71.
The fact that public records do not reveal ownership of any assets by Australian Reliance is not determinative. However, it is not the case that searches of public records are of no evidentiary value; it is still some evidence of impoverishment.[130]
[130] Ailakis v Olivero [2013] WASCA 91 [14] (Pullin JA); Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 2] [2014] WASCA 106 [26], [34] (Murphy JA); applied in Australian Reliance Group Pty Ltd v Coverforce Insurance Brokers Pty Ltd [No 5] [2017] WASC 171 [28] (Banks‑Smith J).
Where a plaintiff files no answering affidavit, a search of public records is capable of giving rise to an appearance that there is a reason to believe that there are no assets to meet the costs of an applicant/defendant.[131]
[131] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [25] (Pidgeon & Owen JJ), applied in Australian Reliance Group Pty Ltd v Coverforce Insurance Brokers Pty Ltd [No 5] [2017] WASC 171 [30] (Banks-Smith J).
In this matter, when regard is had to the uncontested fact that Australian Reliance is no longer trading and the public records do not reveal ownership of any assets that could satisfy a costs order made in favour of PA Audit or Mr English, I am satisfied that I have jurisdiction to order security.
The threshold having been met, the question is whether the court should exercise its discretion to make an order for security.
The fact that the threshold question has been answered in PA Audit's and Mr English's favour does not compel the conclusion that security should be ordered.
In Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd, Edelman J set out factors that may be relevant to the exercise of the discretion to make an order for security as follows:[132]
[132] Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [6].
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(v)whether the award of security would deny an impecunious applicant a right to litigate;
(vi)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(viii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self-help procedures;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
Broadly speaking, Australian Reliance opposes the order sought for security and contends that the court's discretion has not been enlivened on the following three grounds:
(a)Australian Reliance has a credible prima facie case against PA Audit and Mr English;[133]
(b)Australian Reliance's case is that PA Audit and/or Mr English, caused (or were a cause of) loss and damage by reason of their breaches of duty, breaches of contract and negligence;[134] and
(c)the security for costs application has not been brought promptly.[135]
[133] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [12].
[134] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [17].
[135] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [19].
As to the first ground, whilst I have found that Australian Reliance has shown an arguable case for relief, it is not appropriate, generally, for the court to assess, in detail, the likelihood of success in the action.[136] This point is particularly pertinent in this matter. The case put by Australian Reliance raises difficult and complex issues and any assessment of the strength of the case put by Australian Reliance cannot be made in the absence of any consideration of a pleaded defence and/or evidence. For this reason, the first ground put by Australian Reliance should be regarded as neutral.
[136] Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [72] - [74] (Kenneth Martin J; Pullin JA agreeing).
As to the second ground, Le Miere J recently pointed out, in Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd, that:[137]
Where a plaintiff's lack of funds has been caused or contributed to by the defendant, the court will take this consideration into account. The onus is on the plaintiff to prove that it was in an adequate financial state, before its association with the defendant began, to have been able to meet an adverse costs order in the proceeding. That does not mean that the court cannot conclude that the defendant's wrongdoing caused the plaintiff's impecuniosity unless there is evidence to establish the plaintiff's financial health before the wrongdoing occurred. However, the plaintiff must prove causation in the circumstances of the case. (citation omitted)
[137] Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd [2018] WASC 363 [18].
Australian Reliance has adduced no evidence about its financial circumstances prior to the alleged contraventions by Mr Donnelly and Mr Hanson or prior to the time it is alleged that PA Audit and Mr English were involved in the contraventions. It follows, therefore, that the inference sought to be drawn by Australian Reliance, that its impecuniosity was caused by, or contributed to by, the involvement of PA Audit and Mr English, is not open to be drawn.
As to the third ground, it is well established that an application for security should be brought promptly. Australian Reliance argues that:
(a)PA Audit and Mr English were added as parties to the writ in October 2017 and that they have sat by whilst the plaintiffs applied for early discovery and then agitated for the plaintiffs to file a statement of claim; and
(b)after service of the statement of claim, PA Audit and Mr English further delayed in making their strike out application and eked out conferral over several months in response to the strike out application.[138]
[138] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [19].
However, the passage of time is only one relevant factor to be considered in the list of factors to be taken into account in the balancing exercise. The delay must be weighed not only in terms of prejudice but also in terms of the factors that have led to the delay.[139]
[139] Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd [2018] WASC 363 [15].
Delay is an important consideration in the determination of an application for security for costs because it is capable of causing prejudice or unfairness to the plaintiff.
Australian Reliance, however, makes no submission that the delay in making the application for security has caused or is likely to cause it any prejudice. Nor does it contend that an order for security would stifle the proceedings.
PA Audit and Mr English were joined to the proceedings on 27 September 2017 and the plaintiffs claim against them was first made in the re-amended further re-amended writ filed on 2 October 2017. Prior to the plaintiffs being required to plead their case against PA Audit and Mr English (and DFK), Mr English and PA Audit resisted two interlocutory applications made by the plaintiffs. The first comprised two applications for consolidation of this action with a Victorian action and the transfer and consolidation of proceedings in the Perth Magistrates Court.[140] The second application was an application for early discovery.[141]
[140] Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 43 (Chaney J) (delivered 12 February 2018). The transfer application was largely resolved by consent but one aspect of it remained in contention. The transfer application did not involve Mr English or PA Audit.
[141] Vantage Holdings Group Pty Ltd v Donnelly [No 2] [2018] WASC 197 (Chaney J) (delivered 26 June 2018).
Reliance Partners went into liquidation on 30 May 2018.
On 14 August 2018, Mr English and PA Audit gave the plaintiffs notice of their intention to apply for security for costs.[142] After conferral,[143] PA Audit and Mr English proposed that any application for security for costs await the filing of the FRASOC.[144]
[142] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS‑27, pages 126 - 128.
[143] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS‑29, pages 130 - 133.
[144] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS‑31, page 133.
On 15 January 2019, the FRAOC was served.[145] Shortly thereafter, solicitors for PA Audit and Mr English recommenced conferral in relation to security for costs which conferral continued until the application for summary dismissal strike out and security for costs was filed in the court on 16 April 2019.
[145] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS‑32, pages 134 - 236.
In light of the dense factual complexity of the pleaded case, I do not accept the submission that much of the delay was caused by the solicitors for PA Audit and Mr English sending a number of repetitive and voluminous pieces of correspondence prior to engaging in telephone conferral on 29 March 2019.
Whilst it appears that solicitors for PA Audit and Mr English accepted that correspondence, engaged in in February and March 2019, would not be relied upon as constituting conferral,[146] I do not accept that any agreement to this effect necessarily results in a finding that conferral has not occurred.
[146] Affidavit of Jonathan Rex Shepherd, sworn 16 April 2016, JRS‑42, page 273.
It is significant, in my opinion, that the trial of this action is some time away. It cannot be said that the present application for security for costs is made at a late stage.
I agree that deferring the application for security of costs until after the FRASOC was filed and served was necessary in order for PA Audit and Mr English to assess the case put by Australian Reliance and to assess the reasonable and just amount of which to request an order for security.
Whilst a delay of 70 days from the filing of the FRASOC could, in some circumstances, be regarded as significant, given the extent of the facts pleaded and the complexity of the issues raised in the FRASOC, the delay is not such as to disentitle PA Audit and Mr English from making the application for security of costs. Further, in the circumstances of the complexity of and factually dense pleading of the case of Australian Reliance in the FRASOC, the delay in making the application cannot be said to be unreasonable.
In all the circumstances, I am satisfied that on balance, I should exercise my discretion and order security be provided.

(b) The amount of security

The quantum of security is to be the amount the court thinks just, having regard to all the circumstances of the case. The court should have regard to the probable costs which Mr English and PA Audit will be put to in defending the action, so far as that can be ascertained. In the usual case in ordering security for costs, the court does not seek to give a complete indemnity to a defendant.[147]
[147] Huntingdale Village Pty Ltd (Receivers and Managers appointed) v Perpetual Nominees Ltd [No 2] [2014] WASC 217 [34].
In an annexure to their submissions in support of their application for security for costs, PA Audit and Mr English itemise and estimate their recoverable costs incurred to date and their future estimated recoverable costs. They provide a lower figure, having regard to the maximum allowable under the Legal Profession (Supreme and District Courts) (Contentious Business) Determination 2018 (WA), and a higher figure, in the event the court was to make orders lifting the amounts allowable under the items of the Determination. That is, PA Audit and Mr English claim that their recoverable costs would be in the order of, at least, $313,579 (on application of the scale maxima) and, potentially, in excess of $1 million (if the scale items were lifted).
Of those amounts, it is estimated that PA Audit and Mr English have incurred an amount of $24,942 (scale maxima) to $54,548.70 (scale lifted) as recoverable costs incurred to date. These costs include:
(a)three amounts of costs that had been fixed by the court; and
(b)the applications for consolidation and application for early discovery which are the subject of costs orders by the court that these costs are to be taxed if not agreed.
The court may only order security in respect of costs that have already been incurred provided these costs are not the subject of an existing costs order.[148]
[148] Edenham Pty Ltd v Meares [No 2] [2016] WASC 302 [26] (Le Miere J).
The future estimated recoverable costs also includes an amount between $34,100 (being the scale maximum for the chambers application to strike out the statement of claim and for security of costs) to $64,240 (if orders are made that the scale be lifted). Given that PA Audit and Mr English have been substantially unsuccessful in their application for strike out and summary judgment, it is my view that these amounts should be disregarded. In any event, it is my view that the costs of these applications should be the subject of a separate order of the court following the delivery of the reasons for judgment in these applications.
I do not accept that the estimate in the schedule of costs for giving discovery of documents, being 741 to 1,482 hours work for a junior practitioner and 185 to 370 hours work for a senior practitioner, is a reasonable estimate of the time to provide discovery. This estimate is based upon an affidavit of Ms Noordeen sworn on 23 February 2018 which was filed on 26 February 2018 to oppose the plaintiffs' application for early discovery. A party giving discovery is required to ensure that only relevant documents are discovered. Ms Noordeen's affidavit appears to contemplate discovery of all documents in the custody, power and possession of PA Audit, Mr English and DFK comprising audit records, MYOB records, emails, handwritten notes and tax files for the 2013 to 2016 financial years for work carried out for, or on behalf of, Vantage, Reliance Partners, Australian Reliance Group, Australian Reliance and Austin.
Whilst I accept that discovery will be a time consuming and extensive task, I do not necessarily accept that discovery for the records for all of those financial years is necessary in respect of all of the matters which are pleaded. In any event, it is clear that it is highly unlikely that any of those categories of documents which relate to work carried out for Vantage or Australian Reliance Group, or indeed all of those documents relating to the 2016 financial year for the records of Austin, will be relevant to the issues and facts pleaded in the FRASOC.
PA Audit and Mr English say that, in all the circumstances of the case, the court should order that Australian Reliance provide security in the sum of $200,000 up to entry of the matter for trial.[149] Further, that security may be provided by payment of that sum into court or by the provision of a bank guarantee from a financial institution and in a form approved by the Principal Registrar.[150] They also seek an order that they have liberty to apply for further security after the matter has been entered for trial, at which time the court will be able to assess whether any special costs orders have been made.[151]
[149] Fifth and sixth defendants' submissions in support of their application for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and O 25 r 1 of the Rules of the Supreme Court 1971 (WA), filed 8 May 2019 [59]; ts 166, 196, 20 June 2019. Note, however, that the summons seeks an order for security of $300,000.
[150] Fifth and sixth defendants' submissions in support of their application for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and O 25 r 1 of the Rules of the Supreme Court 1971 (WA), filed 8 May 2019 [60].
[151] Fifth and sixth defendants' submissions in support of their application for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and O 25 r 1 of the Rules of the Supreme Court 1971 (WA), filed 8 May 2019 [61].
Australian Reliance submits that if security is ordered, it should be provided in tranches at various points in the process of preparing the proceedings for hearing.[152]
[152] First, third and fourth plaintiff's responsive submissions on fifth and sixth defendants' application for security of costs, filed 12 June 2019 [26]; ts 241, 244 20 June 2019.
There is much to be said for the provision of security on a progressive basis, however, at this point in time, it is difficult to estimate the length and duration of trial. Further, it appears, from the schedule of PA Audit and Mr English's estimate of future recoverable costs, that the substantial part is likely to be incurred in giving discovery of documents.
In these circumstances, I am of the view that I should make the order sought by PA Audit and Mr English but not for the amount which is sought. Whilst I agree that an order for substantial security is called for, it should be based upon a conservative estimate of costs. In the circumstances and in seeking to do justice to all parties, I consider that $125,000 is an appropriate amount to be awarded by way of security up to and including entry for trial. I am also of the view that PA Audit and Mr English are to have liberty to apply for an order requiring Australian Reliance to pay additional security thereafter.
I will hear the parties further on the manner in which, and time within which, the security should be provided and the form of security if the parties cannot reach agreement in that regard.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
EH
Research Associate/Orderly to the Honourable Justice Smith

8 NOVEMBER 2019