Young Investments Group Pty Ltd v Mann

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FEDERAL COURT OF AUSTRALIA

Young Investments Group Pty Ltd v Mann [2012] FCAFC 107

Citation: Young Investments Group Pty Ltd v Mann [2012] FCAFC 107
Appeal from: Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147
Parties: YOUNG INVESTMENTS GROUP PTY LTD ACN 078 020 309, RASTUS GROUP PTY LTD ACN 117 297 015, REID PARK INVESTMENTS PTY LTD ACN 126 109 626 and BEVERLEY LORRAINE YOUNG v JAMES JEFFREY MANN, MICHAEL CHARLES BOWDEN, ANTHONY CHRISTOPHER KENNY, TIMOTHY LEONARD WEIR, STEPHEN EDWARD WOOD, ROBERT PHILIP GRANT, ANGELA CLAIRE HAYWARD, ANTIGONI LIKOUDIS, MARK EVANS MORRIS and ALEXANDER BURT
File number: WAD 431 of 2011
Judges: EMMETT, BENNETT AND MCKERRACHER JJ
Date of judgment: 14 August 2012
Catchwords: PRACTICE AND PROCEDURE – adequacy of pleadings – appeal against strike out of pleadings at first instance insofar as they alleged breaches of the Corporations Act 2001 (Cth) and breaches of fiduciary duty against directors of certain companies – whether statement of claim disclosed arguable case against directors – where adequacy of pleading turned upon allegations of actual knowledge on the part of the directors – requirement to particularise pleaded allegation of knowledge – where statement of claim appeared to assert that knowledge of the directors of the obligations of the companies, combined with the foreseeability of damage to clients if the obligations were breached, gave rise to a duty owed by the directors to the clients to take reasonable care to cause the company to perform the obligations – extent to which cause sought to be pleaded could be inferred from the statement of claim – whether pleading adequately connected relevant representations to the knowledge alleged
Legislation: Corporations Act 2001 (Cth) ss 917A, 917B, 917E
Federal Court Rules 2011 r 16.43
Cases cited: Barnes v Addy (1874) LR 9 Ch App 244
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Fox v H Wood (Harrow) Ltd [1963] 2 QB 601
Giorgianni v The Queen (1985) 156 CLR 473
Keller v LED Technologies Pty Ltd (2010) 185 FCR 449
Pereira v Director of Public Prosecutions (1988) 63 ALJR 1
Pioneer Electronics Australia Pty Ltd v Lee (2001) 108 FCR 216
Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301
Smith v Littlemore (1996) 15 WAR 289
Yorke v Lucas (1985) 158 CLR 661
Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996
Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147
Date of hearing: 14 May 2012
Place: Perth
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 62
Counsel for the appellants: DR Williams QC, NDC Dillon
Solicitor for the appellants: McKinlay Solicitors
Counsel for the first and second respondents: G Donaldson SC
Solicitor for the first respondents: Gadens Lawyers
Solicitor for the second respondents: Tottle Partners

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

GENERAL DIVISION

WAD 431 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN:

YOUNG INVESTMENTS GROUP PTY…

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Details
Case
[2012] FCAFC 107
Decision Date

CaseChat Overview and Summary

In the case of Young Investments Group Pty Ltd v Mann, the appellants sought damages from the directors of certain companies, alleging that the directors were involved in contraventions of the Corporations Act 2001 (Cth) and were knowingly concerned in breaches by their companies of fiduciary duties. The respondents, who were the directors, appealed against a strike-out of the appellants' pleadings. The primary judge had dismissed the proceeding as against the directors, and the appellants sought to appeal that decision. The primary judge's decision was based on the view that the appellants had failed to bring in an arguable pleading against the directors over a period of almost two years. The Full Court had to determine whether the appellants had demonstrated an arguable case against the directors through their pleading.

The legal issues in this case were whether the appellants had properly pleaded an arguable case against the directors and if the primary judge had correctly struck out the pleadings. The court needed to consider whether the appellants' pleadings sufficiently alleged the directors' actual knowledge of the volume and frequency of trades and why such trades breached the companies' obligations. The court also had to decide whether the pleadings adequately connected the relevant representations to the alleged knowledge of the directors. The Full Court found that the appellants' pleadings did not establish an arguable case against the directors. The court held that the appellants were unable to plead the key material facts and particulars regarding the directors' knowledge of the trades and the reasons why such trades breached the companies' obligations. The court concluded that the primary judge was correct in striking out the pleadings, and the appeal was dismissed.

The Full Court further held that the appellants' pleadings failed to meet the necessary legal standards. The court noted that directors are not personally liable for the wrongs of the company merely because of the office they hold. Instead, something more is required, such as actual knowledge or involvement in the wrongful conduct. The Full Court found that the appellants' pleadings did not allege sufficient facts to establish the directors' actual knowledge or involvement in the wrongful conduct. Consequently, the Full Court dismissed the appeal and ordered that the appellants pay the respondents' costs of the appeal, to be taxed if not agreed.

Orders

Orders of the court

1. The appeal be dismissed.

2. The appellants pay the respondents’ costs of the appeal, to be taxed if not agreed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The dishonest and fraudulent design alleged in the Statement of Claim is said to be undertaking unauthorised discriminatory trading, undertaking high volume trading without instructions, and making drawings down under the Leveraged Equities facility for those purposes without authority. That is alleged to be a design of Stripe. However, there is no allegation of facts that constitute dishonesty or fraud that was within the knowledge of the Stripe Directors in one of the senses outlined above, other than by reason of what is described above as the practical imperative for the Stripe Directors to have in place and maintain an adequate system of control. CONCLUSION Directors are not personally liable for the wrongs of the company merely because of the office they hold. Something more is required, and there have been many different formulations in various jurisdictions as to what more is required before a director will be liable for the company’s wrongful conduct. The cases in which such formulations appear are summarised in Pioneer Electronics Australia Pty Ltd v Lee (2001) 108 FCR 216 and Keller v LED Technologies Pty Ltd (2010) 185 FCR 449. The formulations include the following:·A director will be liable along with the company when he or she has procured or directed it to commit the tort. ·A director will be liable only if the director has made the wrongful act his or her own, as distinct from it being an act of the company. ·A director will be liable if he or she has assumed responsibility for the company’s acts. ·A director is not liable for procuring the company to infringe the rights of others. ·For a director to be liable because he or she directs or procures his or her company to commit a wrong, the context must be such that the director is effectively standing apart from the company and directing or procuring it as a separate entity. ·The crucial distinction is between acts that are done for and in the service of the company and acts that, in addition, are done in the director’s own personal capacity, or non-company capacity. Whichever formulation is adopted, the nature of participation in the breach must be identified. There is considerable difference between those formulations, on the one hand, and, on the other, personal liability because of some limited knowledge being held by a director of relevant elements of a potential breach or statutory obligation. However in the end, it is unnecessary, on the present appeal, to determine which of the approaches is to be preferred, as the Statement of Claim relies on none of them. Without actual knowledge of the volume and frequency of trades, together with knowledge as to why it is that such volume and frequency of trades was known by the directors to be in breach of any representation or other obligation, liability on the part of the directors cannot be established, and the accessorial plea in the Statement of Claim cannot stand. There have been two strike outs by the primary judge as well as, it has been asserted, several informal attempts to re-plead the case against the directors. It seems tolerably clear that the appellants are unable to plead the key material facts and particulars as to the directors’ knowledge of both the volume and frequency of the trades and, importantly, why they knew such trades breached the pleaded representations or other obligations. Those matters lie at the heart of the case against the directors, as distinct from the respective companies they direct. It appears that that deficiency cannot be cured.

Ratio Decidendi

Legal Principle Established

The question in this appeal is whether the appellants have demonstrated, as a matter of pleading, an arguable case against the directors of companies with which three of the appellants had contractual arrangements. The appellants seek to recover damages from those directors on the basis that the directors were involved in contraventions by their companies of the Corporations Act 2001 (Cth) (the Corporations Act), and were knowingly concerned in breaches by their companies of fiduciary duties owed by their companies. The allegations of being involved in contraventions and being knowingly concerned in breaches of duty arise out of much the same factual circumstances. A judge of the Court concluded that, in circumstances where, over a period of almost two years, the appellants had failed to bring in an arguable pleading as against the directors, the proceeding should be dismissed as against the directors (see Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147). Accordingly, on 7 October 2011, his Honour ordered that the proceeding be dismissed as against the directors. Following the grant of leave to appeal, notice of appeal from that order was filed on 31 October 2011. The directors are the only respondents to the appeal. By their notice of appeal, the appellants seek an order in the following terms:The judgment to strike out the appellants’ application against the first and second respondents herein… be dismissed.The language of that proposed order is somewhat curious. The Full Court has dealt with the appeal on the assumption that the appellants seek an order that the order of 7 October 2011 be set aside. The appeal has been argued on the basis that the primary judge erred in concluding that the most recent statement of claim filed on behalf of the appellants failed to disclose an arguable case against the directors. There is no ground of appeal alleging that the discretion of the primary judge miscarried in not granting the appellants a further opportunity to re-plead their case against the directors. That question is addressed below. The appellants’ most recent iteration of their statement of claim was filed on 24 August 2011 (the Statement of Claim), pursuant to leave, following an earlier order that parts of the appellants’ pleading against the directors, as it then stood, be struck out as disclosing no reasonable cause of action (see Young Investments Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996). It will be necessary to set out in some detail the allegations made against the directors in the Statement of Claim. However, before doing so, it is desirable to state some relevant legal principles. RELEVANT LEGAL PRINCIPLES It was common ground that the applicable principles in relation to an application to strike out the whole or part of a statement of claim were as stated by the primary judge in an earlier successful strike out application in the proceeding (see Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996). Those principles can be stated shortly. In an application to strike out a pleading, all of the facts alleged in the relevant pleading are to be accepted as true, and it is to be taken for granted that, on all other points, the pleading is unassailable. Provided that a pleading fulfils its basic function of identifying the issues, disclosing an arguable cause of action and apprising the other party of the case that it has to meet at trial, the pleading should be allowed to stand and the proceeding should be allowed to go to trial. Further, a court of first instance should be careful not to risk stifling the development of the law by summarily dismissing a claim where there is a reasonable possibility that, as the law develops, a cause of action may be held to lie. The power to dismiss summarily is to be used only in cases that are unarguable and for which there is no reasonable prospect of success.