FEDERAL COURT OF AUSTRALIA

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

THE COURT ORDERS THAT:

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

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1    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.

2    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.

3    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.

4    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.

5    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

6    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.

7    A statement of claim must allege a cause of action with sufficient particularity and not simply make allegations in general terms. The adequacy of a statement of claim is to be assessed by reference to whether the cause of action is pleaded at a level of particularity that is sufficient to define the issues and inform the other party of the case that it has to meet, in the context of the particular allegations. A respondent or defendant is entitled to know the factual foundation for the case that is being alleged, so that the respondent or defendant can prepare to meet that case at trial. In order to disclose a reasonable cause of action, a statement of claim must contain an allegation of all of the relevant facts necessary to support any allegation made in it. A pleading that simply pleads a conclusion is embarrassing and should not be permitted to stand.

8    More specifically, r 16.43(1) of the Federal Court Rules 2011 provides that a party who pleads a condition of mind must state in the pleading particulars of the facts on which the party relies. Under r 16.43(3), condition of mind for a party includes knowledge. In addition, under r 16.43(2), if a party pleads that another party ought to have known something, the first party must give particulars of the facts and circumstances from which the other party ought to have acquired the knowledge. The question of knowledge on the part of the directors is critical to the causes of action sought to be pleaded against them by the appellants.

9    It has long been the case, in various jurisdictions, that particulars are to be provided of facts and circumstances relied upon to support a plea that something ought to have been known (see Fox v H Wood (Harrow) Ltd [1963] 2 QB 601 at 604 and Smith v Littlemore (1996) 15 WAR 289 at 300). Knowledge itself has usually been treated differently. Knowledge of, or recklessness towards falsity, by way of example, may usually be pleaded as the material fact without particularisation (see Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304). Allegations of fraud, or the involvement of persons in statutory breaches sufficiently analogous to allegations of fraud, on the other hand, have required the provision of quite specific particulars.

10    The reason for not being required to particularise knowledge is not fully explained in the cases. It may be assumed that, on the one hand, there is the obvious difficulty of knowing what is inside another’s mind. On the other hand, there may be instances where the evidence to be relied upon to establish knowledge could be identified by particulars. That evidence might be an admission or a communication, written or oral, that could only give rise to the relevant state of mind. In appropriate cases, the provision of particulars has been ordered when sought.

11    There are sound reasons for requiring knowledge to be particularised, at least in relation to the kind of allegations made in the Statement of Claim. Proving a director’s actual knowledge of the essential ingredients of a contractual or tortious breach or statutory contravention is a prerequisite to the director’s personal liability. For statutory breaches, it is well established that, in order to be an accessory or to be knowingly involved in a contravention, a person must have intentionally participated, having knowledge of the essential matters constituting the contravention (see Yorke v Lucas (1985) 158 CLR 661). That is not imputed or constructive knowledge but, rather, actual knowledge. It would not usually be sufficient to establish a statutory breach to show that a person said to be an accessory to such a breach wilfully shut his or her eyes to the obvious (see Giorgianni v The Queen (1985) 156 CLR 473). Actual knowledge of suspicious circumstances and failure to make enquiry may be different (see Pereira v Director of Public Prosecutions (1988) 63 ALJR 1 at 3). However, actual knowledge of suspicious circumstances is not pleaded in the Statement of Claim in the sense required for accessorial liability.

ALLEGATIONS IN THE STATEMENT OF CLAIM

12    The fourth appellant, Ms Beverley Young, was at all material times a director of the other three appellants, Young Investments Group Pty Limited (Young Investments), Rastus Group Pty Limited (Rastus) and Reid Park Investments Pty Limited (Reid Park). Young Investments acted as an investment company for Ms Young, Rastus acted as a trustee for superannuation funds for Ms Young and her family, and Reid Park acted as a trustee for an investment trust controlled by Ms Young. Each of Young Investments, Rastus and Reid Park (together the Corporate Appellants) was, for the purposes of Chapter 7 of the Corporations Act, a retail client in relation to financial product services.

13    Australian Stockbrokers & Advisory Services Limited (ASANDAS) was the holder of an Australian financial services licence under Chapter 7 of the Corporations Act, and carried on business as the provider of financial services by way of providing financial product advice and dealing in financial products. Stripe Capital Pty Limited (Stripe) carried on business as the provider of financial services, including by way of providing financial product services and dealing in financial products within the meaning of the Corporations Act. It provided those services as the authorised representative of ASANDAS.

14    As a financial services licensee, ASANDAS had certain obligations under s 912A(1) of the Corporations Act. ASANDAS owed, to parties dealing with it or with its authorised representatives, a duty to fulfil those obligations (the ASANDAS Duties). Under the provisions of ss 917A(1), 917B and 917E of the Corporations Act, ASANDAS was responsible for the conduct of Stripe in relation to the provision of financial services by Stripe.

15    The first respondents to the appeal, James Mann, Michael Bowden, Anthony Kenny, Timothy Weir, Stephen Wood and Robert Grant (the Stripe Directors), were the directors of Stripe at relevant times. The second respondents, Angela Hayward, Antigoni Likoudis, Mark Morris and Alexander Burt (the ASANDAS Directors), were the directors of ASANDAS at relevant times.

16    There are two counts pleaded against the Stripe Directors and two counts pleaded against the ASANDAS Directors. The counts against the Stripe Directors are pleaded in substantially the same terms as the counts against the ASANDAS Directors. The first count is an allegation that the relevant directors were involved in contraventions of the Corporations Act by their companies. The second is that they were knowingly involved in breaches of fiduciary duties owed by their companies to the Corporate Appellants. The second count is based on the second limb of Barnes v Addy (1874) LR 9 ChApp 244. Much the same criticisms are levelled at each count. Accordingly, it is necessary to deal with only the counts against one set of directors. It is convenient to deal with the counts against the Stripe Directors.

17    In July 2006, Rastus entered into an agreement with Stripe (the Rastus Agreement), whereby Rastus appointed Stripe as its financial advisor to provide financial services, including financial product advice. In June 2007 Young Investments entered into an agreement with Stripe (the Young Investments Agreement) whereby Young Investments appointed Stripe as its financial advisor to provide financial services, including financial product advice. In June 2007, Reid Park entered into an agreement with Stripe (the Reid Park Agreement) whereby Reid Park appointed Stripe as its financial advisor to provide financial services, including financial product advice.

Involved in Contravention of the Corporations Act

18    Paragraph 15 of the Statement of Claim asserts that each of the three agreements described above was subject to an implied term that, in providing services under the agreement, Stripe would use all reasonable skill, care and diligence. The term was said to be implied as being necessary to give business efficacy to the agreements or, alternatively, to be implied by custom in agreements for the provision of financial services. It is alleged that, in using all reasonable skill, care and diligence, Stripe was subject to eight specific duties (the Stripe Duties). The Stripe Duties were:

    to act only on instructions;

    not to make any profit or commission without disclosing such profit or commission and accounting for any benefit received;

    to ensure its employees and officers acted efficiently, honestly and fairly;

    to have in place arrangements for the management of conflicts of interest that may have arisen in relation to the activities undertaken by its employees and officers in the provision of financial services;

    to ensure that its employees and officers complied with the financial services laws;

    to have adequate resources to provide financial services and to carry out supervisory arrangements;

    to ensure its employees and officers maintained sufficient competency to provide financial services; and

    to have risk management systems.

19    Paragraph 28.1 of the Statement of Claim alleges that, prior to each Corporate Appellant’s entry into its agreement with Stripe, Stripe represented that it would fulfil the Stripe Duties (the Duties Representation). It is not alleged that the Duties Representation was made expressly. Rather, the Duties Representation is said to arise from the following facts:

    In July 2006, Mr Todd King, acting on behalf of Stripe, who was the second respondent named in the Statement of Claim, told Ms Young that he and a number of colleagues, who had formerly worked for the financial services advisor then engaged by the Corporate Appellants, had established Stripe as a full service financial services provider, that Stripe, as the authorised representative of ASANDAS, was authorised by ASANDAS to provide financial services and advice, including in relation to dealings with securities, and that, if the Corporate Appellants engaged Stripe, Stripe would provide financial services, including financial product advice, to them.

    Each of the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement stated that Stripe was the authorised representative of ASANDAS and that ASANDAS was the holder of an Australian financial services licence.

    Written material provided to Ms Young by Stripe stated that Stripe was an authorised representative of ASANDAS and that ASANDAS was the holder of an Australian financial services licence.

20    Paragraph 28.2 of the Statement of Claim asserts that the Corporate Appellants entered into their respective agreements with Stripe in reliance upon the Duties Representation. Paragraph 28.6 asserts that the Duties Representation was a representation in relation to the ongoing future conduct of Stripe, and that it follows from that fact that Stripe also represented that if, at any time, the Duties Representation became untrue, Stripe would disclose to the Corporate Appellants that change of circumstances (the Disclosure Representation).

21    Paragraph 28.3 asserts that, in contravention of s 1041H of the Corporations Act, the Duties Representation was misleading or deceptive, in that it was untrue because Stripe did not have any or any adequate procedures in place or in operation:

    to ensure Stripe employees, in relation to the provision of financial services, acted efficiently, honestly and fairly;

    to prevent Stripe from engaging in conduct in conflict with its duties to Rastus, Young Investments and Reid Park;

    to ensure that Stripe complied with the financial services law, including in relation to discretionary trading;

    to ensure that Stripe’s employees maintained sufficient competency to provide financial services advice;

    to ensure that Stripe’s employees provided financial services, and for Stripe to supervise the ongoing fulfilment of those obligations and duties; or

    to implement and give effect to risk management systems to ensure the risk of breach of client services agreements or breaches of statutory duty or duties at law did not occur.

22    Paragraph 29.1 of the Statement of Claim alleges that the Stripe Directors knew that Stripe had made the Duties Representation and the Disclosure Representation to the Corporate Appellants. Paragraph 29.2 then asserts that, given that it was reasonably foreseeable by the Stripe Directors that their failure to cause Stripe to fulfil the Duties Representation was likely to cause loss to Stripe’s clients, the Stripe Directors had a duty, in order to avoid loss to Stripe’s clients, to take reasonable care to cause Stripe to fulfil the Duties Representation.

23    That allegation is a curious one. It amounts to an assertion that the directors of a company have a duty to the clients of the company to take reasonable care to cause the company to perform its obligations, simply because the directors knew of the company’s obligations and could reasonably foresee that the company’s clients would suffer damage from breach of those obligations. As will become apparent, the existence of such a duty appears to be an essential element of the case pleaded by the appellants.

24    The Statement of Claim then alleges, in paragraph 29.3, that, to fulfil that duty, it was necessary for the Stripe Directors:

    to have knowledge from time to time of the extent of the trading in securities being undertaken on account of Stripe’s clients by Stripe’s brokers;

    to ensure that a system was imposed on Stripe’s brokers that resulted in the Stripe Directors having access to information concerning, and being promptly informed of, the extent of the trading in securities on account of clients being undertaken by Stripe’s brokers; and

    to have prompt knowledge of any exceptional or extraordinary trading undertaken or being undertaken by Stripe’s brokers.

25    Paragraph 29.4 then alleges that the extent of the trading activity undertaken by Stripe on account of the Corporate Appellants was exceptional and extraordinary, in that:

    in approximately 12 months, using investment funds of approximately $8 million, trading in securities was undertaken to the value of $123,269,784;

    single trades were undertaken for which the consideration was greater than $50,000; and

    daily trading was undertaken in excess of $500,000.

There is no assertion as to the criteria against which that trading activity was to be measured in order to determine that it was exceptional and extraordinary. For example, it might have been asserted that the trading was exceptional and extraordinary compared with past trading activity of the Corporate Appellants. Alternatively, it might have been asserted that it was exceptional and extraordinary for companies in the position of the Corporate Appellants. However, there is no allegation about the past activities or the financial position or other circumstances of the Corporate Appellants that might demonstrate why the trading activities alleged were extraordinary and exceptional.

26    Paragraph 29.5 of the Statement of Claim then asserts that the magnitude of the trading activity undertaken by Stripe indicated that that trading activity was:

    unauthorised;

    inappropriate; and

    for the purpose of earning commission for Stripe, rather than for a benefit for Rastus, Young Investments or Reid Park reasonably commensurate with the risks to which they were being exposed, contrary to their interests;

such as required identification and report to the Stripe Directors promptly, so as to enable the Stripe Directors to fulfil their duty to take reasonable care to cause Stripe to fulfil the Duties Representation.

There is no allegation as to what it was about the magnitude of the trading activity referred to in paragraph 29.5 that indicated that the trading was unauthorised, inappropriate and for an improper purpose. For example, the magnitude might be compared with the prior trading activity of the Corporate Appellants, or with their financial position or other circumstances. There is no allegation as to any such matter.

27    Next, the Statement of Claim asserts in paragraph 29.6 that it is to be inferred from the matters outlined above, meaning, presumably, the allegations in paragraphs 29.1 to 29.5, that the Stripe Directors were informed of and knew the trading activity undertaken by Stripe on account of the Corporate Appellants and that, accordingly, they knew that that trading activity was unauthorised, inappropriate and for the purpose of earning commission for Stripe, rather than for a benefit for the Corporate Appellants reasonably commensurate to the risks to which they were being exposed. Thus, there is an allegation of actual knowledge, on the part of the Stripe Directors, of the extent of the trading activity, and of the fact that it was unauthorised, inappropriate and for the purpose of earning commissions for Stripe.

28    The Statement of Claim asserts, in the alternative, that, if there was no adequate system implemented or maintained for reporting of trading as described in paragraph 29.3, in circumstances where the Stripe Directors knew that the Duties Representation and the Disclosure Representation had been made by Stripe, knew that their failure to take reasonable care to cause Stripe to fulfil those representations was likely to cause loss to Stripe’s clients and knew that to fulfil the duty they had to avoid loss to Stripe’s clients it was necessary to implement and maintain an adequate system for reporting of trading, then the Stripe Directors:

    wilfully shut their eyes to the extent of the trading activity undertaken by Stripe and the fact that the trading activity undertaken was unauthorised, inappropriate and was for the purpose of earning commission for Stripe; or

    were wilful and reckless in failing to implement and maintain such a system; or

    failed to undertake enquiries that would have been undertaken by an honest and reasonable person in order to identify such matters.

29    That assertion, based on the assumption that no adequate system for reporting trading was implemented or maintained, is said, in the part of the pleading dealing with knowing concern in breach of fiduciary duties, to lead to the result that the Stripe directors are fixed with knowledge of the fact that trading activity being undertaken by Stripe on account of the Corporate Appellants was unauthorised, inappropriate and was for the purpose of earning commissions for Stripe. It may be that this allegation was inadvertently omitted from paragraph 29 of the pleading. That is to say, it is, or was intended to be, alleged that the Stripe Directors are to be deemed in some way to have knowledge of the matters they would have known if they had had an adequate system in place. The language of that allegation is reminiscent of Barnes v Addy.

30    Paragraph 29.7 of the Statement of Claim then alleges that, since the Stripe Directors were possessed of the knowledge, either actual or deemed, that the trading activity conducted on behalf of the Corporate Appellants was unauthorised, inappropriate and for the purpose of earning a commission for Stripe, they knew that the Duties Representation had become untrue in whole or in part and, accordingly, had become misleading or deceptive. Paragraph 29.8 asserts that, notwithstanding that knowledge, the Stripe Directors, in breach of the Disclosure Representation, failed to cause Stripe to disclose to the Corporate Appellants the change of circumstances.

31    That allegation seems to say that there was a breach of the Disclosure Representation on the part of Stripe insofar as it failed to inform the Corporate Appellants that Stripe was no longer fulfilling the Stripe Duties. There is also an allegation that the Stripe Directors failed to cause Stripe to disclose to the Corporate Appellants that it was no longer fulfilling the Stripe Duties.

32    Next, paragraph 29.9 asserts that, as a result of that conduct on the part of the Stripe Directors, Stripe, between June 2007 and June 2008:

    bought and sold securities on behalf of Rastus, Young Investments and Reid Park without instructions;

    bought securities, including options and derivatives, on behalf of Rastus, Young Investments and Reid Park that were not authorised securities, being securities of a type to which Stripe had agreed to confine its recommendations under its agreements with the Corporate Appellants;

    without any authority to do so, undertook high volume trading of securities in order to effect transactions on which commissions would be earned by Stripe without any reasonably commensurate benefit being earned by Rastus, Young Investments or Reid Park;

    recommended to Young Investments and Reid Park that they enter into a margin loan agreement with the firm Leveraged Equities, the effect of which was to allow securities owned by Young Investments and Reid Park to be pledged as security for a loan facility to be drawn down upon for the dedicated purpose of purchasing further securities;

    received commissions from Leveraged Equities without disclosing those commissions to Young Investments or Reid Park and without accounting for benefits received;

    drew down funds under the agreement with Leveraged Equities without instructions or authorisation; and

    used the unauthorised funds drawn down from Leveraged Equities to undertake high volume trading in securities for the purposes of earning commission without any reasonably commensurate benefit being earned by Young Investments or Reid Park.

33    Paragraph 29.10 of the Statement of Claim then asserts that, in the premises, the Stripe Directors were involved in the contravention:

    by aiding, abetting, counselling or procuring the contravention; and

    by their omission to give notice of the change of circumstances, directly or indirectly, being knowingly concerned in or a party to the contravention.

The Statement of Claim does state explicitly what is meant by the contravention. There is the earlier assertion in paragraph 28.3 of the Statement of Claim that, in making the Duties Representation, Stripe contravened s 1041H of the Corporations Act. That is probably the contravention to which reference was intended to be made in paragraph 29.10. However, it is not entirely clear.

34    Finally, paragraph 29.11 of the Statement of Claim alleges that, by reason of the involvement of the Stripe Directors in the contravention, the Corporate Appellants have suffered loss and damage. Rastus is alleged to have suffered trading losses of $1,820,290.06 and $1,917,757.67 from trading on behalf of superannuation funds. Young Investments is alleged to have suffered trading losses of $1,343,251.70. Reid Park is alleged to have suffered trading losses of $3,418,862.20 and $3,717,680.25. Paragraph 29.11 alleges further that the Corporate Appellants also lost the opportunity to have been competently advised on trading and securities and to have invested in and earned profits on trading and authorised securities, or by investing in alternative investments, or not investing.

Knowingly Concerned in Breach of Fiduciary Duties

35    The second count against the Stripe Directors is based on the assertion that they were knowingly concerned in breaches of fiduciary duties by Stripe, based on the second limb of Barnes v Addy. The assertions that the Stripe Directors were knowingly concerned in breaches of fiduciary duty by Stripe follow a pattern similar to that of the assertions that the Stripe Directors were involved in the contravention by Stripe.

36    Paragraph 34 of the Statement of Claim asserts that, as a result of entering into the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement, a relationship of trust and confidence existed as between Stripe, as financial advisor, on the one hand, and each of Rastus, Young Investments and Reid Park as clients, respectively, on the other hand. It alleges that, pursuant to that relationship, when providing advice in relation to, and in undertaking trading in, securities on account of its clients, Stripe was subject to fiduciary duties:

    to act in good faith and in the best interests of its clients;

    not to put itself in a position where its own interest conflicted with that of its clients; and

    not to act for its own benefit, save as authorised to do so.

37    Paragraph 34.3 alleges that, in breach of those fiduciary duties, Stripe undertook unauthorised discretionary trading that was not in the best interest of its clients, undertook high volume trading of securities in order to effect transactions on which commission would be earned by it, without instructions or authorisation, and, also without instructions or authorisation, made drawings on the facility with Leveraged Equities for the purpose of undertaking high volume trading in securities without any reasonably commensurate benefit to the risk to which Young Investments or Reid Park were being exposed, contrary to their interests.

38    Paragraph 36.1 alleges that the conduct alleged in paragraph 34.3 was in breach of the fiduciary duty pleaded, or, alternatively, was in furtherance of the dishonest and fraudulent design of Stripe to effect the alleged breaches of fiduciary duty. Next, paragraph 36.2 of the Statement of Claim alleges that the Stripe Directors knew that a relationship of trust and confidence existed as between Stripe, as financial advisor, on the one hand, and the Corporate Appellants, as clients, on the other hand, and that, when providing advice and undertaking trading in securities on account of its clients, Stripe was subject to the fiduciary duties described above. In addition, paragraph 36.3 alleges that it was reasonably foreseeable that the failure by the Stripe Directors to take reasonable care to cause Stripe to comply with its fiduciary duties was likely to cause loss to Stripe’s clients and that, in those circumstances, the Stripe directors had a duty to take reasonable care to cause Stripe to comply with its fiduciary duties. That is similar to the duty to Stripe’s clients alleged in paragraph 29.2.

39    Paragraphs 36.4 to 36.7 of the Statement of Claim repeat, in substance, the allegations made in paragraphs 29.3 to 29.6. Paragraph 36.8 then asserts that the Stripe Directors knew that Stripe was in breach of its fiduciary duties, and paragraph 36.9 asserts that, notwithstanding that knowledge, the Stripe Directors failed to cause Stripe to cease acting in breach of, or to cause Stripe to fulfil, Stripe’s fiduciary duties. As a result of that conduct, Stripe was able to engage in the conduct described in paragraph 29.9 of the Statement of Claim. It is alleged that, in those circumstances, the Stripe Directors were knowingly concerned in the breaches of fiduciary duties, and, by reason of that conduct, the Corporate Appellants suffered the loss and damage described in paragraph 29.11.

THE DEFICIENCIES IN THE STATEMENT OF CLAIM

40    The deficiencies in the Statement of Claim about which complaint is made are principally concerned with the allegation of knowledge. It is convenient to deal with the deficiencies in relation to the Stripe Directors. The deficiencies described below apply equally to the counts against the ASANDAS Directors. Knowledge is an essential element in both causes of action. The Statement of Claim makes an effort to satisfy the Rules, insofar as it sets out some facts upon which the allegation of knowledge is based and some facts on the basis of which it is alleged that knowledge ought to have been acquired. The effort is not entirely satisfactory.

The Directors’ Duty to Stripe Clients

41    An essential element in the pleading of knowledge on the part of the Stripe Directors is the duty allegedly owed by the Stripe Directors to Stripe’s clients to cause Stripe to fulfil the obligations of Stripe, either statutory or fiduciary. The duty is said to arise merely from the knowledge that the relevant representations had been made or that fiduciary obligations were owed, coupled with knowledge of the foreseeability of loss by reason of the representation being false or the duties being breached. That appears to be a somewhat novel proposition.

42    It may be that that the pleader did not intend to allege that there was such a duty owed by the Stripe Directors to Stripe’s clients. Rather, it may have been intended to allege no more than some practical imperative. That is to say, it may have been intended to allege only that any competent and diligent director would take steps to ensure that his or her company does in fact comply with all of its obligations, both statutory and fiduciary, and that a director who failed to do so would be wilfully shutting his or her eyes to the consequences, would be wilfully reckless, and would not be acting as an honest and reasonable person.

43    Thus, the alternative pleaded assertion that, if there was no system implemented or maintained for reporting of trading, the Stripe Directors wilfully shut their eyes, were wilful and reckless and failed to undertake enquiries that would have been made by an honest and reasonable person, may have been intended as no more than an assertion that such a practical imperative would have compelled the Stripe Directors to implement and maintain an appropriate system of reporting. On that basis, the assertion intended may have been that, since the Stripe Directors were competent and diligent, the practical imperative gives rise to the inference that they did, in fact, have arrangements in place to ensure that they could monitor the conduct of Stripe’s business by its brokers and its employees and executives.

44    Thus, the Statement of Claim may have been intended to allege only that the inference should be drawn that the Stripe Directors had implemented and maintained an adequate system for reporting, because only a director who was wilfully blind, wilful and reckless or acting unreasonably and dishonestly would have failed to do so. That is to say, the Stripe Directors had in fact put in place a system that resulted in their having access to information concerning, and being promptly informed of, and accordingly they had actual knowledge of, the extent of the trading in securities on the account of clients that were undertaken by Stripe’s brokers, as alleged in paragraph 29.3.

45    That, however, is not what is pleaded. Further, there is a real question as to whether the facts alleged could lead to the conclusion that an inference of knowledge on the part of the Stripe Directors can be drawn, as the Statement of Claim seeks to do.

Involved in Contravention of the Corporations Act

46    Under s 912A(1) of the Corporations Act, the holder of a financial services licence must:

    ensure that the financial services are provided efficiently, honestly and fairly;

    have in place adequate arrangements for the management of conflicts of interest that may arise in relation to activities undertaken;

    comply with the conditions on the licence;

    comply with the financial services laws;

    ensure that its representatives comply with the financial services laws;

    have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements;

    maintain the competence to provide financial services;

    ensure that its representatives are adequately trained and are competent to provide financial services;

    have a dispute resolution system if financial services are provided to persons as retail clients; and

    have adequate risk management systems.

47    There is a clear correlation between the terms of the Stripe Duties, as formulated in paragraph 15 of the Statement of Claim, and the obligations of the holder of a financial services licence under s 912A(1) of the Corporations Act. That is to say, the provisions of s 912A(1) are reflected in the terms of the specific duties said to constitute the Stripe Duties and in the particulars of the making of the Duties Representation. As the holder of a financial services licence, ASANDAS has the obligations referred to in that provision. Under s 917B, a licensee is responsible, as between the licensee and the client, for the conduct of the representative. Under s 917E, the responsibility of a holder of a financial services licence extends so as to make the licensee liable to the client in respect of any loss or damage suffered by the client as a result of the conduct of a representative of the licensee.

48    Thus, the provisions of the Corporations Act appear to have a significant part to play in the circumstances that are said to give rise to the making of the Duties Representation. The allegation is that Ms Young was informed that Stripe was an authorised representative of a licensed financial services provider, namely ASANDAS, and that Ms Young was informed that, if the Corporate Appellants engaged Stripe, Stripe would provide them with financial services including financial product advice. However, it is difficult to see how the alleged Duties Representation (that Stripe would fulfil the Stripe Duties) and the Disclosure Representation (that Stripe would disclose to its clients the fact that it would no longer fulfil the Stripe Duties) arise from the facts alleged in the Statement of Claim.

49    More significantly, however, paragraph 29.1 of the Statement of Claim asserts that the Stripe Directors knew that, prior to the parties entering into the Rastus Agreement, the Young Investments Agreement and the Reid Park Agreement, Stripe had made the Duties Representation. The Duties Representation is said to have been implied from statements made by Mr King to Ms Young, from the terms of the agreements between Stripe and the Corporate Appellants, and from written material provided to Ms Young by Stripe in July 2006 and June 2007. However, there is no allegation of knowledge of those facts on the part of the Stripe Directors. It is also unclear how the terms of the agreements are said to provide any basis upon which the Duties Representation, which preceded those agreements, could be implied. It is impossible to see, from the pleading, how the Stripe Directors are alleged to have known of the Duties Representation.

50    Paragraph 29.1 also asserts that the Stripe Directors knew that Stripe had made the Disclosure Representation. However, the Disclosure Representation is said to be implied from the fact that the Duties Representation was a representation in relation to the ongoing future conduct by Stripe. There is therefore no allegation of knowledge on the part of the Stripe Directors of facts that are said to give rise to the Disclosure Representation.

51    The deficiency in particulars of that knowledge of the Stripe Directors is compounded by the doubt adverted to above as to what is the contravention. As indicated above, the contravention is probably the contravention of s 1041H of the Corporations Act alleged in paragraph 28.3. That conduct is the making of the Duties Representation, in circumstances where it is alleged, in paragraph 28.3, that the Duties Representation was not true. However, paragraph 29.10 asserts that the Stripe Directors were involved in the contravention, inter alia, “by their omission to give notice of the change of circumstances, directly or indirectly, being knowingly concerned in or a party to the contravention”. There is circularity in that assertion. It appears to be an allegation that the Stripe Directors were involved in the contravention because they were knowingly concerned in or a party to the contravention. There is no allegation of facts that constitute the Stripe Directors being concerned in or being a party to the contravention, in circumstances where the contravention was making a false representation that Stripe would fulfil the Stripe Duties.

52    It is impossible to discern from the allegations made in the Statement of Claim what is alleged to be the causal connection between the involvement of the Stripe Directors in the alleged contravention, on the one hand, and the trading losses alleged to have been suffered by the Corporate Appellants, on the other. Thus, the Statement of Claim makes no assertion as to the time when it is alleged that the Stripe Directors knew, or are to be fixed with knowledge of, the fact that trading activities were being undertaken that were unauthorised, inappropriate and for the purpose of earning commission for Stripe, such that, having acquired that knowledge, they should have intervened to prevent further trading activity of that character or at least to give notice that there was a change of circumstances. The Statement of Claim simply alleges that trading activity was engaged in over a period of approximately 12 months. There is nothing to indicate at what stage the trading activity was such that its magnitude indicated that it was unauthorised, inappropriate and for an improper use. That is a significant deficiency, in circumstances where it is alleged that the Stripe Directors knew of the failure by Stripe.

53    The Statement of Claim asserts that the mere magnitude of the trading activity undertaken by Stripe, being an extent of trading that was exceptional and extraordinary, indicated that the trading that was being undertaken was unauthorised, inappropriate and for the purposes of earning commission for Stripe. It is quite unclear how the matters alleged in paragraph 29.4 indicate that trading activity that was being undertaken was unauthorised, inappropriate and for the purposes of earning commission for Stripe. The allegation is simply that:

    in approximately 12 months, using investment funds of approximately $8 million, trading in securities was undertaken to the value of $123,269,784;

    single trades were undertaken for which the consideration was greater than $50,000; and

    daily trading was undertaken in excess of $500,000.

54    There is no allegation of knowledge on the part of the Stripe Directors of the matters alleged in paragraph 28.3 by reason of which it is asserted that the Duties Representation was not true. The most that appears to be asserted is that the Stripe Directors became aware of trading being undertaken that was unauthorised, inappropriate and for the purpose of earning commission for Stripe, and therefore that Stripe was in breach of the Disclosure Representation. There is no indication as to how the knowledge of trading that was unauthorised, inappropriate or for the purpose of earning commission constitutes aiding, abetting, counselling or procuring any contravention by Stripe of s 1041H, by making the Duties Representation, in circumstances where the Duties Representation is false.

Knowingly Concerned in Breach of Fiduciary Duties

55    Under the second limb of Barnes v Addy, a person is liable for breach of fiduciary duty if that person has knowledge of a dishonest and fraudulent design on the part of a fiduciary and that person assists the fiduciary to carry out that design. It is customary to analyse that requirement of knowledge by reference to the following five categories:

    actual knowledge;

    wilfully shutting one’s eyes to the obvious;

    wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make;

    knowledge of circumstances that would indicate the facts to an honest and reasonable person; and

    knowledge of circumstances that would put an honest and reasonable person on enquiry.

The first three categories are generally taken to involve actual knowledge, as understood both at common law and in equity. The last two are generally taken as instances of constructive knowledge, as developed in equity. While there may be some doubt as to the utility of the categorisation, it may be helpful in identifying the different relevant states of knowledge for the purposes of a case based on the second limb of Barnes v Addy (see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160] and [174] (Farah Constructions)).

56    In order to succeed in a case based on the second limb, it must be established that the fiduciary embarked upon a dishonest and fraudulent design. It must also be established that the alleged assistor had knowledge, in one of the first four senses just described, of that dishonest and fraudulent design. While dishonest and fraudulent designs can include breaches of trust as well as breaches of fiduciary duty, any breach of trust or breach of fiduciary duty relied upon must be dishonest and fraudulent (see Farah Constructions at [177] and [179]).

57    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

58    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.

59    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.

60    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.

61    Curiously, however, the appellants did not suggest to the primary judge that any of the criticisms directed to the Statement of Claim could be cured by amendment. No specific leave to re-plead was sought. There was no suggestion that material facts or particulars could be provided to cure the deficiency if another opportunity were given. Further, there is no ground of appeal that the primary judge erred in failing to afford the appellants the opportunity to re-plead their claims against the Stripe Directors and the ASANDAS Directors. Indeed, senior counsel for the appellants did not suggest, on the hearing of this appeal, that any amendment could cure the deficiencies described above.

62    In the circumstances, the appeal should be dismissed with costs. Nevertheless, there may yet be an arguable case against the Stripe Directors and the ASANDAS Directors. If the pleading were clearly capable of being cured with the inclusion of material facts, then to deprive the appellants of an opportunity to advance a pleadable case may be unusual, despite the failed attempts to do so to date. However, as there is no suggested cure for the deficiency, and absent material facts, the respondent directors should not be required to have this litigation hanging over their heads. Whether the doctrines of res judicata or issue estoppel would bar the appellants from commencing a fresh proceeding that overcomes the deficiencies outlined above is a question for another day.

Associate:

Dated:    14 August 2012