FEDERAL COURT OF AUSTRALIA

Hunter Valley Community Investments Pty Ltd v Bell [2001] FCA 201

PRACTICE AND PROCEDURE – representative proceedings – pleadings – three representative applicants bringing claims against four respondents – whether facts pleaded establish that each member of represented classes has a claim against all respondents – whether pleadings adequate to enable respondents to understand the case against them – whether claims give rise to a substantial common issue of law or fact – whether claims founded in same, similar or related circumstances – pleadings struck out – whether leave to replead should be granted.

CORPORATIONS – deregistration – company deregistered after commencing proceedings – whether company should be given leave to replead prior to reinstatement.

COURTS AND JUDGES – whether foreshadowing of constitutional issue sufficient to enliven federal jurisdiction.

Federal Court of Australia Act 1976 (Cth), ss 33C, 33H, 33N.

Corporations Law, s 601AH.

Trade Practices Act 1974 (Cth), ss 51A, 52, 75B, 82.

Judiciary Act 1903 (Cth), s 39B(1A).

Supreme Court Act 1986 (Vic), Part IVA.

Federal Court Rules, O 11.

Philip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487, applied

Cummings v Lewis (1993) 41 FCR 559, cited.

Re Morton; Ex parte Mitchell Products Pty Ltd (1996) 21 ACSR 497, cited.

Sweeney & Vandeleur Pty Ltd v BNY Australia Pty Ltd (1993) 11 ACSR 356, cited.

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, cited.

Femcare Ltd v Bright (2000) 100 FCR 331, cited.

King v GIO Australia Holdings Ltd (2000) 100 FCR 209, discussed

King v GIO Australia Holdings Ltd [2000] FCA 1543, cited.

Wong v Silkfield Pty Ltd (1999) 199 CLR 255, cited.

Johnson Tiles Ltd v Esso Australia Ltd (1999) ATPR 41-679, cited.

Western Australia v Wardley Australia Ltd (1991) 30 FCR 245, cited.

Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384, cited.

Australian Solar Mesh Sales Pty Ltd v Anderson (2000) 101 FCR 1, cited.

Re Wakim; Ex parte McNally (1999) 198 CLR 511, cited.

Australian Law Reform Commission, Grouped Proceedings in the Federal Court (ALRC 46).

HUNTER VALLEY COMMUNITY INVESTMENTS PTY LIMITED & ORS v JOHN WILLIAM BELL & ORS

N 437 of 2000

SACKVILLE J

SYDNEY

9 MARCH 2001

THE COURT ORDERS THAT:

1.      The second, third and fourth applicants’ motion filed on 6 December 2000 be dismissed.

2.      The amended application and the amended statement of claim, insofar as they seek relief or plead a claim against the first respondent, be struck out.

3.      The first respondent’s motion filed on 24 October 2000 otherwise be dismissed.

4.      The amended application and the amended statement of claim, insofar as they seek relief or plead a claim against the fourth respondent, be struck out.

5.      Leave be granted to the second, third and fourth applicants to file and serve a further amended application and a further amended statement of claim against the first, second and third respondents.

6.      The second, third and fourth applicants pay:

(i)         the respondents’ costs of the second, third and fourth applicants’ motion filed on 6 December 2000;

(ii)        the first respondent’s costs of his motion filed on 24 October 2000;

(iii)       the first named fourth respondent’s costs of his motion filed on 27 October 2000;

(iv)       the second named fourth respondent’s costs of his amended motion filed on 23 October 2000.

7.      Liberty to apply on 72 hours notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

the proceedings

1                     These representative proceedings were commenced on 4 May 2000, pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”).  The proceedings relate to the Hunter Valley Community Investments Limited Partnership (“the Partnership”), which was set up in June 1992.  The Partnership was established as part of a scheme (“the Scheme”) which was promoted to potential investors as providing a tax-effective form of investment suitable for wage and salary earners. 

2                     It appears that the proceedings were instituted in this Court in consequence of amended income tax assessments issued by the Commissioner of Taxation (“the Commissioner”) to the limited partners, following a tax audit of the Partnership’s affairs.  The amended assessments disallowed deductions claimed by the limited partners in respect of certain losses distributed to them by the Partnership.  In addition, the amended assessments imposed penalties and interest on each limited partner. 

3                     The applicants’ case is currently pleaded in an amended application and an amended statement of claim filed on 8 September 2000.  (I refer to these pleadings as the “current application” and “the current statement of claim” respectively.)  The applicants recognise that the current pleadings are deficient.  For this reason, the second, third and fourth applicants filed a motion on 6 December 2000 seeking leave to file a further amended application and a further amended statement of claim in the form annexed to the motion.  (I refer to these pleadings, respectively, as the “proposed application” and the “proposed statement of claim”.) The first applicant is not a party to the motion, presumably because it is a corporation which was deregistered on 28 June 2000, some seven weeks after the proceedings were commenced.

4                     The applicants’ motion was preceded by two motions filed on behalf of respondents in the proceedings.  On 24 October 2000, the first respondent filed a motion seeking orders striking out certain paragraphs of the current statement of claim and seeking a direction, pursuant to s 33N(1) of the Federal Court Act, that the proceedings not continue as representative proceedings.  On 23 and 27 October 2000 respectively, each of the fourth respondents filed motions seeking orders striking out other portions of the current statement of claim, and seeking orders dismissing the proceedings as against them.  The second-named fourth respondent also sought an order, pursuant to s 33N(1), that the proceedings not continue as representative proceedings.

5                     All three motions were listed for hearing on the same day.  I directed that they should all be heard together.

6                     Mr Ashhurst, who appeared for the applicants, did not attempt to support the current pleadings.  Moreover, he accepted that there were flaws in the proposed pleadings that required them to be recast.  He also accepted that, at the least, any leave to replead a case on behalf of the first applicant should be conditional upon its registration being reinstated.  The area of dispute among the parties was therefore relatively circumscribed.  The major controversy was whether the applicants should be given leave to replead their case against each of the respondents.  In order to address that question, it is necessary to consider the case pleaded by the applicants and the defects in the current pleadings.

the parties

7                     The first applicant (“Hunter Valley”) was the general partner of the Partnership, having control and management of its affairs.  As already noted, Hunter Valley was deregistered as a company on 28 June 2000.  Mr Ashhurst informed me that an application has been lodged in the Supreme Court of New South Wales seeking orders for the reinstatement of Hunter Valley, pursuant to s 601AH(2) of the Corporations Law.  In these proceedings, Hunter Valley sues on its own behalf and does not represent any group members.

8                     Each of the second, third and fourth applicants is a limited partner of the Partnership.

·        The third applicant is said to represent some thirty-eight limited partners whose income tax returns for one or more of the financial years 1992 to 1995 were prepared by the second or third respondents (who are accountants).

·        The fourth applicant is said to represent some twenty-two limited partners whose income tax returns for the relevant years were prepared by the fourth respondent (another firm of accountants).

·        The second applicant is said to represent some thirty-four limited partners whose income tax returns for the relevant years were prepared by accountants other than the second, third or fourth respondents.

9                     The first respondent (“Mr Bell”) is alleged to have been the promoter of the Scheme.

10                  The second respondent (“Lawler Davidson”) is a company which carried on business providing accounting and taxation advice to members of the public.  The third respondent (“Lawler Davidson Partners”) is a partnership carrying on a similar business.  There is obviously a close relationship between Lawler Davidson and Lawler Davidson Partners, although the proposed pleadings do not make clear the precise nature of that relationship.

11                  The fourth respondent (“Walker and Co”) is a partnership carrying on a chartered accountancy practice.  The two members of the partnership are named as respondents.  Although the two partners have separate solicitors, Mr Leopold appeared on behalf of both at the hearing of the motions.

the pleaded case

causes of action

12                  It must be said that it is not easy to follow the structure of the proposed statement of claim.  In part, this is because the pleading does not adopt the conventional technique of pleading material facts in more or less chronological order.  Be that as it may, the proposed statement of claim pleads six distinct causes of action.  None involves a claim by all four applicants against all four respondents.

1.         The Applicants’ First Misleading and Deceptive Conduct Claim

13                  The applicants allege that three of the four respondents, that is Bell, Lawler Davidson and Lawler Davidson Partners, engaged in misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (“TP Act”).  The misleading and deceptive conduct is said to consist of written representations made to each of the applicants during a three and a half year period from May 1992 to December 1995.  While the proposed statement of claim (par 18) does not make the position clear, it is apparently intended to plead that each of the three respondents made each of the representations to each of the four applicants.  The proposed statement of claim does not identify the documents containing the representations.  No reference is made in this portion of the pleading to any of the group members.

14                  Each of the representations alleged to have been made appears to relate to a future matter.  For example, it is alleged that the three respondents represented that each instalment paid to the Scheme would be fully tax deductible (par 18(a)) and that areas of investment were likely to include such activities as real estate development, rural industries and tourism (par 18(c)).  Each representation is said to have been false, not because the respondents had no reasonable grounds for making them (see TP Act, s 51A(1)), but because the predicted event did not occur (pars 20, 21).

15                  The proposed statement of claim pleads that in reliance on the representations, Hunter Valley subscribed for certain shares and agreed to make certain payments (par 22).  The second, third and fourth applicants are said to have obtained loans and invested the loan funds in the Scheme (par 23).  The proposed statement of claim does not identify when the applicants acted in the manner described.  Some of the representations pleaded were apparently made after the second, third and fourth applicants participated in the Scheme.

16                  The proposed statement of claim includes (par 25) an allegation that Lawler Davidson and Lawler Davidson Partners were knowingly concerned in a contravention of s 75B of the TP Act.  The reference to s 75B is obviously an error for s 52 of the TP Act.  Independently of that error, Mr Ashhurst conceded that par 25 did not plead material facts sufficient to support a claim that Lawler Davidson and Lawler Davidson Partners had been knowingly concerned in a contravention of s 52 of the TP Act.

2.         The Applicants’ Second Misleading and Deceptive Conduct Claim

17                  The proposed statement of claim alleges that during the period June 1992 to December 1994 (apparently an error for December 1995) each of Bell, Lawler Davidson and Lawler Davidson Partners made further representations as to future matters (par 53).  The pleading does not identify the form of the alleged representations, but Mr Ashhurst informed me that the applicants intend to rely on oral and implied representations made by the three respondents over a three and a half year period.  Although the pleading is not clear, the intention is apparently to plead that each of the three respondents made the representations to each of the four applicants.  There is some overlap between the representations alleged in par 18 and those alleged in par 53.

18                  It is alleged that in reliance on these representations Hunter Valley participated in the Scheme (par 57).  The remaining applicants are said to have “joined in and/or continued to participate in the Scheme” in reliance on the representations (par 58).  They are also alleged to have relied on the representations in other respects, such as borrowing funds from Property Finance Pty Ltd, a company said to have been controlled by Mr Bell, and completing income tax returns from time to time.

19                  According to Mr Ashhurst, despite the express terms of the pleading, this portion of the proposed statement of claim was intended “primarily” to identify representations which induced the applicants to remain in the Scheme, rather than to join the Scheme in the first place.

3.         Hunter Valley’s Claim Against Lawler Davidson and Lawler Davidson Partners

20                  The proposed statement of claim alleges that Hunter Valley retained “Lawler Davidson and/or Lawler Davidson Partners” to advise it as to its tax affairs (par 72).  It is said that in breach of its or their duty under the retainer and under the general law, Lawler Davidson and/or Lawler Davidson Partners failed to provide proper advice as to the operation of the Scheme (par 73).  Consequently, it or they failed to advise Hunter Valley, inter alia, that the Partnership was not being conducted in accordance with the representations made to the applicants (par 74).  It or they also failed to advise Hunter Valley of the financial position of the Partnership and of the “taxation ramifications of entering into and participating in the Scheme”(par 78).  The pleadings do not spell out the consequences that are said to have flowed from these breaches.  Nor do they identify what action Hunter Valley would have taken had it received proper advice.

4.         Third Applicant’s Claim Against Lawler Davidson and Lawler Davidson Partners

21                  It is alleged that “Lawler Davidson and/or Lawler Davidson Partners” were retained to prepare the third applicant’s tax returns for the financial years 1992 to 1995 and to advise him as to his tax affairs (par 89).  It is said that Lawler Davidson and/or Lawler Davidson Partners, in breach of its or their duty, failed to ascertain either that the Partnership was not investing in areas of investment consistent with the representations made to the applicants or that the Partnership would never be able to make profits or claim deductions (par 91(i)).  It is also alleged that it was reasonably foreseeable that, if the Commissioner disallowed the deductions, the third applicant would have to pay tax, penalties and interest (par 91(vii)).  Once again, the pleadings neither specify the consequences of the alleged breach of duty nor the action the third applicant would have taken had Lawler Davidson and Lawler Davidson Partners discharged their duty faithfully.  In this connection, it is to be borne in mind that the pleaded retainer was apparently entered into after the third applicant had invested in the Scheme.

5.         The Applicants’ Claim Against Walker & Co

22                  The proposed pleadings do not allege that Walker & Co was a party to any misleading or deceptive conduct.  It is alleged, however, that in May 1995 Walker & Co were retained by each of the four applicants to audit the financial statements of the Partnership prepared by Lawler Davidson and/or Lawler Davidson Partners (par 60).  Walker & Co are said to have failed, in breach of their retainer and duty of care, to advise that the financial statements did not give a true and fair view of the financial performance and position of Hunter Valley and of the Partnership (pars 64, 70).

23                  The proposed pleadings do not specify the consequences of the alleged breach.  It is pleaded, however, that Walker & Co ought to have been aware that failure to properly advise the applicants could result in loss being suffered by them if the Commissioner issued amended assessments imposing penalties and interest.  The pleadings do not explain how the audit, if properly carried out, would have avoided the consequences for the limited partners flowing from the audit which is said to have been carried out by the Australian Tax Office in August 1995 (although it seems that the amended assessments were apparently not issued until much later).

6.                  The Fourth Applicant’s Claim Against Walker & Co

24                  This claim mirrors the third applicant’s claim against Lawler Davidson and Lawler Davidson Partners.  It is alleged that Walker & Co were retained to prepare the fourth applicant’s tax returns for the financial years 1992 to 1995 and to advise him as to his tax affairs (par 99).  The pleading replicates almost precisely the claims made by the third applicant against Lawler Davidson and Lawler Davidson Partners.

the relief sought

25                  The only relief sought by the applicants is damages (pars 108ff).  While pars 108ff of the proposed statement of claim (which set out the damages claims) contain cross-references to other paragraphs of the pleading, they do not specifically link the quantum of damages sought by the applicants to each of the distinct pleaded causes of action.

26                  Hunter Valley claims a total of approximately $4.1 million in capital contributions paid to it by the Limited Partners and subsequently used by it to pay interest.  It is said that Hunter Valley has suffered this loss by reason of the misleading and deceptive conduct pleaded earlier.  It is not clear what part, if any, of this loss is referable to Hunter Valley’s claim (which it makes in common with the other applicants) against Walker & Co.

27                  The second applicant claims the difference between the tax, penalties and interest he has had to pay for the financial years 1992 to 1995 and the tax, penalties and interest he would have paid had he not invested in the Scheme.  This loss is said to flow from the misleading and deceptive conduct on the part of Mr Bell, Lawler Davidson and Lawler Davidson Partners.  Again, it is not clear what part, if any, of this loss is referable to the second applicant’s claim (in common with the other applicants) against Walker & Co.

28                  The third applicant claims the same damages as the second applicant.  Those damages are said to flow from the causes of action founded on misleading and deceptive conduct.  They are also said to flow from the third applicant’s claim against Lawler Davidson and Lawler Davidson Partners, although there is no attempt to identify which losses flow from the alleged breach of duty to the third applicant.

29                  The fourth applicant’s claim for damages is expressed in identical terms to that of the third applicant, except that the fourth applicant’s claim for breach of retainer is against Walker & Co, rather than Lawler Davidson and Lawler Davidson Partners.

the “common questions”

30                  Section 33H(1)(c) of the Federal Court Act requires an application commencing a representative proceeding to “specify the questions of law or fact common to the claims of the group members”.  Paragraph 9 of the proposed application identifies the following questions of law or fact that are said to be common to the claims of Hunter Valley and the other applicants:

“Whether

(a)       [Mr Bell], [Lawler Davidson] and [Lawler Davidson Partners] promoted the limited partnership investment scheme known as Hunter Valley Community Investments Limited Partnership;

(b)             [Mr Bell], [Lawler Davidson] and [Lawler Davidson Partners] made representations that were misleading and deceptive within section 52 of the Trade Practices Act 1974 in respect of the Scheme;

(c)             [Lawler Davidson] and [Lawler Davidson Partners] provided accounting services to each of the Applicants as partners in the Limited Partnership for the years 1992 to 1995 inclusive;

(d)             in providing such services to each of the Applicants [Lawler Davidson] and [Lawler Davidson Partners] breached their retainer with, and/or duty of care to, each of the Applicants;

(e)             [Walker & Co] was retained to audit the financial statements of [Mr Bell] as General Partner of the Limited Partnership for at least the year ending 30 June 1993 (the “Retainer”);

(f)              [Walker & Co] breached the Retainer and/or breached its duty of care to each of the Applicants as partners in the Limited Partnership by failing to advise each of the Applicants that:

i.                    such financial statements were not a true and fair view of the financial performance and position of the First Applicant;

ii.                  …; and

iii.                the Applicants should not rely on the Financial Statements in their current form;

(g)             such failure to advise resulted in each of the Applicants losing the opportunity to have discovered in May 1995 the true nature of the misleading and deceptive conduct, breaches of retainer and/or negligence on the part of [Mr Bell], [Lawler Davidson] and [Lawler Davidson Partners];

(h)             the Applicants, and each of the group members represented by the Applicants, suffered loss and damage from the following:

i.                    any misleading and deceptive conduct by [Mr Bell], [Lawler Davidson] and [Lawler Davidson Partners] in relation to the Scheme;

ii.                  any breach of retainer and/or duty of care which [Lawler Davidson] and [Lawler Davidson Partners] owed to each of the Applicants as partners in the Limited Partnership in providing accounting services to such Applicants for the years 1992 to 1995 inclusive; and

iii.                any breach of retainer and/or duty of care which [Walker & Co] owed to each of the Applicants as partners in the Limited Partnership in providing accounting services to such Applicants for at least the 1993 financial year.”

defects in the proposed pleadings

31                  Mr Ashhurst accepted that the proposed statement of claim is deficient in certain respects and requires redrafting.  It is therefore perhaps unnecessary to identify the defects in any detail.  Nonetheless, since Mr Ashhurst did not accept some of the criticisms levelled at the proposed pleadings, it may be helpful for the future conduct of the proceedings to identify the principal difficulties with the proposed application and statement of claim.

the claims of represented parties

32                  Section 33C(1) of the Federal Court Act provides as follows:

“33C(1)          Subject to this Part, where:

(a)               7 or more persons have claims against the same person;

(b)               the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and

(c)               the claims of all those persons give rise to a substantial common issue of law or fact;

a proceeding may be commenced by one or more of those persons as representing some or all of them.”

33                  In Philip Morris (Australia) Pty Ltd v Nixon (2000) 170 ALR 487, the Full Court accepted that, in order to satisfy s 33C(1)(a), it is necessary for the pleadings to allege facts establishing that the applicants and every member of the represented class have a claim against every respondent: at 511, per Sackville J, with whom Spender and Hill JJ agreed.  It was also accepted (at 510) that applicants must plead adequately the case alleged by them on their own behalf and on behalf of all members of the represented class.  So far as the group members are concerned, the Full Court expressed the view that, (at 515-516) depending on the circumstances of the particular case, it may be sufficient to plead the case of each group member at a “reasonably high level of generality”.  But the claim of each group member must be pleaded.

34                  The proposed statement of claim makes no attempt to plead facts establishing that each member of the three represented classes has a claim against all four respondents.  Indeed there is no attempt to plead the case of any group members, whether at a high level of generality or otherwise.  This is a fundamental defect in the proposed statement of claim.

35                  There is a related defect in the proposed application.  Section 33H(1) requires an application commencing a representative proceeding to

“(a)     describe or otherwise identify the group members to whom the proceeding relates; and

(b)           specify the nature of the claims made on behalf of the group members and the relief claimed; and

(c)           specify the questions of law or fact common to the claims of the group members.”

In order for a representative proceeding to be properly constituted, the application must include the three categories of information specified in s 33H(1): Philip Morris v Nixon, at 514.

36                  The proposed application does not specify the nature of the claims made on behalf of the group members and the relief claimed.  Nor does it specify questions of law or fact common to the claims of the group members (see [61]-[62] below).  The proposed application therefore does not comply with the threshold requirements of s 33H of the Federal Court Act.

acknowledged pleading defects

37                  Mr Ashhurst acknowledged that, in certain respects, the proposed statement of claim did not meet the requirements applicable to pleadings in this Court: see Federal Court Rules (“FCR”) O 11; Philip Morris v Nixon, at 515-516.  In particular, he acknowledged the following defects:

·        The allegation that Lawler Davidson and Lawler Davidson Partners had been knowingly concerned in Mr Bell’s contravention of s 52 of the TP Act omits material facts necessary to make out the claim.  Accordingly, this claim must be repleaded if it is to be tenable.

·        The proposed statement of claim does not identify the loss or damage caused by the conduct of the various respondents.  Nor does it address what the various applicants would have done had Lawler Davidson, Lawler Davidson Partners and Walker & Co not breached the duties they are said to have owed the applicants.  Mr Ashhurst, as I understood him, accepted that the question of causation should be addressed specifically, by reference to each of the pleaded causes of action.  I should perhaps add that it is particularly difficult to follow what loss or damage is said to have been caused to the applicants by Walker & Co’s alleged failure to carry out with due care their retainer to audit the affairs of the Partnership in 1995, since the audit appears to post-date most if not all the events referred to elsewhere in the proposed statement of claim.

other pleading defects

38                  A difficulty pervading the proposed statement of claim, albeit not a defect conceded by Mr Ashhurst, is that it pleads only the outline of a case, omitting material facts necessary to enable the respondents to understand the case made against them.  In certain other respects the pleading is misleading or confusing.  I give the following as illustrations of these difficulties.

39                  It is alleged (par 18) that over a three and a half year period each of Mr Bell, Lawler Davidson and Lawler Davidson Partners made a series of written representations concerning the Scheme.  The proposed statement of claim does not identify any of the documents in which these representations were allegedly made.  Nor does it plead facts demonstrating that each of the three respondents did make the alleged representations or that they acted in concert.  The case that is to be made against them therefore remains unclear.  To take Lawler Davidson as an example, do the applicants say that it prepared and published brochures or information sheets relating to the Scheme?  Or is it alleged that Lawler Davidson authorised Mr Bell to prepare and publish documentation on its behalf?  If the latter, how and when was Mr Bell authorised to act on Lawler Davidson’s behalf?

40                  I do not suggest that the pleading at this stage necessarily should identify every document on which the applicants ultimately rely to support the allegations made in par 18 of the proposed statement of claim.  But unless a more detailed case is pleaded, the respondents cannot be reasonably expected to understand the case to be made against them.  Much the same can be said about the allegation (par 15) that Mr Bell, Lawler Davidson and Lawler Davidson Partners “promoted” the Scheme.

41                  A different problem concerns the pleading relating to misleading and deceptive character of the representations said to have been made by Mr Bell, Lawler Davidson and Lawler Davidson Partners.  All of the alleged representations relate to future matters.  The proposed statement of claim pleads (par 20) that the representations were misleading and deceptive because the represented future matters did not in fact come to pass.  But the applicants’ case is presumably that the respondents had no reasonable grounds for making the representations (TP Act, s 51A(1)), not that the predictions did not come true.  Of course, the representor bears the burden of adducing evidence to show that it had reasonable grounds for making the representations: TP Act, s 51A(2).  And the applicants may not need to refer specifically to s 51A of the TP Act in the pleading: Cummings v Lewis (1993) 41 FCR 559, at 567-568, per Sheppard and Neaves JJ.  But the pleading should identify correctly the basis on which conduct is said to be misleading and deceptive.

42                  Similar criticisms can be made about the second count of misleading and deceptive conduct (par 53ff) as have been made about the first.  The difficulties presented by this portion of the pleading are compounded by the pleader’s failure to make clear the distinction between misleading and deceptive conduct inducing applicants to enter the Scheme and such conduct inducing applicants to remain in the Scheme.  Mr Ashhurst said that in this portion of the proposed statement of claim the applicants intended principally to plead that the conduct induced the applicants to remain in the Scheme.  The wording of the pleading suggests otherwise.  The confusion needs to be remedied.  When it is, attention will need to be paid to the consequences that are said to flow for each applicant or represented party who is said to have been induced to remain in the Scheme.  Attention will also need to be paid to the factual foundation for the claim (which I was told the applicants wish to make) that each of the first three respondents made oral or implied representations in substantially the same terms over a three and a half year period to at least ninety-four group members.

43                  The claims of the third applicant against Lawler Davidson and Lawler Davidson Partners are founded on breach of retainer and breach of duty.  No particulars of the retainer are provided.  Moreover, the pleading does not address what the third applicant would have done had he been property advised.  This is a matter of some importance since the retainer was presumably entered into after the third applicant had committed himself to the Scheme.  Similar criticisms apply to the manner in which the case of the fourth applicant against Walker & Co is pleaded.

the position of the first applicant

44                  In my view leave, whether conditional or otherwise, should not be given to the first applicant to replead its case.  I explained the position of a deregistered company in Re Morton; Ex parte Mitchell Products Pty Ltd (1996) 21 ACSR 497, at 514-515.  Once the company is deregistered, it ceases to be a legal person.  The fact that an application can be made to reinstate the company and that the reinstatement, if granted, is effectively retrospective to the date of dissolution (see now Corporations Law, s 601AH(5)) does not mean that in the interim the company continues to exist: Sweeney & Vandeleur Pty Ltd v BNY Australia Ltd (1993) 11 ACSR 356 (SCt NSW), at 360, per Cole J.  It follows that no order granting Hunter Valley leave to replead can be made until after it has been reinstated pursuant to the Corporations Law, s 601AH.  I express no view on whether any claims that might ultimately be made on behalf of the first applicant (assuming it succeeds in being reinstated) can properly form part of the representative proceedings.

repleading the case against mr bell, lawler davidson and lawler davidson partners

45                  Mr Manousaridis, who appeared on behalf of Mr Bell, and Mr Creais, who appeared on behalf of Lawler Davidson and Lawler Davidson Partners, submitted that the second, third and fourth applicants should be denied leave to replead their cases against their respective clients.  Neither Mr Manousaridis nor Mr Creais, as I understood them, suggested that it would be impossible for the three applicants to frame representative proceedings that complied with the requirements of Part IVA of the Federal Court Act, including ss 33C and 33H.  Rather, they submitted that the defects in the proposed pleadings were so egregious that, notwithstanding that the applicants had had several opportunities to plead their case, that any further pleading inevitably would be defective.

46                  These submissions have some force.  There is nothing in the history of these proceedings that inspires confidence that the second, third and fourth applicants will reformulate their pleadings in a manner that complies with Part IVA of the Federal Court Act and the rules of pleadings as they apply to representative proceedings.  They certainly will not be able to do so unless they remedy the deficiencies that have been identified in the proposed pleadings and carefully address the difficulties inherent in several applicants, each representing separate categories of group members, maintaining representative proceedings against several respondents.  Moreover, it is far from clear that the third applicant’s claim against Lawler Davidson and Lawler Davidson Partners can remain part of the representative proceedings.

47                  However, on balance, I think that the second, third and fourth applicants should be permitted to file a further amended application and a further amended statement of claim against Mr Bell, Lawler Davidson and Lawler Davidson Partners.  In the absence of a contention that the three applicants cannot plead a case complying with the requirements of Part IVA of the Federal Court Act, they should not be precluded from attempting to do so.

48                  In reaching this conclusion, I have not overlooked the submission made on behalf of Lawler Davidson and Lawler Davidson Partners that any causes of action founded on their alleged misleading and deceptive conduct must be statute-barred by reason of s 82(2) of the TP Act (which provides for a three year limitation period in an action for damages by reason of a contravention of s 52 of the TP Act).  Having regard to the observations of the High Court in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514,it is clearly premature to determine whether those causes of action are statute-barred.

49                  None of this is to say that a further amended application and further amended statement of claim will be immune from challenge.  As I have indicated, there are inherent difficulties in satisfactorily pleading a case on behalf of three categories of represented persons against three respondents.  If the next attempt proves vulnerable to substantial challenge, the time may have well have come to bring the representative proceedings to a halt.

THE CASE AGAINST WALKER & CO

THE SUBMISSIONS

50                  Mr Leopold submitted that, whatever the position as between the second, third and fourth applicants and the other respondents, the applicants should not be permitted to replead their case against Walker & Co.  He pointed out that the two causes of action pleaded against Walker & Co were founded in contract and in tort and, of themselves, did not raise any claim under federal law.  The claims pleaded against Walker & Co arose out of:

·        the allegedly negligent audit of the financial statements of the Partnership, which Walker & Co conducted in May 1995; and

·        the allegedly negligent taxation advice given by Walker & Co to the fourth applicant, apparently after he had entered into the Scheme.

51                  Mr Leopold argued that the proposed application failed to identify any question of law or fact common to all claims of group members.  It followed that the proposed application failed to comply with the requirement in s 33H(1)(c) of the Federal Court Act, that an application commencing a representative proceeding “specify the questions of law or fact common to the claims of the group members”.  More importantly for present purposes, Mr Leopold contended that, even if the applicants attempted to replead their case, there still would be no substantial issue of law or fact common to the group members’ claims against Walker & Co and to their claims against the other respondents.  Thus any repleaded case would not satisfy s 33C(1)(c) of the Federal Court Act because the claims of all applicants and group members would not “give rise to a substantial common issue of law or fact”.

52                  Mr Leopold further submitted that the case pleaded against Walker & Co is quite distinct from that pleaded against the other respondents, both in a temporal and legal sense.  Accordingly, the claims pleaded are not “in respect of, or arise out of, the same, similar or related circumstances”, within the meaning of s 33C(1)(b) of the Federal Court Act.  Moreover, so he argued, the proceedings against Walker & Co are not capable of being repleaded in a manner that would comply with s 33C(1)(b) of the Federal Court Act.

53                  Finally, Mr Leopold submitted that, as the only causes of action pleaded against Walker & Co were in contract and tort and were distinct from the other pleaded causes of action, they did not fall within the accrued jurisdiction of the Federal Court.  The claims against Walker & Co formed no part of the “matter” over which the Court had jurisdiction.  At the same time as he made this submission, Mr Leopold foreshadowed that, depending on the outcome of the application for special leave to appeal to the High Court from the decision of the Full Court in Femcare Ltd v Bright (2000) 100 FCR 331, Walker & Co might wish to contend that Part IVA of the Federal Court Act is unconstitutional in whole or in part.  (The application for special leave to appeal has been referred to the Full Court of the High Court: Femcare Ltd v Bright (S110/2000, 15 December 2000).

54                  Mr Leopold’s first submission rested on the proposition that, for there to be a “substantial common issue of law or fact” within s 33C(1)(c) of the Federal Court Act in a representative proceeding involving more than one respondent, the issue must be common to the claims of all applicants and all group members against all respondents.  Mr Ashhurst accepted this proposition.  He maintained, however, that the proposed application identified a common issue, namely whether Walker & Co’s failure to advise the applicants that the financial statements of the Partnership did not give a true and fair view of Hunter Valley’s financial performance

“resulted in each of the Applicants losing the opportunity to have discovered in May 1995 the true nature of the misleading and deceptive conduct, breaches of retainer and/or negligence on the part of [Mr Bell], [Lawler Davidson] and [Lawler  Davidson Partners]” (par 9(g) of the proposed application).

Accordingly, so he argued, any repleading of the representative proceedings would raise a substantial question of law or fact common to the claims of all applicants and group members against all respondents, including Walker & Co.

55                  Mr Ashhurst gave a somewhat curious answer to Walker & Co’s contention that s 33C(1)(b) of the Federal Court Act had not been satisfied.  He submitted that s 33C(1)(b) is satisfied if the circumstances relating to the applicants and group members are the same, similar or related.  He contended that it is not necessary that the claims against the various respondents arise out of the same, similar or related circumstances.  I describe this contention as “curious” because if his submission holds good for s 33C(1)(b), it presumably holds good for s 33C(1)(c).  Yet Mr Ashhurst in effect conceded the point of construction in relation to the latter provision.

56                  In answer to Walker & Co’s third contention, Mr Ashhurst submitted that the Court had accrued jurisdiction to deal with the claim against Walker & Co.  The basis of this submission was that the claims against Walker & Co and the other respondents involved a common substratum of facts.  According to Mr Ashhurst, the claims involved the “existence and legitimacy” of the Scheme.  Moreover, so he contended, par 9(g) of the proposed application showed that the liability of Walker & Co depended substantially on whether valid claims could be established against any of the other respondents.  Mr Ashhurst did not address the significance of the constitutional argument foreshadowed by Mr Leopold, namely that Part IVA of the Federal Court Act is invalid in whole or in part.

the question of construction

57                  It is becoming increasingly frequent for representative proceedings to be brought by more than one representative applicant against more than one respondent.  Philip Morris v Nixon establishes that, in order to comply with s 33C(1)(a) of the Federal Court Act, every applicant and represented party must have a claim against all respondents.  In King v GIO Australia Holdings Ltd (2000) 100 FCR 209, Moore J considered the scope of the ruling in Philip Morris v Nixon.  His Honour said this (at 220-221):

“In my opinion, the decision of the Court in Philip Morris (Australia) Ltd v Nixon does not establish, for present purposes, more than that a proceeding may be brought as a representative proceeding against a number of respondents under Pt IVA if, and only if, each applicant and every member of the representative group has a claim against each respondent.  It does not establish that what constitutes a claim is to be viewed narrowly and that applicants and group members must, on that basis, have the same claim against all respondents.  However plainly, as Sackville J discussed, the claims must have sufficient in common to satisfy the requirements of both pars (b) and (c) of s 33C(1).

There is a clear requirement in s 33C(1)(a) that the group members must have, if there is one respondent, a claim against that respondent.  That is, each member must have a claim against that respondent.  However, it is equally clear that the claim, for the purposes of s 33C(1)(a), need not result in the same relief (s 33C(2)(a)(iv)), need not be based on the same conduct of the respondent (s 33C(2)(b)(ii)) and may arise out of different transactions with the respondent (s 33C(2)(b)(i)).  What the claims must have as unifying characteristics to permit their prosecution under Part IVA is that they are founded in the same, similar or related circumstances (s 33C(1)(b)) and give rise to a substantial common issue.  The common issue can be either of fact or law (s 33C(1)(c)).”

The Full Court refused leave to appeal from Moore J’s orders: King v GIO Australia Holdings Ltd [2000] FCA 1543.  In refusing leave, the Full Court said nothing about this passage.

58                  It is clear that Moore J had in mind that the claims of all applicants and group members against all respondents, while they do not have to be the same claims, must

·        be founded on the same, similar or related circumstances; and

·        give rise to at least one substantial common issue of fact or law.

In my respectful view, this construction of s 33C(1)(b) and (c) is correct.  It is consistent with the language of those provisions.  It also gives effect to the approach taken by the Law Reform Commission, Grouped Proceedings in the Federal Court (Report No 46, 1988), pars 134, 136-138.

a substantial common issue of law or fact?

59                  In Wong v Silkfield (1999) 199 CLR 255, the High Court held (at 267) that

“when used to identify the threshold requirements of s 33C(1), ‘substantial’ does not indicate that which is ‘large’ or ‘of special significance’ or would ‘have a major impact on the… litigation’ but, rather, is directed to issues which are ‘real or of substance’.”

The single substantial common issue identified in that case was the accuracy of a “serious and significant” representation allegedly made by the respondent.  The Court said that it was not to the point that this might not prove to be the “core” issue.  Nor was it

“necessary to show that litigation of the common issue would be likely to resolve wholly, or to any significant degree, the claims of all group members” (at 268).

60                  The approach of the High Court avoids what Merkel J described as “an overly legalistic approach” to the requirements in s 33C(1)(a) of the Federal Court Act: Johnson Tiles Ltd v Esso Australia Ltd [1999] ATPR 41-679, at 42,684.  But the applicants must be able to identify at least one issue of law or fact common to all claims.  And any issue so identified must be one that is “real or of substance”.  It is not enough, as Hedigan J recently observed in relation to the substantially identical Victorian legislation in Part IVA of the Supreme Court Act 1986 (Vic), to identify as common questions those that are “too general, address matters probably not in contention [or] address issues that are merely sub-sets of the principal matters in issue”: Cook v Pasminco Ltd [2000] VSC 534, at [56].

61                  Of the eight so-called common questions of law or fact identified in par 9 of the proposed application, seven plainly do not relate to the claims of all applicants against all respondents.  The only one that Mr Ashhurst suggested might be common to the claims of all applicants against all respondents is specified in sub-par (g), the terms of which are set out in [30] above.

62                  I am unable to understand how subpar (g) identifies an issue of fact or law common to the claims of all applicants against all respondents.  In the first place, the proposed statement of claim does not allege that a consequence of Walker & Co’s breach of retainer or duty was to deprive the applicants of the opportunity to have discovered in May 1995 “the true nature of the misleading and deceptive conduct…” of Mr Bell, Lawler Davidson and Lawler Davidson Partners.  In any event, subpar (g) identifies the issue as whether the applicants, by reason of Walker & Co’s breach of retainer or duty, lost that opportunity.  That issue is not common to all claims of the applicants against the other respondents, let alone the unpleaded claims of group members.

63                  The question then arises whether, if the applicants were to replead, they could identify a substantial issue of law or fact common both to the claims against Walker & Co and the claims against the other respondents.  This is not necessarily an easy question to resolve in the absence of a reformulated pleading.  It is nonetheless material to determining whether the applicants should be permitted to replead their case against Walker & Co in these representative proceedings.  It also must be said that the difficulty is of the applicants’ own making, since thus far they have not pleaded their case in a manner that conforms with the principles of pleading or with the requirements of Part IVA of the Federal Court Act.

64                  Mr Ashhurst asserted that an issue common to all claims in a reformulated pleading would be whether Mr Bell, Lawler Davidson and Lawler Davidson Partners had engaged in misleading or deceptive conduct in relation to the applicants.  This assertion was apparently based on the proposition that the applicants’ claim against Walker & Co for breach of duty or retainer would seek damages by reason of Walker & Co’s failure to reveal the misleading and deceptive conduct. It is, however, difficult to see how any reformulated statement of claim against Walker & Co could raise the issue of whether Mr Bell, Lawler Davidson and Lawler Davidson Partners had engaged in misleading and deceptive conduct.

65                  Confronted with this question, Mr Ashhurst suggested that, if the respondents other than Walker & Co relied on the three year limitation period specified in s 82(2) of the TP Act, the applicants might be able to claim against Walker & Co for the loss of their opportunity to claim damages under s 82(1) of the TP Act within the limitation period.  But it is for a respondent to assert non-compliance with the limitation period specified in s 82(2), rather than for an applicant to assert compliance: Western Australia v Wardley Australia Ltd (1991) 30 FCR 245, at 259, per curiam. Section 33C(1)(c) of the Federal Court Act operates, as the High Court pointed out in Wong v Silkfield, at 266, at the “threshold” of representative proceedings.  It is concerned with the “commencement, not subsequent conduct, of litigation” (ibid).  It may therefore be difficult to characterise an issue that will or may arise in proceedings only if a particular defence is pleaded, as either a substantial common question of law or fact for the purposes of s 33C(1)(c) or an issue of law or fact common to the claims of group members for the purposes of s 33H(1)(c) of the Federal Court Act. 

66                  I think that the highest the point can be put for the applicants is that there is a possibility that, if the case against Walker & Co were to be repleaded, they might be able to identify a substantial common issue of law or fact in the representative proceedings.  While that possibility cannot be entirely ruled out, in my view the strong likelihood is that any reformulated pleading will fail to satisfy either s 33C(1)(c) or s 33H(1)(c) of the Federal Court Act.

67                  I should add that, even if the claims against Walker & Co arising out of its alleged breach of retainer or duty to all four applicants can be said to give rise to a substantial issue common to the applicants’ claims against the other respondents, the issue would not be common to any claim against Walker & Co bought by the fourth applicant and the group members he represents.  Mr Ashhurst did not suggest otherwise.  On any view, therefore, not all claims against Walker & Co could be included in the representative proceedings.

related circumstances

68                  Section 33C(1)(b) of the Federal Court Act requires that the claims of all applicants and group members be “in respect of, or arise out of, the same, similar or related circumstances”.  In Philip Morris v Nixon it was said (at 522) that the observations of French J in Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384, at 404-405 provide a helpful guide to the application of s 33C(1)(b).  French J said this:

“The question whether the claims of the persons who are proposed as members of a group arise out of ‘the same, similar or related circumstances’ as required by s 33C(1) is not to be answered by an elaboration of that verbal formula. It contemplates a relationship between the circumstances of each claimant and specifies three sufficient relationships of widening ambit.  Each claim is based on a set of facts which may include acts, omissions, contracts, transactions and other events.  As appears from s 33C(2), the circumstances giving rise to claims by potential group members do not fall outside the scope of the legislation simply because they involve separate contracts or transactions between individual group members and the respondent or involve separate acts or omissions of the respondent done or omitted to be done in relation to individual group members.

The outer limits of eligibility for participation in representative proceedings are defined by reference to claims in respect of or arising out of related circumstances.  The word ‘related’ suggests a connection wider than identity or similarity.  In each case there is a threshold judgment on whether the similarities or relationships between circumstances giving rise to each claim are sufficient to merit their grouping as a representative proceeding.  At the margins, these will be practical judgments informed by the policy and purpose of the legislation. At some point along the spectrum of possible classes of claim, the relationship between the circumstances of each claim will be incapable of definition at a sufficient level of particularity, or too tenuous or remote to attract the application of the legislation.”

In Philip Morris v Nixon, after citing French J’s observations, I said (at 523) that

“[i]n the end, as the primary Judge acknowledged, a judgment must be made as to whether the circumstances giving rise to each claim are so disparate as to merit their grouping as a representative proceeding.”

69                  The proposed pleadings do not show, in my opinion, that the claims of the four applicants against Walker & Co are in respect of or arise out of related circumstances as the claims against the other respondents.  Walker & Co are not alleged to have been promoters of the Scheme.  Nor is it pleaded that Walker & Co made any misrepresentations concerning the Scheme to potential or actual members.  Walker & Co are alleged to have been appointed as independent auditors of Hunter Valley, apparently nearly three years after the Scheme was established and a similar period after the applicants decided to participate in it (although the proposed statement of claim is vague on precise dates). 

70                  The difficulty is not merely that the applicants’ transactions with Walker & Co were quite distinct from their transactions with the other respondents.  The transactions with Walker & Co occurred at different times and were entered into for different purposes and on different terms and conditions than those with the other respondents.  The acts or omissions alleged against Walker & Co concern the performance of their duties as auditors of Hunter Valley and are unrelated to the acts or omissions alleged against the other respondents.

71                  It is difficult to see how, if the applicants’ claim against Walker & Co were repleaded so as to include the claims of group members, the repleaded case could comply with s 33C(1)(b) of the Federal Court Act.  The claims against Walker & Co would still be in respect of circumstances quite different from and, in my view, unrelated to the circumstances giving rise to the claims against the other respondents.

72                  In considering whether s 33C(1)(b) of the Federal Court Act has been or can be satisfied, so far as the claims against Walker & Co are concerned, I have confined myself to the claim by all four applicants against Walker & Co for breach of their duty as auditor of Hunter Valley.  Much the same difficulties apply, however, to the claim pleaded in the proposed statement of claim against Walker & Co for breach of duty in preparing tax returns for the fourth applicant.  These difficulties would remain if the case were repleaded on behalf of the group members represented by the fourth applicant.

federal jurisdiction

73                  I do not think it is necessary to resolve finally the question of whether the Court has jurisdiction to entertain the case currently pleaded against Walker & Co. It would seem, however, that whatever the position concerning the accrued jurisdiction of the Court to deal with claims in contract or tort pleaded against Walker & Co, the Court has jurisdiction to entertain the claim.  This is because Walker & Co have foreshadowed a contention that Part IVA of the Federal Court Act is unconstitutional.  It is true that the contention has not yet been pleaded or argued.  The better view, however, is that a matter may arise under the Constitution or involve its interpretation, (Judiciary Act 1903 (Cth), s 39B(1A)(b)) once the constitutional question is identified as a serious issue in the proceedings: Australian Solar Mesh Sales Pty Ltd v Anderson (2000) 101 FCR 1, at 9, per Burchett J, with whom Wilcox and Tamberlin JJ agreed.  Since a Full High Court is considering the validity of Part IVA of the Federal Court Act and since Walker & Co have indicated that they wish to rely on the constitutional argument, the foreshadowed contention can hardly be regarded as raising other than a serious issue in the proceedings.

repleading?

74                  If the defects in the pleaded case against Walker & Co related only to a failure to adhere to the general rules of pleading or to plead the claims of the group members, I would be inclined to allow the applicants to continue the representative proceedings against Walker & Co, just as I have permitted the second, third and fourth applicants to replead their case against the other respondents.  But I think that the claims against Walker & Co stand in a different position to the claims against the other respondents.  In particular, for the reasons I have given, I think it is highly unlikely that any repleaded case against Walker & Co will satisfy the requirements of ss 33C and 33H of the Federal Court Act.  In these circumstances, the appropriate course is to bring the representative proceedings against Walker & Co to a halt now, rather than expose the parties to further wasteful and futile attempts by the applicants to reformulate their pleadings.

75                  I appreciate that this may have the consequence that any separate claims by the applicants against Walker & Co, since they do not of themselves appear to attract the original jurisdiction of the Federal Court (see Judiciary Act, s 39B), will have to be brought in the Supreme Court of New South Wales or another State court.  This may mean the representative proceedings will continue in this Court and the proceedings against Walker & Co in another.  If this state of affairs comes about, it is a product of the operation of Chapter III of the Constitution as interpreted by the High Court in Re Wakim; Ex parte McNally (1999) 198 CLR 511.  It is not a reason to allow representative proceedings to continue when they have not been and are very unlikely to be properly constituted.

orders

76                  The motion filed by the second, third and fourth applicants (“the applicants’ motion”) should be dismissed.  The second, third and fourth applicants should be granted leave, however, to replead as against Mr Bell, Lawler Davidson and Lawler Davidson Partners.  This grant of leave will not preclude any of the respondents seeking to strike out or otherwise challenge any reformulated pleadings filed pursuant to the grant of leave.

77                  The current application and statement of claim, insofar as they seek relief or plead a claim against Mr Bell, should be struck out.  Otherwise Mr Bell’s motion should be dismissed.

78                  Since Lawler Davidson and Lawler Davidson Partners have not filed any motion, I shall not make any order striking out the current pleadings insofar as those pleadings seek relief or plead a claim against them.  The current pleadings will, however, be superseded when amended pleadings are filed.

79                  The current application and statement of claim, insofar as they seek relief or plead claims against Walker & Co, should be struck out.  The applicants should be refused leave to replead their claims against Walker & Co in these represented proceedings.  The intention is that the second, third and fourth applicants should be at liberty to institute fresh proceedings against Walker & Co if they are so advised.  In case further orders are required to protect the position of the second, third and fourth applicants, for example, in relation to the imminent expiration of any applicable limitation period, I shall reserve liberty to apply.

80                  The second, third and fourth applicants should pay

(i)               the respondents’ costs of the applicant’s motion;

(ii)                Mr Bell’s costs of his motion;

(iii)               Walker & Co’s costs of their motions.

Associate:

Dated:              9 March 2001