FEDERAL COURT OF AUSTRALIA

Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2010] FCA 996

THE COURT ORDERS THAT:

1.                  Paragraphs 11, 22, 26, 28, 31, 32, 34, 35, 36, 37, 38, 40 and 41 be struck out.

2.                  Costs reserved 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                                             These reasons concern two notices of motion each dated 28 May 2010, which wereheard together. 

2                                             By their notice of motion:

            (a)        the first respondent, Stripe Capital Pty Ltd (Stripe), seeks orders striking out various paragraphs of the Amended Statement of Claim; and 

            (b)        the fourth respondents, who are directors of Stripe, seek orders pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth), alternatively Order 11 rule 16 of the Federal Court Rules, striking out the Amended Statement of Claim in so far as it relates to them.

3                                             By their notice of motion:

            (a)        the third respondent, Australian Stockbrokers & Advisory Services Ltd (Asandas), seeks orders striking out the Amended Statement of Claim or various paragraphs of it; and

            (b)        the fifth respondents, who are directors of Asandas, seek orders pursuant to s 31A of the Federal Court of Australia Act 1976, alternatively Order 11 rule 16 of the Federal Court Rules, striking out the Amended Statement of Claim in so far as it relates to them.

4                                             The relief sought under s 31A was not pressed by the respondents either in written or oral submissions.

5                                             By their Amended Statement of Claim the applicants seek to recover damages in respect of losses claimed to have been suffered by them as a result of their dealings with the second respondent, Todd King, over a period of approximately two years ending in or about mid 2008.  It is alleged that Stripe, through Mr King and as the authorised representative of Asandas, provided financial services to each of the applicants.

6                                             The causes of action relied upon by the applicants are:

(a)        breach of contract;

(b)       breach of fiduciary duty; and

(c)        misleading and deceptive conduct in breach of s 1041H of the Corporations Act 2001 (Cth) (the Corporations Act).

7                                             Stripe is alleged to be liable for the loss and damage suffered by the applicants by reason of the alleged breach of contract, breach of fiduciary duties and breach of s 1041H of the Corporations Act.

8                                             Asandas is alleged to be directly liable for the loss and damage under these causes of action too but also to be liable for loss and damage claimed by the applicants against Stripe by operation of ss 917A(1), 917B and 917E of the Corporations Act.

9                                             Stripe’s directors are alleged to have been involved in the contravention by Stripe of s 1041H of the Corporation Act and were knowingly concerned in its alleged breach of duty.

10                                          That situation enures also in respect of the fifth respondents in respect of the alleged contravention by Asandas of s 1041H of the Corporations Act as well as being knowingly concerned in the alleged breach of duty by Stripe. 

Legal PRINCIPLES

11                                          The applicable principles in relation to an application to strike out the whole or part of the statement of claim are well established.  The following are said by the applicants to be particularly relevant here:

1.             The power to strike out is intended to only be used in cases that are unarguable and cannot possibly succeed: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 and Murex Diagnostics Australia Pty ltd v Chiron Corp (1995) 55 FCR 194.

2.         On an application to strike out all of the facts alleged in the statement of claim are accepted as true and it is taken for granted that on all other points the pleading is unassailable: Niven v Grant(1903) 29 VLR 102 at 106.

3.         Providing a pleading fulfils its basic function by identifying the issues, disclosing an arguable cause of action, apprising the other party of the case it has to meet at trial, then the action should proceed: Murchison Zinc Co Pty Ltd v Thiess Contractors Pty Ltd (2000) WASCA 167 [38] and Barclay Mowlem Construction Limited v Dampier Port Authority (2006) 33 WAR 82 at [5]-[9].

4.         The challenged pleading is to be read as a whole.  The Court accepts that a cause of action can be sufficiently pleaded at different levels of generality depending on the nature of the case and the subject matter and most pleadings set forth the material facts at a level which involves some element of conclusion.  In cases involving collusion direct evidence will rarely be available and proof generally rests on inference deduced from acts done in pursuance of the apparent common purpose: Adsteam Building Industries P/L v Queensland Cement and Lime Co (No 4) (1984) 14 ACLR 456and ACCC v April International Marketing Services Australia P/L [2007] FCA 2024.

5.         The Court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action may lie: Hospitals Contribution Fund of Australia v Hunt (1983) 44 ALR 365 at 373.

12                                          The respondents do not challenge the correctness of these principles but submit that the following further principles are of particular relevance to their motions: 

1.         A statement of claim must allege a cause of action with sufficient particularity and not simply in general  terms: Bruce v Odhams Press Limited [1936] 1 KB 697 at 705; Charlie Carter Pty Ltd v The Shop Distributive and Allied Employees’ Association of Western Australia (1987) 13 FCR 413 at 417. 

2.         The adequacy of a pleading is to be assessed by reference to whether the cause of action is pleaded with a sufficient level of generality so as to define the issues and inform the other party of the case it has to meet in the context of the case:  Beach Petroleum NL v Johnson (1991) 105 ALR 456 at 466. 

3.         The respondent is entitled to know the factual foundation for the case that is being alleged so that it can prepare to meet the case at the trial: Philipps v Philipps (1878) 4 QBD 127 at 138-9.  

4.         It is embarrassing simply to plead a conclusion, and a pleading which does so is not saved by using the words ‘in the premises’ to introduce the conclusion: Davids Holdings Pty Ltd v Coles Meyer Ltd (1993) ATPR 41- 227. 

5.         In order to disclose a reasonable cause of action the statement of claim must contain all of the relevant facts to support any allegation made: H 1976 Nominees Pty Ltd v Galli (1979) 30 ALR 181 at 186-7. 

STATUTORY PROVISIONS

13                                          The following sections of the Corporations Act are relevant to the matters pleaded. 

Section 79 – Involvement in contraventions – a person is involved in a contravention if, and only if, the person:

(a)        has aided, abetted, counselled or procured the contravention; or

(b)        has induced, whether by threats or promises or otherwise, the contravention; or

(c)        has in any way, by act or remission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)        has conspired with others to effect the contravention.

Section 198A – Powers of directors

(1)        The business of a company is to be managed by or under the direction of the directors.

            . . .

Section 912A – Obligations of financial services licensee – general obligations 

(1)        A financial services licensee must:

            (a)        do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and

            (aa)      have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative; and

            (b)        comply with the conditions on the licence; and

            (c)        comply with the financial services laws; and

            (ca)      take reasonable steps to ensure that its representatives comply with the financial services laws; and

            (d)        unless the licensee is a body regulated by APRA--have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements; and

            (e)        maintain the competence to provide those financial services; and

            (f)        ensure that its representatives are adequately trained, and are competent, to provide those financial services; and

            (g)        if those financial services are provided to persons as retail clients--have a dispute resolution system complying with subsection (2); and

            (h)        unless the licensee is a body regulated by APRA--have adequate risk management systems; and

            (j)         comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.

Section 912B – Compensation arrangements if financial services providing to persons as retail clients

(1)        If a financial services licensee provides a financial service to persons as retail clients, the licensee must have arrangements for compensating those persons for loss or damage suffered because of breaches of the relevant obligations under this Chapter by the licensee or its representatives. The arrangements must meet the requirements of subsection (2).

. . .

Section 916A – Authorised representatives – how representatives are authorised

(1)        A financial services licensee may give a person (the authorised representative) a written notice authorising the person, for the purposes of this Chapter, to provide a specified financial service or financial services on behalf of the licensee.

. . .

Section 917A – Liability of financial services licensees for representatives – Application of division –

(1)        This Division applies to any conduct of a representative of a financial services licensee:

            (a)        that relates to the provision of a financial service; and

            (b)        on which a third person (the client ) could reasonably be expected to rely; and

            (c)        on which the client in fact relied in good faith.

. . .

Section 917B – Responsibility if representative of only one licensee 

If the representative is the representative of only one financial services licensee, the licensee is responsible, as between the licensee and the client, for the conduct of the representative, whether or not the representative's conduct is within authority.

Section 917E – Responsibility extends to loss or damages suffered by client

The responsibility of a financial services licensee under this Division 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 representative's conduct.

Section 917F – Effect of Division

(1)        If a financial services licensee is responsible for the conduct of their representative under this Division, the client has the same remedies against the licensee that the client has against the representative.

Section 1041H – Misleading or deceptive conduct (civil liability only)

(1)        A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

. . .

Section 1041I – Civil action for loss or damage for contravention of sections 1041E to 1041H 

(1)        A person who suffers loss or damage by conduct of another person that was engaged in in contravention of ...  1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.

14                                          I will deal with the challenges to the current amended statement of claim (ASC) by the respondents together.  

ASC paragraph 11

15                                          This paragraph, in substance , is the same as the plea in para 12.  For that reason alone it is embarrassing.  It ought be struck out. 

ASC paragraph 17

16                                          I do not understand the respondents to contend that, in the circumstances of this case, the implied term pleaded at para 17 is not capable of arising.  Rather, the particular challenge is to the particulars at (b) under para 17.  Paragraph 17 and the particulars at (b) are as follows:

17.       The Rastus Agreement, Young Investments Agreement and Reid Park Agreement were subject to the implied term that in providing services under the said agreements Stripe would use all reasonable skill, care and diligence.

PARTICULARS

(a)        ….

(b)        In using all reasonable skill, care and diligence Stripe was subject to the following particular duties:

            (i)         to only act on instructions;

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

            (iii)       to ensure its employees and officers including Mr King acted, in relation to the provision of financial services, efficiently, honestly and fairly;

            (iv)       to have in place arrangements for the management of conflicts of interests that may arise in relation to the activities undertaken by its employees and officers including Mr King in the provision of financial services;

            (v)        to ensure its employees and officers including Mr King complied with the financial services laws;

            (vi)       to have adequate resources (including financial, technological and human resources) to provide financial services and to carry out supervisory arrangements;

            (vii)      to ensure its employees and officers including Mr King maintained sufficient competency to provide financial services;

            (viii)      to have risk management systems;

(together “Stripe Duties”)

17                                          The difficulty, it seems to me, arises from the use in the particulars at (b) of the words “was subject to the following particular duties” which are collectively described as the “Stripe duties”.  Fairly read, they are not additional duties but rather what the applicants allege constitutes, in this case, the content of the duty pleaded at para 17.  The prefatory words under particular (b) “In using all reasonable skill care and diligence …” is consistent with that understanding.  Viewed in that way, I do not consider it is embarrassing or, as the respondents submit, fails to disclose a reasonable cause of action. 

ASC paragraph 18

18                                          Paragraph 18 is in these terms:

18.       Furtherthe Rastus Agreement, Young Investments Agreement and Reid Park Agreement were subject to the following express and or implied terms (“Trading Terms”) in respect of any financial advice given by Stripe in relation to the purchase and sale of securities.

            18.1      Stripe should only recommend shares in:

                        (a)        companies listed on the Australian Stock Exchange (“ASX”);

                        (b)        companies with high net asset backing which secured the value or price of the securities of that company;

                        (c)        companies which could reasonably be expected to achieve capital growth;

                        (d)        companies that paid dividends which were greater than existing bank deposit rates.

                        (“Authorised Securities”)

            18.2      Ms Young on behalf of Rastus, Young Investments or Reid Park would give instructions in response to any recommendation made and Stripe would only act in accordance with those instructions.

            18.3      If a positive instruction was given Stripe would make an offer to purchase the recommended shares on behalf of (as instructed) one or other of Rastus, Young Investments or Reid Park.

            18.4      Thereafter, Stripe was required to provide details to Rastus, Young Investments and or Reid Park in relation to any shares purchased, the price paid (including commission or other fee charged) and the holding details of those shares.

            18.5      If instructed by Ms Young to do so, Stripe would sell the relevant shares and provide details of the sales and account for the sales.

19                                          The respondents submit that this paragraph is deficient in a number of respects.  First, it does not identify the bases upon which any of the terms are said to arise by implication: Byrne v Australian Airlines Ltd [1995] 185 CLR 410 at 422.  Second, it cannot be discerned as to which terms are said to be implied and which are express. 

20                                          However, the following further particulars have already been separately provided by the applicants:

(a)        Paragraph 18.1

            The term was expressly agreed between Rastus, Young Investments and Reid Park acting through Mrs King and Stripe acting through Mr King.

(b)        Paragraphs 18.2, 18.3, 18.4 and 18.5.

            (i)         The terms were expressly agreed between Rastus, Young Investments and Reid Park acting through Mrs King and Stripe acting through Mr King.

            (ii)        Further and alternatively, the terms are implied as being necessary to give business efficacy to agreements for the provision of financial services or by custom in the dealings between a financial advisor in relation to trading in securities and clients.

21                                          Whilst the plea is unorthodox and the asserted implied terms might be thought to be unlikely to be established, that is a matter for argument and ought be left to the trial judge upon a full appreciation of all relevant material. 

ASC paragraph 19

22                                          The complaint here is that this pleading incorporates the “Stripe Duties” which are those particularised under (b) to para 17.  My conclusions as to para 17 apply to this paragraph.

ASC paragraph 22

23                                          Paragraph 22 is as follows:

22.       In relation to all financial services advice provided by Stripe, Rastus, Young Investments and Reid Park:

            22.1      understood all financial services were undertaken by Stripe in accordance with:

                        (a)        the terms of the Rastus Agreement, the Young Investments Agreement and or the Reid Park Agreement;

                        (b)        the duties owed by Stripe pleaded in paragraph  19 herein,

            22.2      relied upon Stripe to have provided the financial services as pleaded in the preceding subparagraph;

            22.3      in relying on Stripe having provided the financial services as pleaded, acted in good faith.

24                                          This paragraph is an attempt to plead the material facts necessary to invoke the provision of s 917A(1) of the Corporations Act.  Counsel for the applicants conceded correctly, in my opinion, that the word “understood” in para 22.1 was irrelevant.  That being so the paragraph becomes embarrassing.  When the word “understood” is disregarded the whole paragraph is rendered meaningless.  This paragraph ought be struck out. 

ASC paragraph 25

25                                          Paragraph 25 is as follows:

25.       Young Investments and Reid Park entered into the LE Margin Loan Agreement:

            25.1      on the basis that Stripe in making the Margin Loan Representations was providing financial services advice;

            25.2      in reliance of Margin Loan Representations;

            25.3      in good faith.

26                                          This too is a plea to incorporate the material facts to render the accessorial liability provision in s 917(A)(1) of the Corporations Act applicable.  The complaint is that this, as a matter of law, has no application because the context of the pleading in which it sits is a claim under s 1041H of the Corporations Act in respect of misleading and deceptive conduct and that the relevant accessorial liability provision is s 1041I.  The applicants submit that s 917(A)(1), nonetheless, has application.  I do not think it appropriate to shut out the applicants from arguing this at trial. 

ASC paragraph 26

27                                          Paragraph 26 is as follows:

26.       In fact and in breach of s 1041H of the Corporations Act the Margin Loan Representations were misleading or deceptive in that the intention of Stripe in recommending Young Investments and Reid Park enter into the LE Margin Loan Agreement and in making the Margin Loan Representations was for Stripe and or Mr King:

            26.1      to obtain a secret commission or commissions from Leveraged Equities; and/or

            26.2      to allow Stripe to draw down on the facility provided by the LE Margin Loan Agreement to purchase further securities and to trade those securities in an attempt to recover losses already incurred by Young Investments and Reid Park on unauthorised trading undertaken by Stripe; and/or

            26.3      to allow Stripe to draw down on the facility provided by the LE Margin Loan Agreement to undertake high volume trading of securities in order to effect transactions on which commissions would be earned by Stripe without any or any reasonable commensurate benefit being earned by Young Investments and or Reid Park.

28                                          The respondents submit, correctly, that intention is irrelevant to a cause of action under s 1041H of the Corporations Act.  This plea relates back to para 24 where the pleaded representation concerned “the purpose of the LE Margin Loan Agreement”.  It seems that what the applicants may have had in mind at para 26 in alleging falsification of the representation was that in fact the “purpose” of the LE Margin Loan Agreement was other than stated.  However, that is not what is pleaded.  There is a disconnection then between the representation in para 24 and the alleged falsity of it pleaded at para 26.  It should be struck out. 

ASC paragraph 28

29                                          This particular challenge is consequential upon the challenges to paras 17 and 19 which I have rejected.  It follows then that this challenge too is unsuccessful.

ASC paragraph 30

30                                          This paragraph is as follows:

30.       As a result of the matters pleaded in paragraphs 13, 22 and 25 herein ASANDAS is also responsible for the conduct of Stripe pleaded in paragraphs 26 and 27 herein and is also responsible for the loss and damage pleaded in paragraph 29 herein.

31                                          The respondents correctly submit that any of the pleaded paragraphs earlier successfully challenged will undermine this paragraph.  Paragraphs 22 and 26 are the only such paragraphs.  However, as I propose to grant leave to the applicants to replead it is not necessary on this ground to strike out para 30.

ASC paragraph 31

32                                          ASC para 31 is as follows:

31.1      prior to the parties entering into the Rastus Agreement, Young Investments Agreement and Reid Park Agreement and or by entering into the said agreements Stripe represented that it would fulfil the Stripe Duties;

31.2      Rastus, Young Investments and Reid Park entered into the said agreements in reliance of (sic) the said representation;

31.3      the said representation was misleading or deceptive and in contraventionof s 1041H of the Corporations Act.

PARTICULARS

            (a)        Stripe did not have any or any adequate procedures in place to ensure Stripe employees, including Mr King, in relation to the provision of financial services, acted efficiently, honestly and fairly;

            (b)        Stripe did not have any or any adequate procedures in place to prevent Stripe from engaging in conduct in conflict to its duties to Rastus, Young Investments and Reid Park;

            (c)        Stripe did not have in place any or any adequate procedures in place to ensure Stripe complied the financial services law including in relation to discretionary trading;

            (d)        Stripe did not have in place systems to ensure that its employees, including Mr King, maintained sufficient competency to provide financial services advice.

            (e)        Stripe did not have and or had not engaged adequate resources to ensure its employees, including Mr King, provided financial services and for Stripe to supervise the ongoing fulfilment of those obligations and duties.

            (f)        Stripe did not have any system or adequate system in place to take steps or to take adequate steps to implement and give effect to risk managements systems to ensure the risk of breach of client services agreements and or breaches of statutory duty or duties at law did not occur.

31.4      By reason of Stripe’s breach of the said representation pleaded in the preceding paragraph Stripe was able to undertake the conduct pleaded in paragraph 27 herein.

31.5      By reason of Stripe’s conduct as pleaded in the preceding paragraph Rastus, Young Investments and Reid Investments have suffered loss and damage.

PARTICULARS

            The matters pleaded in paragraphs 29.1 to 29.4 are repeated.

31.6      Further and in the alternative:

            31.6.1   the said representation was a representation in relation to the ongoing future conduct by Stripe;

            31.6.2   in the premises, Stripe also represented that if at any time the said representations or any of them become untrue then Stripe would disclose to Rastus, Young Investments and Reid Park that change of circumstances.

            31.6.3   After the said representation was made the representation in whole or in part became untrue and, accordingly, the said representation became misleading or deceptive.

            31.6.4   Notwithstanding the change of circumstances pleaded in the preceding paragraph, Stripe did not disclose to Rastus, Young Investments or Reid Park the change of circumstances.

            31.6.5   As a result of Stripe’s failure as pleaded in the preceding paragraph Stripe represented by its silence that the said representation remained true.

            31.6.6   In the premises the conduct of Stripe pleaded in the preceding paragraph was misleading or deceptive and in contravention of section 1041H of the Corporations Act.

PARTICULARS

                        Particulars of the date when the said representation became untrue in whole or in part will be provided following discovery.

            31.6.7   by reason of the breach pleaded in the preceding paragraph, Stripe was able to engage in the conduct pleaded in paragraph 27;

            31.6.8   by reason of the matters pleaded in the preceding paragraph Rastus, Young Investments and Reid Park have suffered loss and damage.

PARTICULARS

                        The matters pleaded in paragraphs 29.1 to 29.4 are repeated.

33                                          Paragraph 31.1 read together with 31.2 is embarrassing when regard is had in para 31.1 to the words “and or by entering into the said agreements”.  Those words ought be struck out.  Self evidently the pleaded act of reliance at para 31.2 could not logically follow from this alleged representation. 

34                                          There is, however, a more fundamental difficulty with paras 31.2-31.5.  The alleged representation at ASC para 31 as later particularised is that Stripe represented that it would fulfil the Stripe duties as it:

(a)        represented that it was the Corporate Authorised Representative of Asandas and Asandas was the holder of Australian Financial Services Licence 294 097;

(b)        provided financial services advice and in doing so held itself out as a qualified and competent financial services provider.

35                                          Accordingly, in a confusing and embarrassing way the pleaded representation is particularised by a different representation.  That may be an attempt to demonstrate that, in part, the pleaded representation is to be implied from the particularised representation.  It is by no means clear.

36                                          Morever, there is no pleading of material facts or provision of particulars as to material date(s), places, natural persons, words spoken or conduct going to the allegation of the representation.

37                                          Further, it is embarrassing because the representation pleaded is as to a future matter “… would fulfil the Stripe duties”.  Yet the falsity of the alleged representation is alleged at ASC 31.3 as a matter of present fact, that Stripe, in effect, was not meeting its obligations or duties (the Stripe duties) imposed by s 912A of the Corporations Act.  It says nothing as to why, in relation to the future, the representation was misleading or deceptive.  There is also a confused use of the word “representation” in para 31.4 and “conduct” in para 31.5.  Section 1041H of the Corporations Act is relied upon yet there is no “conduct” pleaded until the pleading at para 31.4.  Then at para 31.5 it is pleaded that the conduct is “as pleaded in the preceding paragraph”.  The preceding para (30) pleads the conduct of Stripe at ASC paras 26 and 27.  ASC para 26 does not plead conduct.  It pleads the intention of Stripe.  If the preceding paragraph is taken to refer to subparagraph 31.4 then this ties the conduct back to ASC para 27.  This is not pleaded as conduct in contravention of s 1041H.  Paragraphs 31.2-31.5 when read with 31.1 are embarrassing and do not disclose a reasonable cause of action.  Paragraph 31.2-31.5 ought be struck out.  Moreover, the same confusion and consequent embarrassment attaches to ASC para 31.6.  It too should be struck out. 

ASC paragraph 32

38                                          Paragraph 32 is as follows:

32.       Further, Ratsus, Young Investments and Reid Park plead as follows.

            32.1      The Stripe Directors were involved in the misleading or deceptive conduct pleaded in paragraph 31 herein in that they aided, abetted, counselled or procured the contraventions.

PARTICULARS

            Particulars are provided separately.

            32.2      In the premises the Stripe Directors are liable to pay the loss and damage pleaded in paragraph 31.5 and or 31.6.8 herein.

39                                          The particulars provided for para 32 in a separate document are as follows:

PARTICULARS OF PARAGRAPH 32

(a)        In respect of the conduct pleaded in paragraphs 31.1 to 31.5 thefollowing particulars are provided.

            (i)         The Stripe Directors knew:

                        (A)       the matters pleaded at paragraph 31.1;

                        (B)       the matters set out in the particulars to paragraph 31.3.

            (ii)        Further, the Stripe Directors knew that, notwithstanding the matters set out in the particulars to paragraph 31.3, Stripe provided financial product advice to and dealt in financial products on behalf of Rastus, Young Investments or Reid Park.

(b)        In respect of the conduct pleaded in paragraph 31.6, the following particulars are provided.

            (i)         The Stripe Directors knew the matters pleaded in paragraph 31.1.

            (ii)        After the said agreements were entered into the Stripe Directors knew the representation pleaded in paragraph 31.1 had become untrue as set out in the particulars to paragraph 31.3 above.

            (iii)       Notwithstanding knowing the matters particularised in (ii) above, the Stripe Directors:

                        (A)       knew that Stripe continued to provide financial product advice and dealt in financial products on behalf of Rastus, Young Investments and or Reid Park;

                        (B)       failed to disclose or to cause Stripe to disclose to Rastus, Young Investments or Reid Park the said change of circumstances.

40                                          This paragraph invokes the “involved in” accessorial provisions of s 1041I concerning alleged contraventions of s 1041H of the Corporations Act.  The circumstances in which a person may be involved in a contravention are set out under s 79 of the Corporations Act.

41                                          As particularised this paragraph alleges accessorial liability based merely on knowledge.  No attempt has been made to relate this knowledge to the various types of involvement under s 79.  Indeed all are relied upon.  This paragraph is vague in the extreme and should be struck out. 

ASC paragraphs 34-35

42                                          Paragraphs 34-35 are as follows:

34.       Further, the conduct of Stripe pleaded in paragraph 27 herein was as a result of the following breaches by ASANDAS of the ASANDAS Duties.

            (a)        ASANDAS did not have any or any adequate procedures in place to ensure Stripe, in relation to the provision of financial services, acted efficiently, honestly and fairly.

            (b)        ASANDAS did not have any or any adequate procedures in place to prevent Stripe from engaging in conduct in conflict of interest in relation to the provision of financial services to Rastus, Young Investments and Reid Park.

            (c)        ASANDAS did not have any or any adequate procedures to ensure Stripe’s employees and officers complied with the financial services laws.

            (d)        ASANDAS had failed to engage adequate resources to ensure it and its authorised representative Stripe to provide financial services and to carry out supervisory arrangements.

            (e)        ASANDAS failed to take steps or to take adequate steps to ensure Stripe and or Mr King maintained sufficient competency to provide financial services advice.

            (f)        ASANDAS had failed to take steps or to take adequate steps to implement and give effect to risk management systems and to ensure Stripe had risk management systems.

35.       As a result of ASANDAS breaches of the ASANDAS Duties pleaded in the preceding paragraph:

            (a)        Stripe was able to engage in the conduct pleaded in paragraph 27 herein;

            (b)        Rastus, Young Investments and Reid Park suffered loss and damage.

PARTICULARS

            The matters pleaded in paragraphs 29.1 to 29.4 are repeated.

43                                          The Asandas duties are those alleged under s 912A(1) of the Corporations Act as pleaded at ASC para 12.

44                                          These paragraphs are said to be embarrassing because it appears to be a separate plea from that at ASC para 30 which relies upon the vicarious statutory liability imposed under s 917A upon Asandas.

45                                          The statutory obligations imposed under s 912A of the Corporations Act may in certain circumstances give rise to direct liability as against a financial services licensee without resort to the provisions of s 917A.  However, there would, in my opinion, require to be a relationship giving rise to such statutory duties being owed by the licensee to the client.  Here there is no contractual relationship pleaded as between Asandas and the corporate applicants.  No tortious duty is said to be owed.  Accordingly, these paragraphs sit in a vacuum.  They do not disclose a reasonable cause of action and should be struck out. 

ASC paragraphs 36 and 37

46                                          This is, in part, the same complaint as in respect of para 31.  The same words “and or by entering into the said agreements” in para 36.1 ought be struck out. 

47                                          However, more importantly these paragraphs which, as against Asandas, mirror the allegations against Stripe and its directors under ASC paras 31 and 32.  They suffer from the same difficulties.  Accordingly, ASC paras 36 and 37 should be struck out. 

ASC paragraph 38

48                                          Paragraph 38 provides as follows:

38        Further Rastus, Young Investments and Reid Park plead as follows.

            38.1      At all material times in providing financial services Stripe owed to Rastus, Young Investments and Reid Park fiduciary obligations.

            38.2      In the premises Stripe owed the following duties to Rastus, Young Investments and Reid Park Investments:

                        38.2.1   to only recommend or make investments for those parties which were in their interests to do so;

                        38.2.2   not, without informed consent, give any advice or undertake any dealing for or on behalf of those parties in which Stripe had any interest.

            38.3      The conduct of Stripe pleaded in paragraph 27 herein was in breach of the duties pleaded in paragraph 38.2 herein.

            38.4      As a result of Stripe’s conduct Rastus, Young Investments andReid Park have suffered loss and damage.

PARTICULARS

The matters pleaded in paragraph 29.1 to 29.4 are repeated.

49                                          This paragraph alleges that ‘at all material times’ Stripe owed fiduciary duties to the corporate applicants, Young Investments, Reid Park and Rastus. The respondents submit that this is a bald assertion without any plea of the material facts said to give rise to the fiduciary relationship and that the pleading presumes that the relationship is fiduciary in nature when no such assumption can be made.  This, it seems to me, is correct.  Such duties, depend in this case, upon a contractual foundation: Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 97 per Mason J.  The material facts require to be clearly pleaded.  Those are absent in this case.  It is no answer for the applicants to submit that the relevant material facts can be followed elsewhere in the ASC.  Whatis required is “more than a mere incantation of equitable principle”: Joyce v Palassis [2008] WASCA 151 at [28]; Boase v Axis International [2009] WASC 331 at [3].

50                                          The applicants submit that it cannot be contested that a party providing financial services advice owes fiduciary obligations.  They cited Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371.  However, what was said there by Brennan J (as his Honour then was) needs to be reconciled with what was said by Gaudron and McHugh JJ in Breen v Williams (1996) 186 CLR 71 at 113 where their Honours said:  

In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests.  As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict.  If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach.  But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.  (Footnote omitted.)

51                                          The task of reconciliation was performed by Austin J in Aequitas v Sparad No 100 Ltd (formerly Australian European Finance Corp Ltd) (2001) 19 ACLC 1,006. 

52                                          These matters were referred to by Siopis J in Eric Preston Pty Ltd v Euroz Securities Limited (2010) 77 ACSR 135 at [432] when his Honour observed:

Austin J referred to the “discordant” nature of the observations of Brennan J in Daly (see [424] above), and the observations of Gummow and McHugh JJ in Breen.  At 1,059, at [286]-[287], Austin J observed:

The reasoning in Breen v Williams is quite a distance away from Brennan J’s dictum in Daly v The Sydney Stock Exchange, and yet Daly v The Sydney Stock Exchange was cited by Gummow J (at 134) without any hint of disapproval.  It would be possible to reconcile the cases by orienting each case to its facts, on the basis that the doctor-patient relationship is less comprehensively fiduciary than the financial advisor-client relationship.  But that distinction would not give effect to the conceptual analysis which found favour with five of the six judges who decided Breen v Williams.  The logic of their analysis is that most of the observations of Brennan J do not relate to the fiduciary character of the advisor’s position.

In my opinion, in light of the reasoning in Breen v Williams, Brennan J’s dictum should be taken to refer, for the most part, to the contractual aspects of the advisor client relationship.  The duty to provide “best advice” and to disclose knowledge and information arise out of the advisor’s “undertaking”, and are therefore implied terms of the contractual retainer.  And disclosure may also relieve the advisor from the fundamental fiduciary duty not to “assume a position where his self-interest might conflict with the honest and impartial giving of advice”.

53                                          Furthermore, the duty pleaded at ASC para 38.1 is arguably prescriptive in nature.  Finally the breach of the asserted fiduciary duties pleaded by reference to the conduct of Stripe pleaded in ASC para 27 are, at least in ASC paras 27.1-27.3, 27.5 and 27.7 not on their face related or capable of being related to the duties in ASC para 38.2. 

54                                          Accordingly, for all these reasons, ASC para 38 should be struck out as not disclosing a reasonable cause of action. 

ASC paragraphs 40-41

55                                          ASC paras 40-41 which concern allegations of breach of fiduciary duty provide as follows:

40        Further Rastus, Young Investments and Reid Park plead as follows.

            40.1      The Stripe Directors were knowingly concerned in the breach of duty by Stripe pleaded in paragraph 38.3 herein.

PARTICULARS

            Particulars are provided separately.

            40.2      In the premises the Stripe Directors are liable to pay the loss and damage pleaded in paragraph 38.4 herein.

41        Further Rastus, Young Investments and Reid Park plead as follows.

            41.1      The ASANDAS Directors were knowingly concerned to the breach of duty by Stripe pleaded in paragraph 38.3 herein.

PARTICULARS

            Particulars are provided separately.

            41.2      In the premises ASANDAS Directors are liable to pay the loss and damage pleaded in paragraph 38.4 herein.

56                                          The particulars to para 40 are as follows:

PARTICULARS TO PARAGRAPH 40

(a)        The Stripe Directors knew:

            (i)         that Stripe owed to Rastus, Young Investments and Reid Park the duties pleaded in paragraph 38.2;

            (ii)        at the time the Rastus Agreement, Young Investments and Reid Park Agreement were entered into or after they were entered into:

                        (A)       Stripe did not have any or any adequate procedures in place to ensure Stripe employees, including Mr King, in relation to the provision of financial services, acted efficiently, honestly and fairly;

                        (B)       Stripe did not have any or any adequate procedures in place to prevent Stripe from engaging in conduct in conflict to its duties to Rastus, Young Investments and Reid Park;

                        (C)       Stripe did not have in place any or any adequate procedures in place to ensure Stripe complied the financial services law including in relation to discretionary trading;

                        (D)       Stripe did not have in place systems to ensure that its employees, including Mr King, maintained sufficient competency to provide financial services advice;

                        (E)       Stripe did not have and or had not engaged adequate resources to ensure its employees, including Mr King, provided financial services and for Stripe to supervise the ongoing fulfilment of their obligations and duties;

                        (F)        Stripe did not have any system or adequate system in place to take steps or to take adequate steps to implement and give effect to risk managements systems to ensure the risk of breach of client services agreements and or breaches of statutory duty or duties at law did not occur.

            (iii)       notwithstanding the matters particularised in (i) and (ii) above, Stripe continued to provide financial product advice and dealt in financial products on behalf of Rastus, Young Investments and or Reid Park;

            (iv)       the dealing referred to in particulars (iii) above included high volume dealings in Unauthorised Securities and or speculative securities including derivatives and options and using funds drawn down under the LE Margin Loan Agreement;

            (v)        Stripe engaged in the conduct pleaded in paragraphs 27.1 and 27.7 herein.

(b)        Alternatively to particular (a)(v) above:

            (i)         given the conduct pleaded in paragraphs 27.1 to 27.7 herein was the obvious consequence of the matters particularised in (a)(ii) to (iv) above, any failure by the Stripe Directors to also know the matters pleaded in paragraph 27.1 to 27.7 herein was a result of the Stripe Directors wilfully ignoring that conduct; and or

            (ii)        given knowledge of the matters particularised in (a)(i) to (iv) above, failure to inquire in relation to whether the conduct pleaded in paragraphs 27.1 to 27.7 had or was being engaged in or was wilful and reckless; and or

            (iii)       given knowledge of the matters particularised in (a) (i) to (iv) would indicate to an honest and reasonable man that the matters pleaded in paragraph 27.1 to 27.7 had or was incurring the Stripe Directors’ failure to know those facts lacked honesty and was unreasonable; and or

            (iv)       knowledge of the facts particularised in (a)(i) to (iv) above would have caused an honest and reasonable man to inquire whether the facts pleaded in paragraph 27.1 to 27.7 had or were incurring and the Stripe Directors cannot now deny such knowledge.

57                                          The particulars to para 41 are as follows:

PARTICULARS TO PARAGRAPH 41

(a)        The ASANDAS Directors knew:

            (i)         that Stripe owed to Rastus, Young Investments and Reid Park the duties pleaded in paragraph 38.2;

            (ii)        at the time the Rastus Agreement, Young Investments and Reid Park Agreement were entered into or after they were entered into:

                        (A)       neither ASANDAS nor Stripe had any or any adequate procedures in place to ensure Stripe employees, including Mr King, in relation to the provision of financial services, acted efficiently, honestly and fairly;

                        (B)       neither ASANDAS nor Stripe had any or any adequate procedures in place to prevent Stripe from engaging in conduct in conflict to its duties to Rastus, Young Investments and Reid Park;

                        (C)       neither ASANDAS nor Stripe had in place any or any adequate procedures in place to ensure Stripe complied the financial services law in relation to discretionary trading;

                        (D)       neither ASANDAS nor Stripe had in place systems to ensure Stripe’s employees, including Mr King, maintained sufficient competency to provide financial services advice;

                        (E)       neither ASANDAS nor Stripe had engaged adequate resources to ensure Stripe’s employees, including Mr King, provided financial services and for Stripe to supervise the ongoing fulfilment of their obligations and duties;

                        (F)        neither ASANDAS nor Stripe had any system or adequate system in place to take steps or to take adequate steps to implement and give effect to risk managements systems to ensure the risk of breach of client services agreements and or breaches of statutory duty or duties at law did not occur.

            (iii)       notwithstanding the matters particularised in (i) and (ii) above, Stripe, as ASANDAS authorised representative, continued to provide financial product advice and dealt in financial products on behalf of Rastus, Young Investments and or Reid Park;

            (iv)       the dealing referred to in particulars (iii) above included high volume dealings in Unauthorised Securities and or speculative securities including derivatives and options and using funds drawn down under the LE Margin Loan Agreement;

            (v)        Stripe engaged in the conduct pleaded in paragraphs 27.1 and 27.7 herein.

(b)        Alternatively to particular (a)(v) above:

            (i)         given the conduct pleaded in paragraphs 27.1 to 27.7 herein was the obvious consequence of the matters particularised in (a)(ii) to (iv) above, the ASANDAS Directors’ failure to also know the matters pleaded in paragraph 27.1 to 27.7 herein was as a result of ASANDAS Directors wilfully ignoring that conduct; and or

            (ii)        given knowledge of the matters particularised in (a)(i) to (iv) above, failure to inquire in relation to whether the conduct pleaded in paragraphs 27.1 to 27.7 had or was being engaged in or was wilful and reckless;

            (iii)       given knowledge of the matters particularised in (a) (i) to (iv) above would indicate to an honest and reasonable man that the matters pleaded in paragraph 27.1 to 27.7 had occurred or was occurring the ASANDAS’ failure to know those facts lacked honesty and was unreasonable; and or

            (iv)       knowledge of the matters particularised in (a)(i) to (iv) above would have caused an honest and reasonable man to inquire whether the facts pleaded in paragraph 27.1 to 27.7 had or were incurring and the ASANDAS Directors cannot now deny such knowledge.

58                                          Paragraph 40, as particularised, is an attempt to plead a case against Stripe’s directors based on what is known as the second limb of Barnes v Addey.  This is, in Australia, that a respondent becomes liable if that respondent assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary: Farah Constructions Pty Limited v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160]. 

59                                          There is no plea in either ASC para 40 or 41 that the Stripe directors or the Asandas directors respectively had knowledge of a dishonest and fraudulent design on the part of Stripe.  Indeed there is no plea against Stripe that it had a dishonest and fraudulent design.  As was observed in Farah Constructions at [170] an allegation of such knowledge concerns a plea the seriousness of which means that it ought to have been pleaded and particularised. 

60                                          Accordingly, I regard ASC paras 40-41 as failing to disclose a reasonable cause of action.  They ought be struck out. 

ASC paragraphs 42 and 43

61                                          The challenge to these paragraphs were not pressed by the respondents.   

62                                          There are numerous paragraphs which might be struck out consequent upon the actual striking out of other paragraphs of the ASC.  I do not propose, however, to formalise that result by striking the former category out.  Rather, I consider that the applicants ought have a further opportunity to replead their claims.  The respondents submit I should not follow that course because the applicants, despite being taken to the respondents’ challenges to the ASC in correspondence, steadfastly refused to concede these.  I do not propose presently to summarily shut out any of the applicants’ claims.  Rather, I propose to give the applicants a further opportunity to replead their statement of claim.  As so many paragraphs of the ASC have been struck out it seems to me that this is preferable to the grant of leave to replead the various paragraphs struck out within the vehicle of the ASC. 

63                                          I will invite the parties to make submissions as to the consequential orders that ought be made.  The relevant respondents were substantially successful on their motions.  The applicants should, therefore, pay the costs of the motions. 

Associate:

Dated:         10 September 2010